(a) Explain the methods of measuring the national income of a country
(b) State any three problems associated with measuring national income.
Explanation
(a) Methods of measuring the national income of a country are:
(i) Output method: This method measures the total money value of all goods and services produced in the country in a year. In order to avoid double counting, the figures are collected on the basis of value added.
(ii) Expenditure method: The expenditure approach calculates the total amount spent on consumption and investment purposes during the year. It is the total amount spent on goods and services by individuals, the government and firms.
(iii) Income method: This is obtained by adding incomes received by all the factors of production. The incomes to be added include workers' earning, profits of entrepreneurs, rents on land, etc. Transfer payments such as payment to old people, beggars are not included.
(b) Problems associated with measuring national income include:
(i) Incomplete information: Income returns are inaccurate and incomplete.
(ii) Double counting.
(iii) Inflation which changes the value of money upsets the calculation.
(iv) Subsistence production, i.e. housewife, production of goods for one's family.
(v) Unpaid goods and services, e.g. housewife, housekeepers.
(vi) Illegal transactions like drug peddling, smuggling etc.