Social accounting and global trade – Part 2
HELLO, FRIENDS. As always, I look forward to communicating with you through this medium. I do hope that you also look forward to each week’s lesson. This week, we will discuss national income accounting. Please enjoy the lesson and remember to do some additional reading from your textbooks.
NATIONAL INCOME ACCOUNTING
How well is the Jamaican economy performing today? Is it operating at full capacity, or are some of the country’s resources idle? Is the country’s productive capacity and actual production growing? If so, is production growing at a faster rate than the population? These are the kinds of questions that economic policymakers are constantly asking themselves. In order for policymakers to formulate sound economic policies for maintaining the nation’s economic health, it is necessary to have accurate measures of the country’s performance.
National income accounting refers to the accounting records that measure the national economy’s performance. National Income looks at a country’s total income. There are a number of variants or forms of national income. These are:
GROSS DOMESTIC PRODUCT (GDP)
This is the total money value of the final goods and services produced in a country during a one-year period, using the resources of the country. There are THREE methods of measuring GDP. All three methods should result in the same GDP figure.
The first method of measuring GDP is to add up the value of all goods and services produced in the country. This is known as the PRODUCT/OUTPUT method.
The second method of measuring GDP is to add up all the incomes in the form of wages and salaries, profit, rent, and interest and dividends. This is known as the INCOMES method.
The third method focuses on the expenditure necessary to purchase the nation’s production. This is called the EXPENDITURE method.
The value of what is sold is equal to the value of what is produced and these must also be equal to the expenditure. Therefore, all three methods must yield the same results.
NATIONAL PRODUCT/OUTPUT=NATIONAL INCOME=NATIONAL EXPENDITURE
GROSS NATIONAL PRODUCT (GNP)
This is the broadest measure of the economy’s ‘health’. It refers to the total money value of all final goods and services produced by a country during a one-year period. GNP takes into account not only what is produced, locally, but also what is produced by firms abroad that are owned by local individuals and the government.
GNP is GDP plus or minus net property income from abroad. Property income paid is a minus, and property income received is a plus.
NATIONAL INCOME (NI)
This is the measure of the total income earned by everyone in the economy. It includes those who use their own labour to earn an income as well as those who make money through ownership of the other factors of production.
National income/net national product (NNP) is GNP minus depreciation or capital consumption. Depreciation refers to the loss of value because of wear and tear of consumer durables and producer goods. GNP and GDP do not take depreciation into account. Therefore, the difference between GNP and NNP/NI is depreciation.
PER CAPITA INCOME
This refers to the average income or income per head. It is calculated by dividing the total national income by the total population. This gives the income per person.
There are some uses (advantages) and some limitations (disadvantages) of national income statistics.
USES AND LIMITATIONS OF NATIONAL INCOME STATISTICS
Uses include:
1. The statistics allow us to compare output of one country with another.
2. The figures can be used to compare economic growth of countries at a particular time and over a period of time.
3. The statistics serve as a tool or instrument of economic planning, i.e., the statistics help government to determine how to plan for a country, and these plans are included in their budget.
4. One of the most important uses of these statistics is its use in comparing the standard of living of one country with another, i.e., an increase in national income statistics usually means an increase in the standard of living.
Limitations include:
1. Problems in measuring national output because of unrecorded items.
2. Total GDP/GNP figures ignore the distribution of income.
3. Problems in using national income statistics to measure welfare since:
(a) Production does not equal consumption.
(b) There may be high human costs of production.
(c) Externalities are ignored.
(d) National income statistics is recorded in money terms, the value of which is constantly changing and, therefore, inflation can cause it to appear, incorrectly, as if the country’s national income is increasing. Deflation would have the opposite effect.
That’s it for this week. Work well and rest well. See you next week.