TOPIC: MEASUREMENT OF ECONOMIC PERFORMANCE
SUBTOPIC: NATIONAL INCOME STATISTICS
OBJECTIVES
By the end of this subtopic learners should be able to:
 Calculate the Gross Domestic Product and Gross national Product using the three methods
 Convert the Gross national product to net national product
 Compare the performance of Zimbabwe’s economy using the national income figures
 Compare the economic performance of two or more countries over a given period of time
National Income
 National income is a measurement of the output of a country or an economy.
 The country measures the output of its economy to gauge how well the economy is
performing.
 The performance of the economy is measured by different methods, including the gross
domestic product.
 Using the national output figure a country ascertains the economic growth of the country.
 Economic growth is a measure of the increase in the national output from one year to the
other.
 The output statistics are compiled on an accounting period such as quarterly or yearly.
 An economy is considered to have a sustained economic growth if it experiences an increase
in output yearly for many years.
 If a country experiences economic growth, economists assume that there is an increase in
the standard of living of the residents.
The importance of national output statistics
(a) One of the importance of the national output statistics is to compare the economic
performance of a country on a year to year basis.
(b) The national output can also be used to compare the economic performance of two or more
countries.
(c) The national output figure helps in the formation of economic policies such as fiscal or
monetary policies in order to address key economic issues, such as deficit.
 In compiling national output statistics, accountants give breakdown of the various
components of the economy.
 Such breakdown can easily be interpreted by economists and policy makers and transformed
into national policies.
(c) The current output statistics can be used to analyze the future trend of the economy,
prompting the adoption of corrective measures when there are bottlenecks or stagnations.
 The government may use the statistics to make changes in its spending and patterns.
(d) The national output can be used to compare the standard of living of different countries.
(e) The statistics help in measuring the welfare and standard of living of the people in the
country, particularly if GDP per capita is used.
(f) Economists use the information to create and test economic models, which help in finding
ways to improve the performance of the economy.
(g) The national output figures can be used when a country seeks economic aid from other
countries and donor organizations.
Gross Domestic Product
 The most basic way of measuring the output of a nation is the gross domestic product (GDP).
 The gross domestic product is the total output produced by an economy within a period of
time, such as a year.
 It is the value of all final products that are produced within a country, over a period of time.
 As a result the value of products of goods produced in previous national accounting periods
will not be included in the current year’s GDP figure.
 Even the output produced by foreign firms and individuals operating in the country are
included in the GDP figure.
 Therefore, GDP is the total value of goods and services that has been produced in the country
within a period of time.
 The income obtained from the resale of products produced in previous periods is not included
in the GDP.
 For example, if a person has an existing house and sell it now, that amount is not added into
the GDP figure.
 The term “gross” means before allowing for capital consumption eg depreciation of
machinery and equipment.
 Term “domestic” means within the boundaries of a given country
 Product” means output
 The GDP originates from the use of the factors of production within the country.
 In simple terms the GDP is obtained by adding the value of final goods.
Measurement of national income
 The national income can be measured using any of the following three methods, namely:
i. Output method
ii. Income method
iii. Expenditure method.
 These methods produce the same results because:
Output = income = expenditure
Output or value added method
 The output method involves the addition of the value of current output of all industries,
including manufacturing sector, construction and the service industry.
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The production of goods and services made by the government is also included under GDP.
Using this method, national accountants add the value of final goods and services that are
produced by all firms and individuals in the entire economy.
 Table 1 shows a sample of calculating GDP using the output method.
Table 1: Calculating GDP
Industry
Amount ($000)
Mining sector
$12 000
Finance
$10 000
Insurance
$11 000
Agriculture
$20 000
Transport and communication
$15 000
Education
$ 5 000
GDP at Factor Cost
$73 000
This is a simple workout assuming that these are the only sectors that exist in the economy.
 Not all output of firms should be added, because some output from other firms is used as
input in the production of other goods and services.
 The goods that are used for further production purpose are referred to as intermediate
goods.
 The value of intermediate goods and services must not be included when using this method,
as that may lead to double counting of the products.
 Alternatively, GDP can be obtained by calculating the total of the value added at each stage
of production.
 Valued added = output of the firm minus inputs purchased from other firms.
 There is a problem of calculating the value of stocks which is not sold within the given period.
 If not used with care the output method can lead to the problem of double counting.
The problem of double counting
 Double accounting occurs if the value of a single good or service has been added twice in
calculating GDP.
 Therefore, if due care is not taken, the value of national output can be overstated through
double counting.
 The surest way to avoid double counting is using the value added method at various stages
of output.
 The economy can simply add the value of final goods and services.
 Final goods and services are goods which are not used as inputs in the production of other
goods.
 The goods that are used as inputs in the production of other goods are called intermediate
goods and must not be included in the calculation of GDP.
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These inputs are bought from other producers.
So only the net value of production of each firm must be included in GDP.
Double counting can also be avoided by summing up the incomes earned by the owners of
the factors of production at the various stages of production.
Income method
 The national output is obtained by adding up the various incomes that are earned by factors
of production which include labour, capital, enterprise and land.
 Using this method, the total output of the economy is a summation of interests, wages and
salaries, rent and profit earned within the specified period of time.
 This is so because the goods and services in the economy are purchased using income earned
from factors of production.
 Wages and salaries are a payment for labour.
 Rent is received from the use of property owned by households and businesses.
 Profit is earned by entrepreneurs, including self-employed individuals.
 Corporate profits are profits earned by businesses and are also added to the national income.
 Table 2 shows a sample of how the national income is derived using the income method:
Table 2: Calculating GDP using the income method
Profit ( entrepreneurs + Corporate)
$30 000
Interest on capital
$20 000
Rent and royalties earned
$ 5 000
Compensation for labour (wages + Salaries)
$15 000
Mixed earnings (income)
$ 3 000
National income (at cost)
$73 000
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The figures included in the calculations are aggregate ones.
However, all transfer payments such as unemployment benefits and student grants must not
be added up because they have been given to the beneficiary without them producing goods
and services.
 It also excludes the transfer of income from one person to the other, which is referred to as
private transfer.
𝑮𝑫𝑷 = 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 + 𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒆 𝒄𝒐𝒎𝒑𝒆𝒏𝒔𝒂𝒕𝒊𝒐𝒏 + 𝒓𝒆𝒏𝒕 𝒂𝒏𝒅 𝒓𝒐𝒚𝒂𝒍𝒕𝒊𝒆𝒔 + 𝒑𝒓𝒐𝒇𝒊𝒕
+ 𝒏𝒐𝒏𝒊𝒏𝒄𝒐𝒎𝒆 𝒄𝒉𝒂𝒓𝒈𝒆𝒔
 When calculating GDP at factor cost, we add subsidies to GDP at market price, then subtract
indirect taxes.
𝑮𝑫𝑷 𝒂𝒕 𝑭𝒂𝒄𝒕𝒐𝒓 𝒄𝒐𝒔𝒕𝒔 = 𝑮𝑫𝑷 𝒂𝒕 𝒎𝒂𝒓𝒌𝒆𝒕 𝒑𝒓𝒊𝒄𝒆 − 𝒊𝒏𝒅𝒊𝒓𝒆𝒄𝒕 𝒕𝒂𝒙𝒆𝒔 + 𝒔𝒃𝒔𝒊𝒅𝒊𝒆𝒔
Transfers
 Some of the money that changes hands in the economy are called transfers.
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Transfers are not included in the national statistics.
Transfers are the incomes that people receive without contributing to output.
There is output if a good or service or both are produced.
The following are some examples of transfer payments:
o Social security funds provided by the government.
o Student grants that come from the government.
o Income obtained from the sale of second hand products.
Expenditure method
 The goods and services that are produced in the country can be sold or kept as inventories.
 Therefore the output of an economy can be obtained by adding up the income spent on
buying goods and services.
 However, expenditure on intermediate goods and services should be excluded.
 Transfer payments must also be excluded from the accounting.
 When using expenditure method, exports’ value is added and expenditure of imports
subtracted.
o The resultant figure is called net exports
 To get an accurate figure, subsidies must also be added and indirect taxes subtracted.
 There are different forms of expenditure that are added up, which are:
o Consumption
o Government expenditure
o Private investment
o Net exports
Consumption (C)
 Consumption refers to purchases made by households on final goods and services.
 It is the amount of money used to buy durable and non-durable consumer goods.
 It also include the payment made by consumers on services such as education and healthcare.
Government expenditure (G)
 This is the amount that the government has used in purchasing goods and services.
 The government buys capital goods.
 It also buys consumer goods such as police and army uniforms.
 The government pays its employees as well.
Investment (I)
 Investment refers to the money used by businesses to buy capital goods such as machinery,
equipment and tools.
 Investment can include the replacement of old equipment and machinery as well as their
repairs.
Net exports (X-M)
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This is the difference between the export figure and the import figure.
Therefore GDP = C +G + I + (X-M)
Table 3 shows an illustration of calculation of the national output using the expenditure
method:
Table 3: Calculation of national income using expenditure method
Expenditure
Value ($000)
Investment
20 000
Government
15 000
Consumption
25 000
Net exports
7 000
Total increase in stock
6 000
GDP at market price
73 000
Problems encountered in calculating national income
 It is difficult for most countries to get accurate national income figures due to the following
problems:
 Some people get income from engaging in illegal economic activities such smuggling some
goods. Income obtained in this way is not recorded.
 The products that are produced by households for personal consumption are not accounted
in the national income figure. Some income such as rent are not exchanged in the
marketplace.
 Some countries with low level of literacy may find it difficult to get accurate figures. For
example, government may not get accurate figures from individuals who have low numerical
capabilities.
 There is a problem of transfer payment. There are earnings that are part of the income for
individuals, which are expenditure to the government. There is no consensus if such income
should or should not be included in the national income.
 The treatment of depreciation also creates challenges. There are different means of
measuring depreciation of capital assets. Firms use different methods of calculating
depreciation.
 Some firms and businesses give wrong production and sales information as a means to divert
taxation.
 Some goods and services that are produced in the hidden economy are not added to the
national income.
 At times the national income figure is inflated due to double counting.
Gross National Product (GNP)
 Gross national product is the total output of all residents of a country, irrespective of where
production takes place.
 It is the output made by residents of a country, using factors of production that they own,
whether inside or outside the country.
 All output produced by Zimbabweans at home or in other countries is added together.
 The earnings of foreigners who do business in the country are not included in GNP.
 As in the case of GDP, gross means that there has been no adjustment made for depreciation
of capital assets.
 The GNP is normally regarded as a better measure of national income, as it includes
production made by all nationals of the country.
 The gross national product is derived from GDP by adding net factor income.
 Net factor income figure is obtained by subtracting factor income paid to foreign countries
from factor income received by Zimbabwe from abroad.
Net National Product (NNP)
 The net national product is derived from the GNP by subtracting depreciation arising from
capital assets.
 This is because the production of goods and services results in wearing and tearing of
machinery and equipment.
 So depreciation is part of the cost of producing output.
 The more output produced the more the depreciation.
 Depreciation shows the amount that is set aside from the national income to maintain the
capacity of the economy to produce goods and services in the future.
Income per capita
 The income per capita is the most common method of assessing the living standards of the
residents of a country.
 The income per capita is obtained by dividing the national income by the total population of
the country within a period of time.
 The term per capita simply means per person.
 Per capita income shows the average amount of money each resident of a country would get
if all the people are given the same amount.
 It is used as a measure of the wealth of a country.
 The GDP per capita is found by divide the country’s GDP figure by the population of the
country.
 The real GDP per capita is GDP per capita adjusted for change in inflation.
 Gross national product per capita is obtained by dividing the GNP by the population.
Comparison of economic performance of various Southern Africa Development Community
(SADC) countries
 The national statistics can be used to compare the economic performance of countries.
 Table 4 shows statistics of SADC countries for the year 2001.
Table 4: Comparison of GDP for 2001
Country
GDP in $
Per capita income
Angola
6.72 billion
$466.26
Zimbabwe
6.16 billion
$489.74
Botswana
5.25 billion
$2 944.33
Madagascar
4.19 billion
$258.31
Mozambique
3.80 billion
$202.30
Namibia
3.51 billion
$1 817.96
Zambia
3.33 billion
$321.18
Swaziland
1.39 billion
$1 291.47
Lesotho
1.10 billion
$587.24
Seychelles
538.16 million
$6 627.40
South Africa
384.29 billion
$2 716.56
 The GDP figure is used to compare the economic sizes of different countries.
 For example a country deciding to have economic agreements may need to consider the
economic capacity of the nation, which is shown by national income figures.
 For example, South Africa with $384.29 billion (GDP) has more economic power than
Zimbabwe, which has a GDP figure of $6.16 billion.
 The per capita income is used to compare the standard of living of people in various countries.
 For example, Angola with a per capita income of $466.26 is considered to have a better
standard of living than Mozambique with per capita income of $202.30.
Comparison of national income figures over time
 The national income figures of a country can help economists and national planners to
evaluate the performance of the national economy.
 GDP and per capita income can be used, depending on what aspects of the economy is being
assessed.
 Diagram 1 shows the per capita income of Zimbabwe over a period of time, 1960 to 2011:
Diagram 1
 These figures show trend in GDP per capita income.
 The trend in GDP per capita indicates a downward trend between 1960 and 2010.
 The higher the per capita income, the better the standard of living of the people living in the
country.
 Therefore standard of living was higher in the period 1972 to 2000 than in between the period
2000 to 2007.
 Table 5 shows the GDP distribution by sectors:
Table 5
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Using these national income figures the performance of the different sectors of the economy
can be compared.
For example the manufacturing sector and the agriculture sectors were the major economic
performers 2010 to 2012.
The domestic service was the lowest performer.
The analysis of such statistics helps the country to identify areas of the economy that requires
assistance in order to increase the national income and to make the economy more
competitive.