Economics is the social science that analyzes the production, distribution, and consumption of goods and services.

Sunday, 18 September 2011

Method of measuring National Income

Method of measuring national income

We need information on how much is our spending, income and output had been created in an economy over a period of time.

Measuring national income
There are three ways to measure the National Income:
a.       Income method
b.      Output method
c.       Expenditure method

What is National Income?
National income measure the money value of the flow of output in form of goods and services produced within an economy over a period of time. Measuring the level and rate of growth of national income (Y) is important to economists when they are considering:
·                     Economic growth
·                     Standards of living
·                     Distribution of income

a.         Income method
Here GDP is the sum of the incomes earned through the production of goods and services. The main income of factors are as follows:
·                     Wages and salaries
·                     Interest and dividends
·                     Rent
·                     Profit
·                     Income from employment and in self-employment.
It is important to recognize that only those incomes that are actually generated through the production of output included in the calculation of GDP by the income approach.
The following items are excluded from the accounts:
·                     Transfer payments e.g. the state pension payment for retirement; income support paid to families on low incomes; the Jobseekers’ Allowance given to the unemployed and other forms of welfare assistance including child benefit and housing benefit.
·                     Private transfers of money from one individual to another.
·                     Income that is not registered. Every year, billions of RM worth of economic activity is not declared to the tax authorities. This is known as the shadow economy where goods and services are exchanged but the value of these transactions is hidden from the authorities and therefore does not show up in the official statistics!). It is impossible to be precise about the size of the shadow economy but some economists believe that between 8 – 15 percent of national output and spending goes unrecorded by the official figures.

b.           Output method

To measure national income based on product method are predicated to help each sector in country. These sectors can be classified into three; primary sectors, secondary sectors and tertiary sectors.

                                                         i.            The primary sectors
-          Agriculture, forestry, and fishery.
-          Mining and quarry.

                                                       ii.            The secondary sectors
-          Manufacturing/ industry
-          Construction

                                                     iii.            The tertiary sectors
-          Electric, gas and water.
-          Transport, storage and communication.
-          Wholesale trade and retail, hotel and restaurant.
-          Finance, insurance, estate and property business service.
-          Government service.
-          Other services.

c.         Expenditure methods

There are three components in calculating national income by using expenditure methods.

                                                         i.            Household expenditure and consumption

                                                       ii.            Producer expenditure or gross investment or gross private capital expenditure
-          Example; new construction such as housing, factories, equipments like machinery tools, changes in business stocks or inventories.

                                                       iii.            Government expenditure on goods and services excluding transfer payments.