INTRODUCTIONNationalincome from economic perspective is a measure of value of the total output ofgoods and services produced in an economy in a given period of time usually ayear. It can also be seen as the value of income which flows from output andexpenditure which involves purchasing of the output.
Measuring of changes inthe real output of the economy has been identified as a major problem and assuch a critical issue or subject in U.S Government over time, due to the factthat accurate method have not been used or implemented in calculating the realgrowth of Gross Domestic Product and economy’s productivity which has beengrowing increasingly. But, despite various amendments and improvements proposedby different commissions, the official statistical method and approach beingused is still underestimating the real output of the economy. Therefore, beforegoing into the key issues in this literature, there is need to explain someeconomic activities being faced by economic problems such as; Gross Domestic Product(GDP): This is the value of output produced with income received by domesticresidents such as business firms and household using resources and factors ofproduction located within the domestic economy.Personal Income (PI):Personal income refers to individual total earnings from wages, investmententerprises and other ventures. It is the sum of all the incomes received byall the individuals or household during a given period. While,Productivity: Is viewedas the effectiveness productive effort, especially in industry as measured interms of the rate of output per unit of input. One of the key issues of literature is that national incomehas been streamlined to be measuring of output alone which has breached or fallshort of the original meaning and focus on what national income is all about,which has resulted into the underestimating of Gross domestic product (GDP) ofthe economy.
This means that national income is more than just estimating thewelfare of households and general output of the economy as proposed from thedefinition. Another issue here is about those economic and non-economic factorsand determinants that are left out of GDP and asides this, what is new andinteresting to know from this paper is that the official measure of absoluteGDP has not achieved its stated aim of measuring real national output and itsown definitions. In calculating the real GDP growth, government considersthe estimation of nominal GDP, which poses a market value with millions ofgoods and services traded in the product market to various economic unit suchas household, business firms, Government and foreign traders. Again governmenthas put up a great performance in collating and updating data from a large areaof sources. But, the first shortcoming noticed is that, they are having notbeen able to measure a good quality change from a time period to another. To dothis, nominal GDP, must be converted to real GDP, through an accurate “PriceIndex” (consumer and producer price index).
And it can be explained further as:sum of prices of all items in certain period ( divided by sum of all items in a base yearperiod (?Po). Therefore, for most goods and services the official estimate onlygives small information about the quality of change in the real output ofconsumer and other economic agents. Which means that the official estimates ofthe total real GDP growth is underestimated. Nominal GDP also includes the sales of new product, but theeffect of the new product is not felt in the measure of real output in priceindexes. Therefore increases in the level of income of consumers purchasingthem are underestimated.
Inability to include or put into consideration newproduct with their real value to final consumer is a problem. In terms of Productivity change, we consider labourproductivity which is measured in terms of real output divided by the number ofhours worked by employees. Overtime as well, determining productivity change asbeen a bone of contention in measuring real output. As a result of inability toidentify the value of the new product and measure of quality change, the rateof productivity growth as well is underestimated.
In relation to real incomeand inflation, both in the long run and short run as indicated that businesscan be affected in the short run by inflation due to fluctuations in real GDP, whilein the long run real income of people might grow higher than the rate ofincrease in the general price level of goods and services due to changes insocietal environment. In conclusion, underestimating the real growth of GDP,quality change of goods and services, personal income and productivity willcause more economic imbalance due to inaccurate estimation of their realvalues. Therefore, in order to achieve the full objective of national incomethere is need for proper reviewing of the appropriate method to be used inestimating our real GDP. From this paper, we can deduce that the cause of theunder estimation is because, output and income approaches were used inmeasuring, and from findings we discovered that there are lot of short comingsattached to the approaches. Therefore, the best method in achieving an accurateestimation of real GDP, personal income and productivity is the “Expenditureapproach” which cuts across every sector and combines resources from consumers,investment, Government expenditure and Foreign trades (Imports and Exports).
i.e (GDP=C+I+G+X-M). This can be classified as a “Classical Model”, where GDPis the dependent variable (Y) and other variables are independent variables ina product, commodity or goods market.