A New Approach to National Income Accounting

Distinguished Ladies and Gentlemen, Members of this Honourable House,

permit me to kick-off this session with a brief paper on how we can revitalize
the approach to national income accounting.
It is worthy of note that numerous challenges are being faced in estimating
our national income, hence the reason why income and expenditure figures
are not always correct and the need for frequent budget reviews.
Kindly permit me to start this way:
Definition of our National income
National income is the total value of our countrys final output of all new
goods and services produced in one year. This arises from Gross Domestic
Product (GDP), which measures the amount of goods and services produced
within the boundary of our domestic economy in a given period of time
(usually in one calendar year) plus net income from abroad. This simple yet
strong definition of GDP says that only goods produced this year are
supposed to be included into this years national income estimate.
Hence: National Income = GDP + Income from Abroad
National income accounting data provides our economists and statisticians,
who draw up the national budget periodically with detailed information that
can be used to track the health of an economy and to forecast future growth
and development.
Distinguished Ladies and Gentlemen, although national income accounting is
not an exact science, it provides useful insight into how well our economy is
functioning, and where monies are being generated and spent.
The national income identity
The above is expressed in the national income identity, where the amount
received

as

national income is

identical

to

the

amount

spent

as

national expenditure, which is also identical to what is produced as national

output.

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Calculating Our National Income

Any transaction which adds value involves three elements expenditure by
purchasers, income received by sellers, and the value of the goods traded.
There are three methods of calculating national income:
1.

The income method, which adds up all incomes received by the factors

of production generated in the economy during a year. This includes wages

from employment and self-employment, profits to firms, interest to lenders of
capital and rents to owners of land.
2.

The output method, which is the combined value of the new and final

output produced in all sectors of the economy, including manufacturing,

financial services, transport, leisure and agriculture.
3.

The expenditure method, which adds up all spending in the economy

by households and firms on new and final goods and services by ouseholds
and firms.
The output approach
The output approach focuses on finding the total output of our nation by
directly finding the total value of all goods and services we produce.
Due to the complication of the multiple stages in the production of a good or
service, only the final value of a good or service is included in the total
output. This avoids an issue often called 'double counting', wherein the total
value of a good is included several times in national output, by counting it
repeatedly in several stages of production.

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Formulae: GDP(gross domestic product) at market price = value of output in
an economy in the particular year - intermediate consumption
NNP at factor cost = GDP at market price - depreciation + NFIA (net factor
income from abroad) - net indirect taxes

The income approach

The income approach equates the total output of our nation to the total
factor income received by residents or citizens of the nation. The main types
of factor income are:

Employee

compensation

(cost

of

fringe

benefits,

including

unemployment, health, and retirement benefits);

Interest received net of interest paid;

Rental income (mainly for the use of real estate) net of expenses of
landlords;

Royalties paid for the use of intellectual property and extractable

natural resources.

All remaining value added generated by firms is called the residual or profit.
If a firm has stockholders, they own the residual, some of which they receive
as dividends.

Profit

includes

the

income

of

the entrepreneur -

the

businessman who combines factor inputs to produce a good or service.

Formulae: NDP at factor cost = Compensation of employees + Net interest +
Rental & royalty income + Profit of incorporated and unincorporated NDP at
factor cost
The expenditure approach

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The expenditure approach is basically an output accounting method. It
focuses on finding the total output of a nation by finding the total amount of
money spent. This is acceptable, because like income, the total value of all
goods is equal to the total amount of money spent on goods. The basic
formula for domestic output takes all the different areas in which money is
spent within the region, and then combines them to find the total output.
GDP= C + I + G + (X-M)
Where:
C = household consumption expenditures / personal consumption
expenditures
I = gross private domestic investment
G = government consumption and gross investment expenditures
X = gross exports of goods and services
M = gross imports of goods and services
Note: (X - M) is often written as XN, which stands for "net exports"
The Problems with Measuring National Income in Nigeria
1. Illiteracy and inaccessibility
Some countries have a lower literacy rate than other countries.
However better than

the past, Nigeria has still has a low literacy rate. This

makes it difficult for the

governments

to

compute

income data because the people may not be able to provide

national

the

data. In addition, there is also the problem of inaccessibility to

required

some

remote areas.
2. Lack of skilled labour
We need professionals like statisticians, researches, programmers,
skilled interviewers

and

data

collection

the necessary system for the collection of data for

experts
the

to

implement

computation of

national income. The insufficiency of such professionals in Nigeria

makes

the computation of national income difficult.

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3. Provision of false information
Insincerity of our people is huge In order to avoid paying high personal
income taxes,

many businesses and self-employed people might under-

declare their earnings. Provision of false data has caused miscalculation of

the national income.
4. Arbitrary definitions
The phase national income is very loosely and arbitrary defined. For
example, a maid and

housewife

are doing

the

same

household

chores. However, the services of a maid are included in the calculation of

national income but not that of a housewifes because

the former is paid

for her services. Likewise, if a professional painter paints his

neighbours

house, his service is included in the calculation of national income

because he gets paid for work. However, if he is not a professional and
is not paid, the

same kind of work will not be included in the calculation

5. Errors and Omissions - this is a problem in collecting and calculating

statistics. This is a problem as people hide what they earn and firms
hide their output, this is the black economy also known as the "ray
gun"
6. Over recording of figures (Double Counting) - This is losing all perks
as you are not revived and incomes are being counted multiple times.
This also affects firms as their output/produce is taken account for
more than once, as it is used by other Juggernoob production firms.
7. Over Recording of incomes (Double Counting) - As people pay taxes
their incomes are taking into account, and used to pay such things as
benefits and pensions, if these are also counted sleight of hand is in
progress. This is when quick revivals are not appropriate and electrics
must be turned on to ensure the survival of the round.
8. Treatment of the Government
Government expenditures:
1. Defiance and administration expenditure.

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2. Social welfare expenditure.
3. Payment of interest on national debts
4. Miscellaneous development expenditure.
The real problem that is faced relates to which of the above should be
included in the

national income.

9. Income from Foreign Firms

One of the major problem relates to the fact that weather the income
arising from the

activities of the foreign firms operating in a country should

be included in the countries

national income or not .With the growing trend

of doing business globally has increased this problem to a great extant.

However the I.M.F has given the viewpoint that the

production and income

of these foreign forms should go to the owning country while

there profit

must be credited to the parent concern.

A New Approach to National Income Accounting

Distinguished ladies and gentlemen, I wish to state the resolve of our
amiable administration to cut down on the shortages as well as excesses
encountered in the national budget development. This we believe will
minimise the recurrent visits to this honourable house for approval of
supplementary estimates.
The Federal Government under the able leadership of the Coordinating
Minister of the Economy, DG of Budgets of the Federation alongside the
Federal office of Statistics and other Key agencies have developed new
Models to the problems of our national income accounting.

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Provision

for

some

of

these

upgrades

are

made

in

the

adjoining

supplementary estimate.
Permit me to enumerate them as:
Solving Conceptual Difficulties
1.

Inclusion of Services: a detailed list of services to be included as income drivers has been
developed and will be gazzeted in 3 weeks.

2.

Identifying Intermediate Goods: Only final goods will be included in income estimates.
Howevere, this has its peculiarities which are currently been addressed.

3.

Identifying Factor Incomes: Separating factor incomes and non factor incomes are also
finalised. Factor incomes are those paid in exchange for factor services like wages, rent, interest etc.
Non factor are sale of shares selling old cars property etc

4.

Income from Abroad: effort are being made to ensure all foreign incomes due to the country are
being captured and recived.

Solving Practical Difficulties

1.

Illiteracy: we will enroll our data collectors and analysts in programmes that will train them on
data capture and analysis. In addition, awareness programmes will be implemented that will educate
the people on the need to give accurate data. This will help improve data analysis performance

2.

Data Capture Equipment: Government is investing huge sums in acquiring data capture
machine that will help in capturing relevant data alongside field activities.

3.

Logistics: the plan of the Government is to provide more logistics support that will help reach
every nook and cranny of this country for better data capture

4.

Unreported Illegal Income: the Government has put in place mechanism that will help capture
all the right information about peoples incomes, to avoid tax evasion.

5.

Non Monetized Sector: government will strengthen the office of statistics to help capture
accurate information about people and their welfare. This will help identify areas of gap and how to fill
it.

6.

Depreciation: it is the resolve of the government to ensure proper mechanisms

are put in place for accuracy and apportionment of costs used to generate
revenue. Especially in public sector.

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Conclusion
This paper, aims to remind the honourable house that despite the usefulness
of the former approach, there are problems we face using national income to
measure the countrys economic and social welfare performances. Many are
generally not aware of the detailed methodology in collecting national
income and the magnitude of errors made. But recognizing how the national
income is generally measured is useful.
This has led to the many visits to the National Assembly for budget revisions.
We believe that this new approach, which has been adopted partially in the
supplementary estimates overleaf will help to minimise if not totally
eradicate the many waters we face in generating out national income
accounts.
Thank You.

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