Advanced Notice Of Economics 02 Advanced level 2025/2026 Summarized notice from AMBILIKILE notice
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The some of topic from thise summarized notice are National income
1;National Income
THE NATIONAL INCOME
MEASUREMENT OF THE NATIONAL INCOME (THE NATIONAL INCOME
ACCOUNTING)
The national income accounting is the process of measuring the value of the national
income in a specific period of time, like a year. Before looking at the methods of
measuring the national income, let us look into the circular flow of income, output and
expenditure.
Circular Flow of Income
Figure 1.1: Circular flow of the national income
Assumptions of the Circular Flow
The circular flow of the national income has the following assumptions:
• It assumes a closed economy, in which there is no foreign trade such that commodities
are produced and consumed within the country.
• There is no leakage, like savings. This means all the income received by individuals
must be spent on goods and services and non remains for savings.
• Simple economy with two sectors of the economy which are, business firms and
households (consumers)
• Households own the factors of production.
• It assumes that households supply all the factors needed for the production of
commodities, and receive payments in the form of wages, rent, salaries, etc.
• It assumes that households spend all their income in buying goods and services that
are provided by the producers. Therefore, the household's expenditure is the
producer’s income.
Note
From the circular flow of income, we can see that, each time any commodity is produced
and sold. Its market value is equal to the value of the expenditure of the consumers on
Income to firms by selling goods = Expenditures by households
Y ≡ E
that commodity and it is received as income, to all the participants (factors of production)
in the process of production and exchange.
Leakages (withdraws)
This is an income that does not passed go through the circular flow of income. For
example, tax, imports, savings and capital outflow. It has a contraction effect on the
national income.
Injections
These are the additions to the domestic income, arising from other expenditures apart
from the domestic households. It has an expansionary effect on the national income.
Examples of the injections in the economy are: investments, the government
expenditures, exports and capital inflow. If any of these injections change, it leads to a
change in the national income.
Methods of Calculating the National Income
There are three methods of calculating the national income, namely:
(i) Product method
(ii) Expenditure method
(iii) Income method
(i) Product Method:
In this method of computing the national income, the value of the national income is
obtained by taking the values of goods and services produced by the citizens of a given
country for period of time. The national income, by this method can be reflected by the
Gross National Product.
The Gross National Product
This is the total value of all the goods and services produced in the country in a particular
year. It is usually calculated at factor cost that is, excluding subsidies and taxes imposed on
the goods or services. It is, in fact, the cost of the total output of the producers. After
taking account of the net income from abroad, which is the value of exports less the value
of imports, we have the Gross.
National Product at Factor Cost
Having calculated the Gross National product, it is possible to calculate the national
income. All that is required is to make an estimate of the capital consumption that has
taken place during the year, and deduct this from the Gross National Product. Thus, it
will be seen that, the national income is in effect the net national product, that is, the total
volume of production after allowance has been made for that part of production that was
devoted to making goods the depreciation of the existing capital equipment.
Sale of goods and services to households
Sale of input, e.g. labour, to firms
Expenditure of firms on inputs = Income of households, by selling inputs
E ≡ Y
HOUSEHOLDS
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