Key Determinants of National Income
One of the foundations of studying macroeconomics is understanding national income. Every country has to give an account of its economic growth and development. And this can only happen if there are proper records of investors, from within and without, and their contribution to the current state of things. In other words, it is important to consider how much the country has made over a period of one year, in terms of economic output. Everyone can agree that there are different sources of national economies. When they are all brought together within the stated period, they among the national income.
Economists define national income as the overall value of the final output of a country's new goods and services within one year. Understanding this concept is very important in understanding macroeconomics and how it works. A nation defines its economic development through GDP comparison with previous years. It can then be said to have grown or dropped by a certain percentage depending on what has been currently brought to the table.
It is critical to follow national income identity when explaining this concept too. Note that several terms don't seem to make a lot of sense to come people, and one of them is national income. Consider we can find the relation between deferent but related terms in national income identity. In this case, all the amount received as national income is also the much spend as a national expenditure. This figure is also the same as what comes out in the end as national out. The terms income, output, and expenditure are used interchangeably through macroeconomics. And it is easy to understand the reason behind this, that the terms almost mean the same thing. In this case, however, we are using national income as the total output of a country's economy over a year, where new products and services are involved.
Accounts for National Incomes
National incomes are recorded yearly and then recorded for future references. In the UK, for instance, the government has gathered in-depth records of national income since 194oa. But the real data dates as back as the 17th century. These incomes, when published, are then referred to as "Blue Book," which measures all the economic processes or value addition to the economy.
Adding value is another concept that is often misunderstood or forgetting when defining national income. However, it is critical to understand that national output, incomes, and expenditure is to build whenever there is and exchange involving money transactions. But that is not all, for a selected economic process, or transaction to feature in aggregate national income, there must be buying of the newly produced product. We already understand that consumption needs are unlimited, while resources are limited. Hence, the transaction must have a positive impact on the value of the scarce resource. This means that not just any goods will qualify as adding value to the national income; the purchase of second-hand goods that were a new year back, for instance, has no added value. Even so, the original purchase did add value to the economy. Such transactions that don't add value are referred to as transfers, which includes all second-hand purchase, gifts and welfare transfers from the government (including disability allowances, and state pensions.
How is national income created?
Think of it this way, what happens when some goods and produced and sold? Well, basically, these are processes that go through various stages, beginning with identifying raw materials and converting them into the desired end product by the firm. After this, the company will sell it at the next stage. The whole process can be compiled into three stages: the first stage where the firm finds the raw material, intermediate process, which involves the production and selling of the said product, and the final stage, which involves the product receiving the retail price. The final prices carry the sum of added value that includes the resources that go into all the previous stages.
When referring to accounting, it is only the final output that goes into records. But then, those making the reports must be keen on double-counting issues, in which they can avoid by only considering the value at the final stage. In this case, the product will have carried both the cost of the product and the profit. And this is why we say national income is the total value of the final input of goods and services newly produced within a year.
Consider, for instance, the prices of a motor car at the retail price of $25,000. Here, you will discover that the cost of products accounts for $21000, whereby $6000 goes into components, $10000 into the assembly, and then $5000 as marketing costs. This means there will be $4000 remaining as profits. So, national income does not account for the other values, except for the selling price of $25000 at the end of the process. Goods that are sold or bought at second-hand goes through a process that does not add value to the goods, or the GDP, in which case it does not feature in the national output. If this were to happen and these goods are counted, we would be discussing double-counting issues, which leads to false inflate in total national income.
Let's refer to the car above, which gets sold after two years in use at $15000. The owner will, of course, get some money, but this does not in any way affect the nation's income positively. If it were to be so, then it would mean the machine was sold at $40000 (the original price of $25000 added to the second-hand price of $15000), which is not the case. For this reason, future second-hand sales are never included in the national income. As stated above, these transactions are called transfers.
Transactions that add value are based on three elements, which include consumer expenditure, what the seller receives, and the total value of the traded goods. If a student bought a textbook worth $20, then it will mean the spend $20, the income the store owner is $20, and the value of the book is $20.
Calculating income involves three methods:
- The income method which employs the sum of all incomes from production factors in the economy through the year. Factors of production include salaries from employed and self-employed, firms' profits, interests collected by capital lenders, and rents from land-owner,
- The output method takes into account the combined value of new and final outs in all economic sections. These economic sectors include manufacturing, financial services, transport, leisure, and agricultural output.
- Last but not least is the expenditure methods. As you may have already guessed, this technique seeks the sum of all expenditures by households and firms within an economy, on new and final goods. It takes into account internal expenses by households and firms that add value to the economy.
The national out is described by its elements, which are valued based on the individual input to the economy. In other words, components that show more importance are given better priorities, while those that don't give much are considered last. A process called annually-chained is used to determine the weights of these outputs and levels of importance, which were initially generated every five years until 2003. From here, a yearly adjustment of weightings came into action, bringing with it more reliability of weighting – which now chained value measurement. Hence, there is not more up-to-date information, allowing for an accurate measure of changes to all national income stages.
Factors Affecting National Income
National output is not a smooth process. If it were, then the world would not be experiencing economic recessions like that one that was witnessed in 2007/2008 financial failure. This is because of all the factors involved in the accounting of and success of national income.
The following factors have been the most quoted by economic analysts.
Resources – Natural and Human
According to micro and macroeconomic principles, there is always scarcity at the center of economic growth and development. This is because there is a finite quantity of resources to cater for the infinite consumer needs. As such, people always have to give up something for another. In this case, we can say that the quantity of a nation's resources as well its quality exerts the most critical influence on its output. For instance, a country will witness more productivity in case of a favorable climate, navigable rivers, general environment, and much.
But resources are not only in terms of what the environment can give, but it is important also to consider basic hand tools to more advanced industrial machinery. There has been an increasing output of goods on the market associated with surging investment opportunities in capital equipment. For instance, if a miner gets the right machinery and equipment, they can dig out more minerals than when using a shovel.
In other words, national income is influence by how much technology a country's citizens have invested in to utilize available resources. The effectiveness of consumption of natural and human sources relied larges on how much investment they make in equipment.
Also, there is the factor of a working population, which is influenced by other factors like age restrictions and social attributes. For instance, a society that judges women's position as 'stay-at-home' wastes their talents on things that cannot add much value.
The issue of the labor force can never go unmentioned. If people are well equipped with knowledge and intelligence, they can perform better in economic development. This usually comes from skills acquired through education, training, and general life exposures. For instance, entrepreneurial skills and decision-making abilities require sound judgment as well as some courage. These qualities come from a long process of learning and training, which can be of great input to national income.
Technical knowledge and technology
No one can deny that we are living in a world where technology is taking over everything. Those who are not ready to accept it miss out on so much. For instance, there are newer ways of production, and methods of benefiting fully from resources, techniques that could very much increase the output of products. A society that is ready to try out new ideas and support industrial and scientific inventions, especially in commerce, can enjoy better living standards.
Politic runs the world. It is the main force that determines the cause of many processes, especially where economic growth and development are concerned. Hence, political stability is critical in the expansion of economic processes. When there are constant wars and internal revolutions in a country, the quantity and quality of production are highly affected. This is because such things highly elevate commercial risks in entrepreneurship, which cannot be tolerated by anyone. When there is no proper businesses and a good environment to encourage such, then national output is affected. As discussed above, national income is highly dependent on the production of new goods. And this can only happen there is good security within the state that protects investor's goods.
Trade terms and governments
It is in the interest of countries to make good trade terms. However, the extent of benefit varies from country to country based on different factors, including changes in price levels as well as the tax on exports and imports. It would, therefore, be better for a country to put in place the most favorable terms of trade, whereby lower prices of import goods encourage local production while encouraging importers to carry on with their business. This will also mean a large number of imports can be exchanged with a similar number of exports. This highly increases goods available for national income. It is all about governments putting in effect favorable conditions.
When a country opens its borders to foreign investments allows them to receive goods from the creditor country without having anything to the debtor country. This means a country that has more favorable net returns from a similar Gross Domestic Product with another country stands to gain a higher national income. It is therefore important for a country to encourage their citizens to invest in other nations, which increase their GDP.
Author: James Hamilton