NATIONAL INCOME
National income is the total value of a countries final output of all new goods and services produced in one year. It is certain that to understand how national income is created how national income is crated is the starting point for macroeconomics.
NATIONAL INCOME ACCOUNTS
Since the 1940s the UK government has gathered detailed records of national income, though the collection of basic data goes back to the 17th century . the published national income account for the UK called the ‘BLUE BOOK” measure all the economic activities that ‘add value” to the economy.
ADDING VALUE
National output, income and expenditure are gathered when there is an exchange involving a monetary transaction. However, for an individuals economic transaction to be included in aggregated national income it must involve the purchase of newly produced goods or services. In other words it must create a genuine addition to the value of the scarce resources for instance a transaction that involves selling a second hand good, and which was new two years ago does not add to national income , through the original production and purchases does. Transactions which do not add value are called transfers, and they includes l second hand sales, gifts and such as disability allowance and state pensions
THE NATIONAL INCOME IDENTITY
This relationship is expressed in the national income identity, where the amount received a national income is identical to the amount spent as national expenditure, which is also identical to what is produced as national output. Throughout macroeconomics the terms income, output and expenditure are interchangeable
THE CREATION OF NATIONAL INCOME
The simplest way to think about national income is to consider what happens when one product is manufactured and sold typically, goods are produced in a number of stages where raw materials are converted by firms at one “stage” than sold to firms at the next stage. Blue is added at each intermediate, stage, and at the final stage , the product is giving a retail selling price. The retail prince reflects the value added in terms of all the resources used in all the previous stages of production
FINAL OUTPUT
In accounting terms, only the value of final output is recorded . to avoid the problem of double counting, only the value of the final stage, the retail price is included and not the value added in all the intermediate stages, the costs of production. Plus profits. Infact national income is the value of all the final output of goods and services produced in one year. For instance, for one to consider the production of a motor car which has a retail price of N250,000 and this price includes N210,000 for all the cost of production, N60,000 for component, N10,000 for assembly, N500 for marketing and N40,000 as profit for one to avoid double counting the national income accounts only record the value of the final stage, which is at the selling price of N250,000
There are three methods of calculating national income:
1. The income methods : This system add up all incomes received by the factors of production generated in the economy during a year. This includes wages from employment and self employment, profits to firms , interest to senders of capital and rents to owners of land
2. The output method: which involve the combined value of the new and final output produced in all sectors of the economy. Including manufacturing financial services transport, leisure and agriculture
3. Expenditure method : this system add up all spending in the economy by households and firms on new and final goods and services by households and firms
Thus gross domestic product (GOP) is the most important aggregate of national income for accounting purposes and for economic analysis
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