DIPLOMATS INTERNATIONAL SCHOOL RUMUEKINI PORT-HARCOURT

ECONOMICS LESSON NOTE FOR WEEK FOUR (4) ENDING 03/05/2022

CLASS: SS 2
DURATION: 3 periods (40 Minutes each)
TOPIC: ELEMENT OF NATIONAL INCOME ACCOUNTING
LESSON OBJECTIVES: By the end of the lesson students should be able to:
1. Define the concepts of (i) Personal Income (ii) Disposable Income (iii) Gross/Net
Domestic Product (iv) Gross/Net National Product (v)National income (vi) Income per
capita
2. Measure national income via methods- (i) Income Approach (ii) Output or Net Product
Approach (iii) Expenditure Approach
3. Discuss the Problems of computing National income via the three approaches
4. State the Sources and Reasons for/Usefulness of National income statistics
5. Outline Limitations of the use of National Income
6. Examine the Relationship between Standard of Living and Cost of Living

INSTRUCTIONAL MATERIALS: Comprehensive Economics for senior secondary schools

by Johnson Ugoji Anyaele; Fundamentals of Economics by R.A.I Anyawuocha., WASSCE past
Questions/Answer series and other online resource tools.
PREVIOUS KNOWLEDGE: The students have been taught Taxation. The teacher therefore
asks the following introductory questions to ascertain their understanding of the topic:
1. Define Incidence of Taxation and outline four (4) effects of taxes.
2. What is Taxation? State the merits and demerits of: Direct tax (ii) indirect tax?
INTRODUCTION
The teacher introduces the lesson by saying that:
The concept of National income is an integral aspect of a country’s economy that determines the
level of progress and economic welfare of the people of that country. It serves as a basis for
comparisons among countries of the world. The economic groupings or division of the countries
of the world into first, second and third world countries is partly made possible through the
national income estimate. A study of National income is important as it addresses the question
regarding what influences the financial position of a country’s economy and how to estimate this
financial position. It is for these reasons that this lesson material is packaged to fulfil the above
stated objectives.
PRESENTATION: The teacher presents the lesson under the following steps

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 1ST PERIOD
LESSON OBJECTIVES: By the end of the lesson students should be able to:
1. Define the concepts of (i) Personal Income (ii) Disposable Income (iii) Gross/Net
Domestic Product (iv) Gross/Net National Product (v)National income (vi) Income per
capita
2. Measure national income via methods- (i) Income Approach (ii) Output or Net Product
Approach (iii) Expenditure Approach

STEP 1: DEFINITION OF CONCEPTS

The teacher defines the following concepts of National income accounting as follows:
(i) Personal Income: This is the earnings of an individual (in monetary terms) for taking
part in the production of goods and services, either by him or his property. It includes the
wages for labour services rendered, interest received by capital owner, rent paid to land
owner and profit received by entrepreneur.
(ii) Disposable Income: This is part of income which is left after personal income tax is
deducted; that is personal income less taxation. It is the amount left for spending and
saving.
(iii) Gross Domestic Product (GDP): This is the total value (in monetary terms) of all final
goods and services produced in a country within a period of one year, by all residents
(including citizens and foreigners) of the country.
In calculating GDP, earnings of citizens or their investments abroad are excluded, while
earnings of foreigners or earnings from foreign investments in the country are included.
Also no allowance is made for depreciation. GDP is the same as Gross Domestic Income
(GDI). Therefore, GDP = NDP + Depreciation. Also, GDP = GNP – Net income from
abroad. Where NDP = Net Domestic Product,
GNP = Gross National product.
Net income from abroad = (x-m), export less imports
Net Domestic Product (NDP): This is the G.D.P less depreciation. In this case,
allowances are made for the wear and tear of capital assets (otherwise known as capital
consumption). NDP = GDP – Depreciation.
(iv) Gross National Product (GNP): This is the monetary value of goods and services,
produced by the citizens of a country (including income from their investment) both at
home and abroad. It includes the earnings of the citizens and their investment in other
countries, but excludes the earnings of foreigners or their investment in the country. In
calculating GNP no allowance is made for depreciation. GNP =GDP + Net income from
abroad.

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 Net National Product (NNP): This is the product of the difference between GNP and the
Depreciation that occurred in the period under review. Depreciation refers to the
deductions made from a country’s fixed capital as a result of wear and tear. NNP = GNP -
Depreciation or Capital consumption allowance.
(v) National Income (N.I): This is the estimated monetary value of all goods and services
produced in a country over a period of time usually one year. It is also seen as the sum
total of all incomes (i.e. profits, rents, interest and wages) accruing to the four factors of
production in a country.
(vi) Income Per Capita: This is the income per head of the population. It is the national
income divided by the total population of a country. It is also the total GNP of a
country divided by her total population. It is the average income of a given country and
serves as economic indicator of the level of standard of living and development.
Per capita income = Real GNP or Total National Income
Total population

STEP 2. MEASUREMENT OF NATIONAL INCOME METHODS

The teacher explains the following ways of measuring National income in a country thus:
1. Income Approach
2. Output or Net Product Approach
3. Expenditure Approach
2.1 Income Approach: In this method, the total monetary values of incomes received by
individuals, business organisations, government agencies, etc., are calculated. These incomes
include all interests, salaries, rents, profits, etc., received and made in a given period of time
usually in a year. To avoid double-counting, business expenses and transfer incomes or payments
are not included.
N/B: Transfer payment refers to payment of money for which goods and services are not
received in return. Examples of transfer payment include the incomes redistributed by the
government, firms and individuals through gifts given to old people, students and beggars;
pensions paid to old people, etc. They are art of people’s income which are already counted.
Using this method will yield the following outcome:
i. GNP or GDP at factor cost (When the costs (i.e. incomes) of all factors of production are
summed up).
ii. GNP ort GDP at market prices (When taxes are added and subsidies subtracted from the
factor costs).
2.2 Output or Net Product Approach: This method is used to calculate the total monetary
value of all goods and services produced by the various economic units (individual, firms and the
government) in a year. In this method, national income is measured by:

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a. Adding together, the value of the net contributions of the various sectors in the country to
national output. To avoid double counting, income is measured on a value-added basis.
Value added is the value of output, less cost of inputs. The sum of these values-added of a
sector becomes the net contribution of that sector.
b. The value of exports is included while that of import are subtracted
c. The value of free services are included e.g. defence and justice, house-helps, house wives.
d. The value of producer-consumed goods and services, and owner-occupied houses are
included.
Using this method will yield the following outcome:
i. GDP at market prices (when the values of net contributions of all sectors are summed
up).
ii. GDP at factor cost (When subsidies are added and taxes subtracted from (a)).

2.3 Expenditure Approach: This method measures the total expenditure on goods and
services by individuals, firms and government in a country. In calculating the National Income
via this approach:
a. Only expenditure on the monetary values of all goods of a final nature are calculated,
expenditures on intermediate goods (i.e. capital goods) are excluded. This is done in
order to avoid double-counting.
b. Incomes that were not spent but saved must also be added to arrive at a true estimate of
N.I
c. Transfer payments are excluded.
Using this approach requires the use of the formula below to compute: Y= C+ I + G + (X-M)
Where:
Y= National income; C= Private consumption expenditure; I= Private investment expenditure;
G=Government expenditure on consumption and investment. X= Exports; M= Imports.
N/B: If these three methods are meticulously calculated through a herculean task, they will
arrive at the same answer- National Income of a country.
See worked examples below

EVALUATION: The teacher assesses the students based on the following:

1. What is National Income? How is Gross National product (GNP) different from Gross
Domestic product (GDP?
2. List and Explain any two (2) approaches to calculating National income statistics

2ND PERIOD
LESSON OBJECTIVES: By the end of the lesson students should be able to:
3. Discuss the Problems of computing National income via the three approaches
4. State the Sources and Reasons for/Usefulness of National income statistics

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STEP 3. GENERAL PROBLEMS OF COMPUTING NATIONAL INCOME VIA THE
THREE APPROACHES IN WEST AFRICA
The teacher leads discussion into the problems of computing National income as follows:
i. Double counting: This involves calculating the value of commodities twice or more. In
using the output approach, the cost may sometimes be recorded in addition to the value of
the finished product. This gives inaccurate estimate of National Income.
ii. Inadequate statistical data: This problem arises where small scale producers do not
keep any financial records of their income and expenditure. And also where there exist
inaccurate data due to illiteracy and false declaration of income to evade tax.
iii. Transfer payments: These are a part of income which is given to others freely, without
any services rendered by the beneficiaries in production. It is sometimes difficult to
ascertain whether a payment made is a transfer or not. As such they are sometimes
recorded as part of income.
iv. Determining depreciation value: The inability of many business units and industrial
ventures to calculate the depreciation of their machinery makes it difficult to ascertain the
true position of a country’s national income.
v. Effects of Services not paid for: Many services are rendered to oneself or others which
are not paid for. For instance, cutting one’s own hair. Since these services are not
counted, it leads to underestimation of National income.
vi. Changes in the value of money: Frequent changes in the value of money brought about
by inflation or deflation, often lead to inaccurate estimate of National income which
could be overly exaggerated or underestimated.
vii. Problems of assessing income from abroad: Many payments made to and from other
countries do not pass through official channels, thereby making national income estimate
very difficult.
viii. Payments in kind: Many payments are made with material objects rather than money.
As such, the value of these payment sometimes becomes difficult to determine.
ix. Abundance of owner occupied houses: Since the number of owner-occupied houses are
difficult to determine. The rent not paid for by these owners are difficult to estimate
hence wrong estimate of national income becomes inevitable.
x. False data from Inland Revenue service also hampers accurate national income
estimate.

STEP 4. SOURCES AND REASONS FOR/USEFULNESS OF NATIONAL INCOME

STATISTICS
The teacher states the sources of and reasons for National income statistics as follows:
4.1 Sources of National Income statistics
The following are sources of national income statistics:
1. Foreign trade figures
2. Payroll of both private and public enterprises from which income can be estimated.

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 3. Income tax returns
4. Economic surveys to determine output and expenditure patterns

4.2 Usefulness of/ Reasons for Measuring National Income

1. National income figures are used for economic planning
2. It helps to determine the growth rate of the economy
3. It is used to measure the level of prosperity or the general standard of living of the people
4. It provides a basis for foreign aid and technical assistance.
5. It influences foreign investment
6. It enables the country to know the performance of the various sectors of the economy.
7. It helps to determine the pattern of expenditure of households.
8. It useful for international comparisons of the standard of living among countries.
EVALUATION: The teacher assesses the students based on the following
1. Discuss the Problems of computing National income via the three approaches
2. State the sources of National income statistics
3. Outline the reasons for/Usefulness of National income statistics

3RD PERIOD
LESSON OBJECTIVES: By the end of the lesson students should be able to:
5. Outline Limitations of the use of National Income
6. Examine the Relationship between Standard of Living and Cost of Living

STEP 5. LIMITATIONS OF THE USE OF NATIONAL INCOME ESTIMATE

The teacher outlines the limitations of the use of National income as follows:
1. It fails to show whether National income are distributed evenly or inequitably. As such
per capita income becomes useless as a measure of the general standard of living.
2. There may be population changes and problems of population statistics which could
invalidate the use of national income estimate as a true measure of standard of living
3. The different approaches to measurement of national income may be associated with
some complications that makes comparisons among countries difficult. This is because of
the tendency of the other country to exclude an item(s) that the other country has
included in its computation.
4. National income figures do not reveal the differences in working conditions and the real
cost of increasing national output among countries.

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 5. The differences in the internal value of money makes it difficult for national income
figures to be used as a basis for comparing the standard of living among countries.
6. Changes in the price level limits the comparison of national income between years.
Although this limitation can be remedied through the use of price index where the
inflation rate is known.

STEP 6. RELATIONSHIP BETWEEN STANDARD OF LIVING AND COST OF

LIVING
The teacher examines the relationship between standard of living and cost of living as follows:

6.1 Standard of Living: This refers to the level of welfare attained by individuals in a
country at a particular time. This level of welfare is measured in terms of the quantity and quality
of goods and services consumed within a period of time. The higher the quantity and quality of
goods and services consumed, the higher the standard of living and vice versa.
The standard of living of a people of a country depends on a variety of factors such as the size of
the national income, the total population, the method of distribution of the national income, the
price level, etc. It raises a lot of difficulties in using per capita income to measure the standard of
living because it does not take into account the conditions under which the income is produced,
the working hours, the hazards, pollutions etc.
6.2 Cost of Living: This refers to the total amount of money spent to obtain the goods and
services which will enable him exist at a particular time. It is also seen as the money cost of
acquiring the essentials of good living required for sustainability at a given period of time.
The cost of living largely depends on the prices of goods and services. If prices are high, the
purchasing power drops hence cost of living will be low and vice versa.
6.3 Relationship between them
1. If prices are high, the cost of living will be high. Thus a reduction in the purchasing
power of the people will lead to low standard of living
2. If Prices are low, the cost of living will be low. This increases the purchasing power and
consumption of the people leading to an increase in the people’s standard of living.
3. There is an inverse relationship between cost of living and standard of living in that,
while a high cost of living reduces the standard of living, a reduction in cost of living
increases the standard of living.
4. Therefore, it is the cost of living that determines the standard of living

WORKED EXAMPLES:
Q.1 The data below is the National Income Statistics of a country in the year 2005. (all
figures are in Millions of $). Use the information in the table to answer the questions that follow

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 S/ ITEMS Amount ($) m
NO.
1 Manufacturing 840
2 Mining 420
3 Agriculture 350
4 Construction 200
5 Commerce 100
6 Utilities 150
7 Transport, storage and other services 300
8 Net factor Income from Abroad 180
9 Depreciation 90
10 Subsidies 100
11 Indirect taxes 80

(a) Compute the following

(i) Gross Domestic Product at Market Price
(ii) Gross National Product at Market prices
(iii) Net National Product at market prices
(iv) Net National product at factor cost
(b) Given the total population of the country as 50,000. What is the per capita income in the year
2005?
(c) Identify any four problems associated with this method of measuring national income.

SOLUTION
(i) Gross Domestic Product at Market (iv) NNP at factor cost:
Price: = NNP at market price + Subsidies –
Manufacturing-------- 840 Indirect taxes
Mining----------------- 420 = $ 2,450m + $100m - $ 80m
Agriculture------------ 350
NNP at factor cost (fc) = $ 2,470m
Construction---------- 200
Commerce-------------100
Utilities---------------- 150 (b) Per Capita income:
Transport/storage---- 300
= Net National Product (fc)
Total Population
GDP at market price = $ 2,360 m
NNP at factor cost (fc) = $ 2,470m
Total population = 50,000
(ii) Gross National Product at Market
= $ 2,470m
Price: 50,000
= GDP + Net income from abroad Per Capita income = $ 49,400.
= $ 2,360 m + $ 180m (c) Problems of the output/ product
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GNP at market price= $2,540 m approach:
1. Problem of double counting
 Q.2 The table below shows the national income of a country in 1998. Use the data to answer the
questions that follow

S/NO. ITEMS Amount ($) Calculate the:

millions
1 Personal consumption expenditure 640 (i) Gross Domestic Product (GDP)
2. Gross Private Domestic Investment 180
(ii) Gross National Product (GNP)
3 Government expenditure 220
4 Exports of goods and services 175 (iii) Net National Product (NNP)
5 Imports of goods and services 202
6 Subsidies 48 (iv) National Income at factor cost
7 Indirect business taxes 322
8 Consumption of fixed capital 115
9 Net property income from abroad 80

SOLUTION
Using the Expenditure approach (iii) Net National Product (NNP):
GDP = C+ I + G + (X-M) = GNP – Consumption of fixed capital
(i) Gross Domestic Product (GDP): = $ 1,093m - $ 115m
Personal consumption expenditure (C) ---640 ∴ NNP at market price = $ 978 m
Gross Private Domestic Investment (I) -- 180
Government expenditure (G) --------------220 (iv) National Income at factor cost:
Exports- Imports (X-M) ------------ (175-202)
= NNP at market price – Indirect taxes +
∴GDP = $ 1,013 m subsidies
(ii) Gross National Product (GNP): = $978 – $322 + $48
= GDP + Net Property income from abroad ∴N.I (fc) = $ 704 m
= $ 1,013 m + $ 80m
∴GNP = $1,093 m
[

Q.3 The table below shows the national income of a country in 2018. Use the data to answer the
questions that follow

S/NO ITEMS AMOUNT Calculate the:

($) m
(i) GDP at market price
1 Compensation of employees 800
2 Mixed income of self-employed 900 (ii) GNP at market price
3 Net factor income from abroad -50 SOLUTION
(iii) NNP)
4 Rent 350
N/B:
(iv)Operating surplusatisfactor cost
National Income
5 Profit 600 the surplus or deficit on
6 Consumption of fixed capital 200
7 Net indirect taxes 250
8 Interest 450
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9 Operating Surplus 1400
production activities before interest, rents or charges and corresponds to the income which the
units obtain from their own use of their production facilities
(i) GDP mp = Compensation of employees + mixed income of self-employed + operating surplus
+ depreciation + net indirect taxes
= 200+ 250+ 800 + 1400 (350+600+450) + 900
GDP mp = $3550
(ii) GNP mp = GDP mp + Net Factor Income from abroad (NFIA)
= 3550 + (-50)
GNP mp = $3500
(iii) NNP mp = GNP mp – Depreciation.
= 3500- 200
NNP mp = $ 3300
(iv) National Income (N.I) fc = NNP mp – Net Indirect Taxes
=3300 - 250
(N.I) fc = $ 3050
EVALUATION: The teacher assesses the students based on the following:
1. What are the limitations of national income estimates as a measure of welfare?
2. Differentiate between Cost of living and standard of living
3. Distinguish between the following pairs of concepts
i. GNP and GDP
ii. NNP and NDP
iii. NNI and GNI
iv. National income and per capita income
4. National income account

items Amount N million

Consumption expenditure 5000
Government expenditure 7000
Capital consumption allowance 1000
imports 3000
exports 8000
Gross capital formation 9000
Increase in stocks 2000
(a) Calculate the national income

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 (b) What method of national income measurement is required in this case?
CONCLUSION: National income accounting is an aspect of macroeconomics that measures the
economic performance of a country during a given period of time. It helps to determine whether
the economy is growing, stagnating or declining over time. A good knowledge of this aspect of
economics not only help the government, firms and individuals to prioritize the allocation of
scarce resources in the most productive way but also enables them to evaluate the net
contributions of the factors of production in the various economic sectors of the country to the
National output which in turn determines the level of welfare of the people. It is for this reason
that A. C. Pigou defined economics as the science of material welfare. The teacher concludes
with a recap of major points discussed, entertains questions and administers test.
ASSIGNMENT: Discuss whether the following items should be included in an estimate of Net
National Product.
1. Food produced for our own consumption
2. Capital consumption allowance
3. Transfer payments
4. Government subsidies

SUPERVISOR’S REMARK: ____________________

Thanks for reading.

PREPARED BY: LENEE, LETAMBARI G.
gletam4u@gmail.com
08139126541

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