National income is the total monetary value of goods and services produced in a country within one year. There are three main approaches to determining national income: expenditure, income, and value added. The expenditure approach uses the formula GDP=C+I+G+NX-M, where C is consumption, I is investment, G is government spending, NX is net exports, and M is imports. The income approach calculates GDP as the sum of compensation of employees, interest, rent, profits, and subtracts net factor income from abroad. The value added approach determines GDP by calculating the value added at each stage of production and summing across all sectors of the economy. National income statistics are important for economic analysis and policymaking but have some

1. MEASURESOF NATONALINCOME
National income is the total monetary value of all goods and services produced in a country within a
period of one year. It depicts among others; the living standards of citizens and the performance of
a government when it comes to prudent use of economic resources collectedfrom its citizens.
There are three knownapproaches to determining the national income of a country namely;
expenditure, income and value added approaches.
In the expenditure approach,thevalue is arrived at by use of a formula GDP = C + I + G +NX
Where:
C = Consumption, or expenditures by the household sector
I = Gross PrivateDomestic Investment, or expenditures by firms (or the business sector)
G = Government purchases of goods and services, or expenditures by the government sector
NX = Net Exports, or expenditures by the international sector
Since GDP is a measure of production for the entire economy,it can be measured by adding
together the expenditures forproduction of each of these four components, or sectors. Using this
method to compute GDP is called the expenditures approach. The expenditures approach uses a
formula that should become familiar to all students of macroeconomics:
In The Income Approach, todetermine the value of the gross domestic product,the following
formula is used.
GDP equals:
Wages (compensation of employees)+ interest+ rent+ profit (proprietors' income plus corporate
profits)- net factorIncomefrom abroad+ capital consumption allowance (depreciation)+indirect
business taxes (VAT tax)
The value added approach on the other hand ascertains the gross domestic product by determining
the additional mauve made to products at different production stages. To achieve this, the amount
incurred by the intermediate purchasers deducted from the total output. The differencesare then
added up to arrive at the gross domestic product.However,inorder to get the gross national
product net factor income fromabroad, that is, the value of exports less imports has to be added to
that of the gross domestic product. Gross national product=Gross domestic product-Depreciation-
Net National Product(at market price)-indirect taxes.
Example
Answer the followingquestions using the information forthe country X
Consumption -C kshs.700
Government Transfer Payments kshs.100
Depreciation kshs.200
Interest Income kshs.150
Exports -X kshs.200
Gross Corporate Profits kshs.180
Labor Income kshs.380

2. Taxes less Subsidies kshs.260
Corporate Retained Earnings kshs.50
Imports-M kshs.230
Personal Income Taxes kshs.150
Corporate Profit Taxes kshs.70
Government Spending -G kshs.400
Gross Investment -I kshs.100
Net Foreign Investment Income kshs. -15
Required
Determine the value of GDP using expenditure and income approaches
SUGGESTED SOLUTION
EXPENDITURE APPROACH
GDP=C+I+G+X-M (700+100+400+200-230)
1170
Add net foreign factor income -15
GNP 1155
Less depreciation
-200
NNP (mp) 955
Less indirect taxes -260
NNP ( fc)= National income 695
INCOME APPROACH
Interest income 150
Gross corporate profits 180
Labour income 380
Net foreign factor income -15
National income (NNPFC ) 695
G.D.P using income approach
NNP(FC) 695
Add indirect taxes 260
Add depreciation 200
Less net foreign factor income (-15)
GDP 1170
12
G.D. P=(450+105+180+200-250) 685
Adjustments
Increase in stock 5
690
Add net property income 7
GNP 697
Less deprecation -73
NNP (MP) 624
Add subsidies 12
Less indirect taxes -105
NNP (FC) 531
C+I+G+X-M
Inventory is production that has notbeen
sold.
An increasein inventory would bean
investment (ADDED)
A decreasein inventory would be
consumption(SUBTRACTED)

3. VALUE ADDEDAPPROACH
The economic transactions for a hypothetical economy in thousands of shillings are given as
follows:
Sector Total output Intermediate purchaser
Sh."000" Sh."000"
Service 76,000 37,000
Agricultural 55,000 23,000
Manufacturing 111,000 69,000
Indirect taxes = Sh.21, 000,000
fixed assets depreciation =Sh.22, 000,000
Required:
(I) gross national product using the value added approach. (2 marks)
(ii) Net domestic product at market price. (1 mark)
SUGGESTED SOLUTION
SECTOR OUTPUT PURCHASE VALUE ADDED
Service 76,000 37,000 39,000
Agricultural 55,000 23,000 32,000
Manufacturing 111,000 69,000 42,000
GDP (39,000+32,000+42,000) 113,000
Add net foreign factor income -
GNP 113,000
Less depreciation -22,000
NNP(MP) 91,000
Less indirect taxes -21,000
NNP(FC) 70,000
The use of these three methods come with their own fair of challenges including;
The treatment of non-monetary transactions.
Example: Services of Housewife, Services of house- maid. The services of house-maid are
part of national income, but if suppose the master marries the hose- maid, although she still
performs the same services, her contribution to the national income becomes zero. This is
because now these services do not contribute to the economic activity.
The treatment of output producedby theforeign firms in the country.
Should their income form a part of national income of the country in which they are
located? Or, should this income be treated as a part of national income of the country to
which the ownership of the firms belongs? It is generally agreed that the income of such
firm should be taken into account in the national income of the country in which the firm is

4. located. However, the profit earned by such firms will be sent to their own country, and
hence, would form part of that country’s income.
The national income accounts involves inventory adjustments.
The unused stock of the previous year may be sold in the current year, but the income will
be included in the previous year’s account. This adjustment is not at all logical and creates
problem in the calculation of national income of the current year.
Another difficulty in national income arises with regardto the Govt. sector.
How should we treat govt. functions like civil administration of maintenance of law and
those regarding the defense of the country? It is difficult to account the wages and salaries
paid the workers who are in service to that.
Income earned through illegal activities is not included in national income.
Services rendered free of charge are not included in GNP. By leaving out these service,
national income will work out to be less e.g. building your own house
Transfer payments are not included in national income as they do not contribute to
national product.
Capital gains and losses are not included in GNP as they are not the result of current
economic activities.
In the calculation of national income leisure foregone in the process of production is not
included.
OtherDifficultiesspecific to developing countries include:
BarterSystem. In the underdeveloped countries there is large non- monetized sector. A
non-monetized sector refers to that part of economy where output is not bought or sold
with the help of money. Money does not enter into exchange, and hence the value of
value should be imputed to this art of output which does not enter into monetary
transactions.
Subsistencesector. Agriculture is the predominant form of economic activity. But the
farming being still of subsistence in nature, a considerable amount of production is
consumed by the farmers themselves. This is that part of output which has been produced
satisfaction who is estimating the national income of the country.
Illiteracy: A large majority of people in the underdeveloped countries being illiterate, do
not keep any accounts of the actual quantity of goods they have produced. No record of
such transactions is available and the majority of the people do not have any idea about
their income and expenditure. Which again leads the inaccurate estimation of national
income.
Morethan oneJobs: in the underdeveloped countries, there is no clear-cut demarcation of
the occupations from which people derive their income. Many people are simultaneously
engaged in more than one occupation and thus derive their income from many source of
livelihood. Example: A “farmer” in “Slack season”, take up jobs in industries in some casual
jobs like washing and painting etc. Therefore, it becomes difficult to place a worker under
particular occupation.

5. Inadequate Information: information regarding small agriculturists, household industries,
is available is not adequate and reliable to estimate the national income.
Biasness in statistical process: the national income accounting is a statistical process and it
involves huge time, energy and money costs. Because of these inherent difficulties, an
individual investigator may cheat in the process of accounting. He/she may give fake
information/figures only to complete the process of accounting which is very subjective
and cannot be checked.
IMPORTANCE OF NATIONAL INCOME ANALYSIS
Reflecting & comparing the standards of living of different countries.
Reflecting & comparing the standards of living over time.
National income accounting indicates the growth of the economy in terms of income and
output.
National income statistics help the policy makers to frame policies to achieve full
employment and rapid economic growth.
A complete knowledge about the trends in national income is essential in economic
planning.
Research scholar also make use of national income data pertaining to input, output, saving,
consumption, investment and employment.
National income statistics it helps in solving/ removing inequalities in income distribution.