THE DETERMINANT OF THE SIZE OF NATIONAL INCOME

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THE DETERMINANT OF THE SIZE OF NATIONAL INCOME

  1. Availability of resources and their utilization

These resources include natural resources, man-made and human resources; the more the resources utilized the more the income

  1. Political and social stability
  2. The availability of entrepreneur force in the economy
  3. The size of capital accumulated by a country

The more the capital good the more the national income due to the investment

  1. The level of technology

Advancement of technology leads to higher production leading to a higher national income

  1. Government policy       

This is particularly in developing policy such as infrastructure policy and privatization, licensing etc.The more the government policy is complicated the lesser the entrepreneur the lesser the output and hence the lower the national income.

     2. The efficient of labor force

The more the labor is inefficient the lesser the quality and output affecting the size of National income.

USES OF NATIONAL INCOME STATISTICS

  1. National income statistics help to show the growth rate of an economy annually i.e. the government computes the national income and compares it with the other year and calculate the % of growth rate.
  2. National income statistics helps to get per capital income.

Per capital income =National Income/Population

  1. It is used to determine the effectiveness of the government in tax, revenue collection. The tax revenue collected should be proportional to the National income.
  2. It helps to indicate resource utilization i.e. the more the National income the more the utilization of resources.
  3. It is used for international comparison of economic growth and the performance of a country.
  4. It is used for attracting foreign donors
  5. It helps the government in making decisions on allocation of resource in different sector by accessing the contribution in national income. The best sector is considered in resource allocation.
  6. Is used by the government in making policies e.g. Policies on employments e.t.c

PROBLEMS ENCOUNTERED IN COMPILING NATIONAL INCOME STATISTICS.

  1. Inaccurate data makes it difficult to get correct figure of national income and per capital income
  2. Transfer payment, this are used in calculating personal income it is difficult to know their actual value e.g. The value of a gift
  3. There is sometimes a problem of double counting .some items are included more than once in calculating national income e.g. Work in progress.
  4. There is a shortage of qualified personnel in compiling data
  5. Subsistence economy (non monetary activities)
  6. Illegal activities i.e. black market, social evils
  7. There is a problem of estimating income received from abroad.
  8. Data from self employment activities is not easily available.

KEYNESIAN APPROACH IN THE DETERMINATION OF NATIONAL INCOME EQUILIBRIUM.

According to Keynes national income equilibrium is determined at the intersection of demand and supply. In this argument he stated the following assumptions.

  1. Keynes assumed that there are only two sector in an economy i.e. Household and firm.
  2. The price of products are constant
  3. He assumed that there is no government expenditure.
  4. Keynes assumed that the supply of labor is constant.

Demand; according to Keynes is the total expenditure by the society, it is obtained from consumption and investment i.e. total demand is equal to total expenditure = C+I

Hence Y = C + I

Supply; is the total goods and services produced in a country within a year. According to Keynes supply =consumption + saving because when goods and services are sold the income received is spent on consumption and saving.

           Hence total supply  = C+S

                                  DD = SS

                                     Y = C+I      Y= C + S

                               C + I = C+S

                                      I = S

Hence; according to Keynes equilibrium in the national income is obtain when investment (I) is equal to saving (S)

RELATIONSHIP BETWEEN CONSUMPTION AND INCOME.

CONSUMPTION: Is the total expenditure by household which gives a satisfaction.

CONSUMPTION FUNCTION: Is a mathematical relationship between consumption and the level of disposable income. It is denoted by.

C= a + by

Where; c is consumption

             a is autonomous consumption. This is consumption that does not depend on income. It comes from past saving and borrowing.

             b is induced consumption i.e. consumption that depends on income i.e changes with change in income. This is the proportional of the income spent on consumption, it is also called marginal propensity to consume (MPC). it is a slope of consumption function

     The consumption function can be illustrated graphically as follows.

Average propensity to consume (APC)

This is consumption per unit of income i.e it is total consumption divide by total income 
       

Marginal propensity to consume (MPC)

Is the additional consumption resulting from additional income

FACTORS AFFECTING/ DETERMINING THE LEVEL OF CONSUMPTION

  1. The level of income (disposable income)
  2. Government expenditure

The higher the government expenditure the higher the consumption

      3. The more the taxes, the lesser amount spent for consumption.

      4. Prices of goods and service.

         The higher the prices of goods and services the lesser the level consumption.

      5. A mount of undistributed profits.

The more the profit retain the less the income, the lower the consumption.

      6. Changes in interest rate

Low interest rate on loans and savings increases consumption and high interest rate on loans and saving decreases consumption.

      7. Population size.

Level of consumptions depends on level of population. When the population is higher the consumption is also higher and vice versa is true.

 

RELATIONSHIP BETWEEN SAVING AND INCOME

Saving: refers to that part of income which is not spent in the current period.

Saving function: is a mathematical relationship between saving and income.

Qn. Derive the saving function.

 Y = C+S…….. (i)

C  = a + by….. (ii)

Substitute c in (i) in equation (ii)

  Y= a + by + S

Make S the subject

  S = y – a – by

  S = -a – by + y

     = a + y – by

     = a + y (1-b)

   S= a +  (1-b) y

The saving function can be illustrated as follows:-

Average Propensity to Save (APS)

This refers to saving per unit income

         APS = S/Y

Marginal prosperity to save (MPS)

             Is additional saving resulting from additional income

         MPS = ∆S/∆Y

QN: show that MPS + MPC= 1 where MPS is marginal prosperity to save and MPC is marginal propensity to consume.

Soln;

   Y = C + S

Assume there is a change in income bringing a both change in consumption and savings

   Y = C + S

MPC=C/Y   and MPS = S/Y

Divided throughout by change in income

Y/Y = C/Y + S/Y

  1  = MPC + MPS

  1. Why is MPS + MPC=1

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