Measurement and Growth of National Income
National income is a common phenomenon while discussing the economics of a nation. It represents the value of all goods and services that are produced by a country within a given financial year. It is the net result of all the economic activities that happened within one year, valued in monetary terms. As such, it is an uncertain term that is interchangeably used with other terms like national dividend, national output, and expenditure, among others. According to economist Dr. Alfred Marshall, national income is the labor and capital of a country, acting on its natural resources, produce a certain net aggregate of commodities, materials, and immaterial, including services of all kinds in one year (Levitt, 1976). As such, to arrive at the national income of a country, there are basic methods used, as will be discussed below. However, each of the measurement methods exposes the nation to inherent limitations in their accounts based on the method used.
The product method is the most direct in the process of measuring the national income of a country. The method sums up all the figures posted by the firms operating in the economy to get the value of the national output. Besides, the outputs can be grouped in product categories to represent their corresponding industries and sectors. The accumulated incomes will then be adjusted downwards for financial services and any residual errors in the process. The major problem of this method is double counting since one industry’s output is the input of another industry (Everett, 2015). To overcome this challenge, the “Value-added approach” can be adopted. That is, only the difference between inputs and outputs included in the tally for a firm’s output. As such, this method also takes into account the distinction between the intermediate goods and final goods that forms the output of the economy. In the value-added methods, the value added to exports is included while excluding the value of imports.
The income method of measuring national income uses the incomes generated through production. This includes incomes from wages and salaries earned by employed persons, income and return on capital from self-employed persons, rent of land and buildings, royalties earned from patents and copyrights, and return to capital in the public sector (Jorgenson & Schreyer, 2017). This total income represents the total domestic incomes, which is further adjusted for the appreciation of stock, statistical discrepancy to arrive at the GDP at factor cost. The income method of calculating national income is faced with a number of limitations which should be taken into consideration. (1) The incomes included should only be those related to productive services. Thus, transfer incomes should be excluded. (2) The transactions in the sale and purchase of second-hand goods should be excluded since they are not part of the production for the current year. However, the commissions earned in the transactions should be included since they are rewards (3) Income from illegal activities and windfalls should not be included. (4) Direct taxes paid on incomes by employees and companies should not be included as it is part of profits and incomes reported on the individuals and companies.
The final method of national income measurement is the expenditure method. This method adds up the flow of expenditure needed in purchasing a nation’s output by recording only the final expenditures (Haig, 1973). Also, all the expenditure on intermediate goods and services should be excluded. However, this measurement method has some inherent challenges. (1) Price level changes create complications since it is difficult to compare the value in different accounting periods. (2) Public goods that form part of the measurement components do not have a market value. These include markets, roads, schools, defense, among others. (3) The method also ignores goods and services produced for personal consumption. Other limitations include the omission of underground markets, risk of double-counting of the national output at factor cost. The three measurement methods give a relatively good indicator of the national income. However, the latter serves as an indicator of the broader country’s indicator of material welfare and the measure of the aggregate economic performance of a country (Haig, 1973).
Slow economic growth in Africa
Since the 2008 global financial crisis, government and central banks have consistently revised their growth forecasts downwards. However, for African countries, the growth rate has lagged for decades. Many scholars and economists have tried to explain the consistent slow growth through international cross-country frameworks. To a large extent, poor economic policies and lack of openness to international markets play the biggest role in the slow growth for many economies (Thornton, 2013); however, there are unique characteristics that cut across most African economies, as will be explained below.
Factors slowing African economic growth include; (1) Due to the lower income levels in African economies, people have lower access to education and healthcare, which thereby affects the productivity of the available workforce. As such, the economies do not reach productivity as they would. (2) Most developing countries are characterized by poor infrastructure (Duclos & Verdier-Chouchane, 2011), which is the biggest factor of production. The infrastructure includes roads, schools, and hospitals. As such, the infrastructure affects the overall production efficiency, which makes transportation and other factors of production expensive and inefficient. (3) There is a big degree of flight of capital since investors want adequate returns to their capital (Asongu & Odhiambo, 2019). When the African economies do not guarantee the expected returns, investors will pull out their money. As such, even monies that originate from African economies often flows out to seek better returns. (4) In some countries, political instability often scares away investors and hinder investments. For example, Zimbabwe, the political environment, has always scared away many investors due to the unfavorable laws that favor indigenous ownership. (5) Most institutional frameworks in African economies do not adequately protect the rights of their people. As such, it creates an investment environment that impacts greatly on the progress and investment. (6) To some extent, economists have blamed the World Trade Organization for its bias against developing African nations (Elbadawi & Helleiner, 1998). As such, it has seen developed nations adopt protectionist strategies that do not help to liberalize trade.
References
Asongu, S., & Odhiambo, N. (2019). Governance, Capital Flight, and Industrialisation in Africa. SSRN Electronic Journal. doi: 10.2139/ssrn.3475377
Duclos, J., & Verdier-Chouchane, A. (2011). Analyzing Pro-Poor Growth in Southern Africa: Lessons from Mauritius and South Africa*. African Development Review, 23(2), 121-146. doi: 10.1111/j.1467-8268.2011.00276.x
Elbadawi, I. A., & Helleiner, G. (1998). African development in the context of new world trade and financial regimes: The role of the WTO and its relationship to the World Bank and the IMF.
Everett, G. (2015). Measuring National Well-Being: A UK Perspective. Review of Income and Wealth, 61(1), 34-42. doi: 10.1111/roiw.12175
Haig, B. (1973). THE TREATMENT OF STOCK APPRECIATION IN THE MEASUREMENT OF NATIONAL INCOME*. Review of Income and Wealth, 19(4), 429-436. doi: 10.1111/j.1475-4991.1973.tb00900.x
Jorgenson, D., & Schreyer, P. (2017). Measuring Individual Economic Well-Being and Social Welfare within the Framework of the System of National Accounts. Review of Income and Wealth, 63, S460-S477. doi: 10.1111/roiw.12326
Levitt, T. (1976). Alfred Marshall: Victorian Relevance for Modern Economics. The Quarterly Journal of Economics, 90(3), 425. doi: 10.2307/1886042