National Income Accounting

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TYS N2001
National Income Statistics [GDP and GNP]

Candidates should be able to:
Understand the model of national income as a circular flow involving households, firms,
government and foreign sector
Explain the significance of each of the key economic indicators
Interpret statistical data
Use the key indicators to assess the economic performance of an economy, including international
comparisons
Analyse the limitations of using the indicators to measure economic performance as well as
standard of living of an economy including international comparison

TYS N2001
It was reported that in the last 10years there has been an improvement in the standard of living of
the average person in Namibia.
(b) Comment on the difficulties of comparing living standards between countries. [13]


Dissecting the question:
CRITICAL ANALYSE, ASSESS & EVALUATE the difficulties when comparing SOL
between countries

In NIA, candidates are normally required to judge whether national income statistics are
good reflection of SOL between countries. Eg If the GNP of one country is 3x larger, does
it mean that its SOL is 3x higher than another country ?

Advice:
use real world application to explain the difficulties in making comparisons between
countries eg based on PPP/exchange rate problems, different population sizes, difficulties
in collecting data
Good to introduce further evaluative discussion, clearly stating the difficulties of two
types of comparison, ie. a developed with a developing country or two counties at similar
stages of development

Dont:
give descriptive lists of the problems without explaining why they cause difficulties in
making comparisons.
Example of illogical & unsound analysis which does not lead to realistic conclusion: cold
countries spend considerable amounts on heating (hence concluding that they have higher
National Income figures via the expenditure method), ignoringthe fact that hot countries
also spend large amounts on air conditioning!


(b) This part of the question's focus is over space and the discussion does not confine to
Namibia (although the stem is in the context of Namibia).


Theme 1 : Introduction of key concepts embedded in question
State how & why National Income is a common yardstick used in comparison of SOL over
space.

NI is a common yardstick used in comparing living standards between different countries,
as the data is relatively easy to obtain.

Briefly explain the inaccuracy in solely relying on National Income figure to reflect SOL
between 2 countries eg a developed vs a developing country.

However, there are several problems involved in comparing the NI figures of different
countries. Some high-income countries, for example, enjoy per capita incomes ten times
higher than those of developing nations. This does not necessarily imply that the SOL in
the high-income countries is ten times better than those of developing nations. We must
therefore consider the following when making international comparisons of SOL.

Theme 2: Explain the factors that make it difficult to solely rely on National Income figures
to reflect the SOL between countries.

Briefly explain the need to know the differences in population and inflation when
comparing over space even though it is mentioned in part (a).

(a) If you were asked as an economist to show that the average person in Namibia is
better off than ten years ago, explain what information you would need. [12]

In this case, it is ridiculous to compare Chinas NI with that of Namibia.

The National Income of China may be ten times more than that of a smaller country
such as Namibia, but this does not mean that her SOL is also ten times higher since
Chinas population size is definitely much bigger. Moreover, inflation rate in both
countries must be considered in order to gauge the real income or purchasing power
of the average income earners.

State that real GNP per capita will be a better indicator rather than GNP.

Hence a large national income figure does not necessarily mean a high SOL as the
real GNP per capita may be much lower after accounting for population size and
inflation rate. Moreover, real GNP per capita is a more accurate yardstick for
international comparison of SOL among countries.
Theme 3: Examine the various criteria that must / should be used to weigh up when using NI
figures for international comparison of SOL.

i) Different Size of the non-monetised sector and Differences in the availability and
reliability of Data
Comparisons of GNP per capita between countries will be misleading if the relative
importance of the non-monetised economy is greatly different. In developed countries,
most goods and services produced are exchanged for money in the organised
market. However, in some low income countries, where barter trade is prevalent, the
NI estimates will not be able to capture this flow of goods and services.

Another difficulty is the non-availability of data used. Comparing relatively more accurate
estimates of advanced countries with relatively inaccurate figures of more backward
countries will yield misleading results.

ii) Different accounting practices

Differences arise in the following cases:
Different provision for depreciation because of different accounting practices and tax
laws. Thus when comparing the performance of two countries, this problem can be solved
by using the gross concept of NI.
Some developing countries exclude change in inventory in their NI estimates because of
lack of data. Also, the method of valuing inventory differs from country to country.
In using GNP for comparison, one has to realize that some countries like Philippines and
the US use factor income rather than property income.

iii) Different currencies are involved
It is an accepted policy to convert NI estimates in the respective national currencies to a
universally accepted currency, the US$, for comparison.
However, this may not be satisfactory as the exchange rate between currencies may
fluctuate for various reasons and with each fluctuation, the converted NI will change in
value. Official exchange rates are not always reliable since they are subject to
manipulation by the government or to huge capital flows.

As an alternative, the Purchasing Power Parity (PPP) is often used to eliminate some of
the shortcomings of the official exchange rate. In its simplest form, the PPP tells us how
much goods and services can be bought by a unit of currency at home compared with the
purchasing power of other countries currency.

Converting each countrys GNP using PPP rates rather than official exchange rates tend to
lead to more accurate comparisons of NI.


iv) Differences in Composition of NI
In USA and the former Soviet Union, a significant proportion of their national income is
derived from the production of military and space equipment. These goods are not
available for consumption, and add very little to consumers welfare even if the real per
capita income is high. On the other hand, the real income of some developing countries may
be lower but production is concentrated on consumer goods and services which add to
consumers' welfare.

v)

(v) Differences in income distribution
A country's GNP per capita may be higher than another but the living standards in the
former may be lower due to greater inequality in the distribution of income. For example,
the NI figure of Suadi Arabia may be very large, but majority may still be poor as most of
the income is accrued to those who own the oil wells or related industries !


Intangibles
i) Differences in external costs
The higher output in some countries may be accompanied by higher levels of pollution,
congestion and depletion of natural resources. The higher output could actually mean lower
standard of living for such countries.


ii) Differences in the hours of work vs. leisure time

The higher GDP per capita in some countries may be the result of people working harder
or longer hours. A higher GDP per capita does not therefore necessarily mean a better
standard of living if the increased GDP is due to longer working hours.


Theme 4: Summarise the difficulties or problems encountered in using NI figures in comparing
SOL between countries. Briefly suggests how these difficulties can be corrected or provides
alternative measurement of SOL to complement the use of NI statistics.

Conclusion:


In summary, since living standards encompasses both material and immaterial well-beings
of the people, it cannot be accurately be reflected by NI figures which is a quantitative
measurement.



In conclusion, while there are numerous indicators available to compare economic levels
of countries, there is still no single indicator that can provide an all-round comparison of
living standards between countries. This difficulty is brought on by issues such as the
challenge to gauge non-monetised sectors and the reliability of information provided by
developing countries. Hence, there is no holistic approach to this comparison, though a
combination of indicators, such as the Gini coefficient, Net Economic Welfare
(NEW), Physical Quality of Life Index (PQLI), we can have a rough gauge of living
standards between countries.



However since the issue of the reliability of data provided by countries are still at
question, the crux of this issue is to improve the reliability of the data of the countries,
otherwise no indicators can provide a sound indication and therefore comparison of living
standards between countries.