INTRODUCTION and services produced in an economy in a

INTRODUCTION

National
income from economic perspective is a measure of value of the total output of
goods and services produced in an economy in a given period of time usually a
year. It can also be seen as the value of income which flows from output and
expenditure which involves purchasing of the output. Measuring of changes in
the real output of the economy has been identified as a major problem and as
such a critical issue or subject in U.S Government over time, due to the fact
that accurate method have not been used or implemented in calculating the real
growth of Gross Domestic Product and economy’s productivity which has been
growing increasingly. But, despite various amendments and improvements proposed
by different commissions, the official statistical method and approach being
used is still underestimating the real output of the economy. Therefore, before
going into the key issues in this literature, there is need to explain some
economic activities being faced by economic problems such as;

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Gross Domestic Product
(GDP): This is the value of output produced with income received by domestic
residents such as business firms and household using resources and factors of
production located within the domestic economy.

Personal Income (PI):
Personal income refers to individual total earnings from wages, investment
enterprises and other ventures. It is the sum of all the incomes received by
all the individuals or household during a given period. While,

Productivity: Is viewed
as the effectiveness productive effort, especially in industry as measured in
terms of the rate of output per unit of input.

          One of the key issues of literature is that national income
has been streamlined to be measuring of output alone which has breached or fall
short of the original meaning and focus on what national income is all about,
which has resulted into the underestimating of Gross domestic product (GDP) of
the economy. This means that national income is more than just estimating the
welfare of households and general output of the economy as proposed from the
definition. Another issue here is about those economic and non-economic factors
and determinants that are left out of GDP and asides this, what is new and
interesting to know from this paper is that the official measure of absolute
GDP has not achieved its stated aim of measuring real national output and its
own definitions.

          In calculating the real GDP growth, government considers
the estimation of nominal GDP, which poses a market value with millions of
goods and services traded in the product market to various economic unit such
as household, business firms, Government and foreign traders. Again government
has put up a great performance in collating and updating data from a large area
of sources. But, the first shortcoming noticed is that, they are having not
been able to measure a good quality change from a time period to another. To do
this, nominal GDP, must be converted to real GDP, through an accurate “Price
Index” (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 year
period (?Po). Therefore, for most goods and services the official estimate only
gives small information about the quality of change in the real output of
consumer and other economic agents. Which means that the official estimates of
the total real GDP growth is underestimated.

          Nominal GDP also includes the sales of new product, but the
effect of the new product is not felt in the measure of real output in price
indexes. Therefore increases in the level of income of consumers purchasing
them are underestimated. Inability to include or put into consideration new
product with their real value to final consumer is a problem.

          In terms of Productivity change, we consider labour
productivity which is measured in terms of real output divided by the number of
hours worked by employees. Overtime as well, determining productivity change as
been a bone of contention in measuring real output. As a result of inability to
identify the value of the new product and measure of quality change, the rate
of productivity growth as well is underestimated. In relation to real income
and inflation, both in the long run and short run as indicated that business
can be affected in the short run by inflation due to fluctuations in real GDP, while
in the long run real income of people might grow higher than the rate of
increase in the general price level of goods and services due to changes in
societal environment.

          In conclusion, underestimating the real growth of GDP,
quality change of goods and services, personal income and productivity will
cause more economic imbalance due to inaccurate estimation of their real
values. Therefore, in order to achieve the full objective of national income
there is need for proper reviewing of the appropriate method to be used in
estimating our real GDP. From this paper, we can deduce that the cause of the
under estimation is because, output and income approaches were used in
measuring, and from findings we discovered that there are lot of short comings
attached to the approaches. Therefore, the best method in achieving an accurate
estimation of real GDP, personal income and productivity is the “Expenditure
approach” 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 GDP
is the dependent variable (Y) and other variables are independent variables in
a product, commodity or goods market.