- Indicators of standards of living. If the national income is equitably distributed, then the standards of living will be high.
- Measuring economic growth. The statistics of one year are compared with previous year to show whether there is improvement or not.
- Inter country comparison. They are used to compare the economic welfare among countries hence knowing which country is better off and how much. However, the following challenges may be faced when carrying the comparisons: different in currencies, different goods and services, disparity in income distribution and difference in tastes and preferences.
- Investment decisions. They assist the government and other investors to know the sectors to
put their money. The statistics provide relevant information concerning the performance of each sector.
- Basis of equitable distribution of income. The statistics can be used to spread income to the hands of majority of the citizens incase a few individuals control the economy.
- Planning purposes. The statistics will show the contribution of each sector thus helping the government in allocating the funds to the various sectors.
Factors which influences the level of national income.
- Quantity and quality of production. If the factors are more in terms of quantity of good quality, the output will be high hence increasing in national income.
- State of technology. A country with high level of technology will produce goods in large volumes hence high national income.
- Political stability. Countries which are relatively stable politically experience high production hence high national income level.
- Accuracy of accounting systems. If the methods used to gather data are accurate, then the overall statistical figures will the accurate hence reliable.
- Proportion of the subsistence sector. Subsistence sector’s output is not normally included in the statistical figures. If it represents a large proportion, therefore the national income level will be low.
- For other factors refer to Inventor book three pages 68 – 69.
Reasons why high per capita income is not an indicator of a better living standard in a country
- Statistical problems. The collection of the national income data may be inaccurate meaning that the national income figures might be incorrect hence wrong per capita income.
- Changes in money value. If the currency has been devalued, there can be change in the value of money without necessarily representing any changes in the welfare of the people.
- Income distribution. The per capita may be high even though the income is in the hands of very few people thus it is not a representative of the majority.
- Nature of products. If the products are not meant to satisfy immediate wants of the people, then an increase in per capita income may not lead to a higher economic welfare.
- Peoples’ hard work and attitude. Increased national income may mean less sleep and more worries. People have no time to enjoy what they produce and their welfare may be low despite the rise in national income.
- Social costs. People may migrate from rural areas to urban areas straining family relationships while an increase in industries may create pollution, congestion and other environmental disruptions.
- State four problems encountered in comparing standards of living in different countries using national income statistics
- Using a diagram, describe the circular flow of income.
- Explain five factors that may influence the level of national income of a country
- Outline four limitations of expenditure approach used in measuring national income.
- Explain five reasons why high per capita income may not translate to better living standards in a country.
- Describe five factors that affect the circular flow of income.