QUESTIONS AND CALCULATIONS ON NATIONAL INCOME ACCOUNTING

So far, in our analysis of national income, we have looked at various concepts such as GDP, GNP, Personal income, etc.

However, we have failed to explore critical examples of national income accounting calculation.

Consequently, we will further our analysis of national income using these few illustrations.

Example 1

A tailor charges €4000 for each cloth that she makes. The tailor pays her shop apprentice €400 per cloth made in return for sweeping the floor and other chores. 

For each clothe sown, what is the total contribution of the tailor and her apprentice to GDP?

Solution
The answer to this question is simply €4000, which is the market value of the tailoring service rendered.

As per the expenditure approach, only the value of the final goods and services is included in GDP.

It, therefore, follows from the above description that the service of the apprentice will not be counted in the GDP because it is an intermediate service.

Counting the services rendered by the apprentice as well as that of the tailor will amount to double-counting.

Another way of understanding this is to use the value-added approach to calculating GDP.

The value of any economic activity is the difference between the market value of goods or services and other inputs used in producing that goods or services.

The Apprentice uses zero input to produce €400 worth of services. The value added by the apprentice is, therefore, $€400-0$ or €400.

The tailor required €400 worth of services from the apprentice to provide tailoring services of €4000.  The value added by the tailor is, therefore, $€4000-€400$ or €3600

The total value added to the production of the tailoring service is, therefore, $3600+400$ which works out to €4000.

As can be observed, the total value added equals the market value of the services when calculated using the expenditure approach.

Example 2

I sold a 5-year-old house to Mr Daniel for €5 million. I paid the real estate agent in charge of the sales a commission of 3 per cent on the selling price of the house. 

What is the total contribution of this activity to GDP?

Solution
GDP, as I defined earlier, is the market value of all goods and services produced in a country during a given period.

Since GDP measures only goods and services produced in the current year, the value of the 55-year-old house (5 million) will not be counted in GDP.

The reason for this is that the value of the house is already included in the GDP of 5 years ago. Adding it again to this year's GDP will amount to double counting.

However, the commission received by the real estate agents will be counted in GDP.

The reason is that the service provided by the real estate agent is current or new production.

Since the real estate received 3 per cent of the selling price, the value of the real estate services is:
$\frac{3}{100}\times 5 \text{million}=€150,000$

Therefore, the total contribution of this economic activity is €150,000.

Example 3

Daniel, a farmer,  in Northern England produces £10,000 worth of cattle milk.

He sold £3000 worth of milk to his friends and then uses the rest of the milk to feed his livestock, which he finally sold to his friends for £15,000. What is Daniel's contribution to GDP?

Solution
Before we analyze this, we need to distinguish between intermediate goods and final goods.

Final goods are goods in their final stage of production while intermediate goods are goods used up in the production of the final good.

As it relates to this example, the £10,000 worth of milk is both intermediate goods and final goods.

It is an intermediate good because £7000 worth of milk was used in the production of livestock. And since intermediate goods are not counted in GDP, we simply ignored the £7000 worth of milk.

£3000 worth of the milk was sold to Daniel's friends which means it is a final good. And because it is a final good, it is included in GDP.

We also observed that Daniel sold livestock to his friends worth £15,000. This is a final good and is therefore added to GDP.

Therefore, Daniel's total contribution is £3000+£15,000 which works out to £18,000.

Example 4

The total population of Nigeria is 200 million. Supposing that the total expenditure of a household in Nigeria is N1 billion and the total expenditure of business is N800 million. Also assumed the government spends N700 million and Foreign spending amounted to N500 million. Calculate the per capita GDP.

Solution
Per capita GDP is simply:

$\frac{GDP}{T.P}$
      Where GDP is a gross domestic product
                  T.P is the total population.

To obtain GDP via the expenditure approach, we simply add consumer spending, business investment, and government spending.

Therefore, GDP is
$Y=1000000000+800000000+700000000+500000000$
$Y=3000000000$

Therefore, GDP is 3 billion.

Now, let's calculate the per capita GDP

$P.C.G=\frac{3,000,000,000}{2,000,000}$

$P.C.G=N1500$

Example 5

If the Nominal GDP is €10 million and the GDP deflator is 400. Calculate real GDP.

Solution

Real GDP is derived by dividing nominal GDP by the GDP deflator and multiplying the result by 100.

Accordingly,

$R.GDP=\frac{10000000}{400}\times100$

$R.GDP=2500000

Therefore Real GDP is 2.5 million.

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Example 6

Given the following information

items¥
The net change in stocks200
Government expenditures400
Gross domestic fixed capital formation800
Final consumption expenditures2000
Net imports160
Capital formation allowances280
Net foreign factor income-40
Net indirect taxes480

Calculate:
i. GDP

Ii. NDP

iii. GNP

iv. NNP

iv. NI

Solution

i) GDP is the sum of consumption expenditure, investment expenditure, Government expenditure, and net export. That is:

$Y=C+I+G+(X-M)$

$Y=2000+(200+800)+400-(160)$

$Y=3240$.

Therefore, GDP is 3240¥.

Note: Change in stock is an example of investment, hence it is added to investment expenditure.

Also, note that Net import means that Net export is negative. Thus, it is subtracted.

ii) $NDP=GDP-D$

Since depreciation is also called Capital consumption allowances, NDP is

$NDP=3240-280$

$NDP=2960$

Therefore NDP is 2960¥

iii) GNP is the sum of GDP and Net foreign factor income. Accordingly

$GNP=3240-40$

$GNP=3200$

GNP is 3200

iv). NNP is simply GNP minus depreciation

$NNP=3200-280$

$NNP=2920$

v) The formula for national income is NNP minus Net indirect taxes. This is represented below. Therefore

$NI=2920-480$

$NI=2440$

National income is, therefore, 2440¥

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