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Public finance and national income

Economics · WAEC and JAMB · SS2 and SS3

Where government policy meets measurement. Expect a definition, a calculation and an application in the same question.

What you need to know

  • Sources of government revenue: taxes, fees, fines, royalties, loans, grants, earnings of public corporations.
  • Direct taxes are levied on income and wealth; indirect taxes on goods and services.
  • Progressive tax takes a higher proportion as income rises; regressive takes a lower proportion; proportional takes the same.
  • Principles of taxation: equity, certainty, convenience, economy.
  • A budget is a surplus when revenue exceeds expenditure, a deficit when expenditure exceeds revenue.
  • GDP measures output produced within a country; GNP adds net income from abroad.
  • National income can be measured by output, income or expenditure — all three should give the same figure.
  • Double counting is avoided by counting only value added, or only final goods.

Key terms

Fiscal policy
Use of government taxation and spending to influence the economy.
Per capita income
National income divided by population — a rough measure of average living standards.
Transfer payment
A payment with no corresponding output, such as a pension. It is excluded from national income.

Formulae

  • GNP = GDP + net income from abroad
  • NNP = GNP - depreciation
  • Per capita income = national income / population

Worked example

A country has GDP of N50 trillion, receives N3 trillion from abroad and pays out N5 trillion. Find its GNP.

  1. Net income from abroad = 3 - 5 = -2 trillion
  2. GNP = GDP + net income from abroad
  3. = 50 + (-2)

The mistake to avoid

Transfer payments such as pensions and scholarships are excluded from national income, because nothing was produced in exchange.

In the exam

Per capita income questions often ask about living standards. Note the limitation in your answer: it is an average, so it hides inequality.