POB – Grade 11 – Calculating National Income

How to Calculate National Income (NI)

The National Income can be calculated using three (3) main methods:
1. Income Method
2. Expenditure Method
3. Output/Product Method

1. Income Method – this method totals all income earned by/within the country, within a year.

Formula: Income from Employment + Profits + Rents + Net Factor Income from Abroad = GNP – Depreciation = NI

The government obtains the figures used in this formula from income tax returns data and some of the figures
are estimated. In addition, a large portion of the country’s Gross National Product (GNP) is not accounted for
because there are several persons who neglect to pay taxes (such as: baby sitters, taxi drivers, car repairmen and
people who sell on the road side). Since some figures have to be estimated, NI figures are never truly accurate.
The government has to apply certain methods to ensure that the figures used in the formula are not added twice
(double counting).

2. Expenditure Method
This method involves totaling the amount spent by consumers, businesses and the government within a year.
(By calculating all that was spent by a country, one can determine how much was earned.)

Formula: Investment expenditure at market prices + Consumption expenditure at market price + Subsidies –
Indirect Taxes + Net Factor Income from Abroad = Gross National Product – Depreciation = National Income

Figures used in this formula are obtained from the census of distribution which records the value of sales and
the census of production which records the value of investment goods produced and addition to stock. Some of
the figures are also estimated.

3. Output Method – the total of all goods and services produced in the country, whether by the government or
private individuals. In this method, one can use the final costs of finished products as the costs to be added to
arrive at the total output, or one can choose to add the cost of adding value to raw material at each stage of
production until the finished product is completed.

Formula: Total Domestic Product or GDP + Net Factor Income from Abroad = GNP – Depreciation = NI

Personal Disposable Income (PDI) – refers to all the money that individuals have to spend after deducting all
their expenses. It is calculated by taking GDP (which includes salaries, profits, rents received, income from
foreign assets, pensions or tax rebates etc.) and subtracting all expenses/deductions e.g. income tax, company
tax, national insurance and depreciation etc.

Per Capita Income – refers to the average income of individuals within a country. It is calculated by dividing
National Income by Total population.

Formula – National Income = Per Capita Income

Total Population

NB. This can be used to determine the standard of living of a particular country.

Problems/Disadvantages of Using the Methods Above to Calculate National Income

1. Money Terms – It is not possible to add together things such as tons of fish, etc. As a result estimated
figures have to be used as the value for these items and the value of money is constantly changing. Thus
national income calculated is never usually 100% accurate.
2. Double-counting – if wood gained from timber is counted as a part of the output cost, then when the
cost to produce furniture is being calculated the cost of raw material (timber/wood) should not be
counted again, as this is known as double-counting (only the value added at each stage of production
should be counted). Estimates used in calculating output costs and the issue of double-counting therefore
results in inaccuracies in calculating the national income.
3. The Informal Economy – babysitting, bartending, car repairs and people who sell in the streets etc. are
all a part of what is known as the informal economy. These persons earn a great deal of income
combined but this is not included in the calculation of the national income because there is no record of
these persons in government records/statistics. This situation also allows for inaccuracies in the
calculation of the national income.
Uses of the National Income Information
1. Change in living standards – most governments use national income statistics to indicate changes in
living standards.
2. Comparison with other countries – national income figures allows for comparisons to be made between
different countries.
3. Economic growth – a comparison can be made between one year and another year’s national income to
determine if there was any increase/growth in the national income.
4. Enables Economic Planning – the national income figures provide governments with the information
they need to assess past inefficiencies and make plans to implement better strategies to improve the
economy.

Economic Growth
This refers to an overall expansion in the economy and is concerned with the quantitative increases in the
country’s output. It relates to things such as increase in tourism, increase in agricultural production, increased
construction of roads and building of more schools etc. Growth can be measured by changes in Gross National
Product (GNP), which shows general increases in total net output.

Negative Growth
Growth is usually positive, but if a country fails to expand its production, this situation is called a negative
growth. A negative growth means that a country is performing worse than in the year before, while zero growth
means there was no change in the growth from the previous year to the current year. All governments want to
see a growth/improvement in the economy as this usually leads to improved standard of living and greater
economic and political stability.

Growth without Development

Development is not the same as growth. Development is a qualitative concept, which refers to the provision of
resources that enable growth. For example the availability of resources such as machinery and a workforce that
has the necessary skills and education, enables production to be carried out. In other words there can be
increases in output (growth) but the quality of life (development) has not improved. Highly developed countries
are better able to maximize use their natural resources than underdeveloped countries and therefore advanced
economies have better standards of living.

Economic growth is a major concern of every government and is affected by the following:
 Savings – this refers to the part of income that is not spent. There are three types of savings, 1) personal
savings – done by individuals and households, 2) business savings- done by private companies and 3)
government savings – from budget surplus and income from public companies.
 Investments – this refers to the obtaining of capital and the use of capital to create further wealth or in
the production of capital goods e.g. houses, machinery and factories etc. When dealing with the
calculation of the national income, investment refers to the net addition to capital goods or stock by
businesses, not personal or individual investments.

 Technical progress – this involves promoting economic growth through exploiting resources and
increasing productivity. In order for this to take place the workforce have the skills necessary to take full
advantage of new technology. Therefore there needs to be great investment in education and technology.
Investment in the education and skills training of the people is known as human resource
development. Better educated people are able to perform more efficiently in the organization and can be
placed in areas where labour is most needed (mobilization of labour). Better educated people also have
better communication skills, which is important in international trade. Better educated people are also
more likely to become entrepreneurs and entrepreneurship helps in the growth of the economy by
providing jobs and increased revenues for the country in the form of taxes etc.

 Government Expenditure – the government has the power to influence growth in certain sectors by
investing in or spending money to develop these sectors. The government should try to spend money on
the sectors that will cause greater output for the country in the future.

Underdeveloped countries tend to have the following features:

 Poor economic performance
 High rate of population growth
 Low standard of living
 Relatively short life expectancy
 High unemployment
 Considerable/great dependency upon agricultural employment (farming)
 Poor/little educational opportunities which leads to high illiteracy and lack of skills.

Examples of Developed Countries:

USA, Japan, Canada, England, Australia
Examples of Underdeveloped countries:
Many countries in Asia and Africa

Examples of Developing Countries

Caribbean Countries e.g. Barbados, Jamaica and Trinidad & Tobago etc.

Development in the Caribbean takes place in an uneven way and is referred to as Economic Dualism. This is
where the economy is divided into two sectors. One sector is technologically advanced and the other is
technologically backward. The technologically advanced sector uses modern technology and is involved in
large-scale farming, manufacturing, banking, insurance, trading and other services that are linked to these
industries. The backward sector however includes small peasant farmers, very small manufacturing and
handicraft industries. Because there is little linkage between these two sectors, one sector becomes
economically advanced and the other becomes economically retarded.

UNIT 13
International Trade/Foreign Trade
This refers to the buying and selling of goods and services between different countries of the world.
International trade is important to businesses because it provides additional income from the sale of goods and
services. The trade is important to countries because it is by selling to overseas that the local country earns
foreign exchange to buy from other countries. By doing this the quality of life of all countries involved can be
improved.
 Imports – are bought from other countries and result in an outflow of funds from the buying country.
 Exports – are sold to other countries and result in an inflow of funds to the selling country.
 Visible trade – refers to the import and export of goods e.g. food, machinery, vehicles etc.
 Invisible trade – is the importing and exporting of services e.g. tourism, transport, baking & insurance
etc.
Reasons for International Trade
 Differences between countries climate and natural resources cause countries to have to trade in order to
obtain goods which they cannot produce themselves or goods that they find to be too expensive to
produce on their own.
 differences in costs of production between countries.
 it increases the economic welfare of each country by widening the range of goods and services available
for consumption.
 some countries do not have the necessary natural, human and capital resources including technology, to
produce certain goods.

Benefits of International Trade

 Increased production
 Reduction of unemployment
 Improvement in the standard of living of a country
 Wider variety of goods available
 Prevention of famine and starvation in some countries because scarce goods can be obtained from
abroad.
 Reduction of the effect of local monopolies since these monopolies would face competition from
imported products, which may be cheaper and of better quality.

Barriers to Trade
Things that can cause international trade to be difficult or impossible include:
 custom duties/tariffs (charges/fees placed on imports)
 Quotas and licences
 Product Standards requirements
 Physical controls (banning of certain products)
 Counter-trade (demanding that a country must accept a particular product from your country if it wishes
to export its goods to your country.) etc.

Balance of Trade
Current Account (Visible Exports – Imports = Balance of Trade)
Capital account (All inflows from foreign countries – all outflows to foreign countries)

NB. Adding both the current account and Capital account balances gives the Balance of payments