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Every country gauges the performance of its economy by calculating its national income. The national income accounts are therefore used by countries as a source of information on the economy performance. The concept of national income was developed in the early 1920s by Simon Kuznets as a means of gauging the economic performances of an entire courtiers' economy. According to Kuznets an economy's performances could be measured by calculating either the total output or the total income. To measure the total output the Gross -Domestic- Product (GDP) which is the total market value of all services and goods in an economy in a given year could be used to measure the performances of a country's economy ( Gwartney, et al, 2009.pp149 ).The GDP therefore measures the total output in an entire economy.
National income can be described as the total value of all final goods and services produced by a country's economy. Every economy comprises of two sectors which are the productive sector and the household sectors. These two sectors are used to calculate or estimate the national economy. The results from each of the sectors should roughly give the same figure which is the national income of a country. The national income can be calculated in several ways .these calculations measures the total output of an economy or are used to estimate the productive output of a given country. The measures include the GDP (Gross -Domestic- Product), GNP (Gross- National- Product) and the NNI (net national income).the GDP (Gross -Domestic- Product) calculates the total income of the citizens in a country regardless of whether the income is earned domestically or abroad. The national income is therefore calculated as the GDP (Gross -Domestic- Product) less the consumed capital in the period under consideration which is normally annually.
In order for the GDP to be computed all goods and services are assigned dollar values. This is made possible since services are provided at a cost and goods are sold at specific but variable. The prices that are assigned to the services and goods when calculating the GDP are valued at the current prices of the period under consideration. Therefore since the period is normally one year when calculating the GDP goods with fluctuating prices are calculated at their present value when the calculations are being done. This therefore means that the prices of such products as perishable horticultural products that have prices that can vary many times within the same period has their values pegged at their current price. In other words goods that were valued at a certain price in a given period might have their value either increase or decrease depending on their prevailing prices.
This method of calculating national incomes leaves room for speculation since within a given period certain goods may have their prices fluctuating in number of time within the same period. Therefore it can be difficult to determine from the aggregate national income accounts the variations that occur within the considered period. For this reason therefore the calculations are done using constant prices for a given period .Therefore the prices fluctuations are ignored .in order to overcome this problem the paasche and laspeyres indecises are used to calculate the weighted average prices. Both these indices however have systematic biases since they overestimate the prices in general. The biases are as results of failing to account for the substitution effects of consumable goods since the indices only measure the general prices (Giovannini & OECD.2008pp 52).Therefore if consumption patterns change and the general prices keeps fluctuating the adjustment are not reflected in the indices. The GDP does not measure the new productions alone since depreciation that occurs in the process of production of capital goods is taken into account.
The Net National Product (NNP) is the value of GNP Less depreciation. This depreciation represents the wearing out of capital. However due to the inconsistencies in the GNP and the assigning of value to all output at times when an economy is doing badly there is a possibility of the national accounts reflecting the opposite. For example when the environment is grossly depleted by tree harvesting to produce goods the national income accounts only reflects the output of the forest as the final goods ignoring the fact that the natural resources have been depleted in order to reflect the final goods. Therefore environmental degradation resulting from the uses of natural resources is not reflected in the national income accounts what they reflect ids the final goods that accrue as a result of this depletion.
Therefore if the natural resources are overly used to produce goods the national income accounts reflects only increases in goods production and not the higher rate of natural resources depletion (Ackerman, et al, 1997.pp 339).similarly if a country was to fine a company for environmental violation such as dumping hazardous waste into the rivers the national income accounts would reflect the amounts spent of the clean up and the fines as national income. If the waste was to cause heath problems to the immediate population the GDP would reflect the medical cost accrued by those affected as national income in terms of the medical fees paid to the doctors as well as the pharmaceuticals bought to remedies the situations. In other worlds this method of calculating the national income can be deceptive in that for an economy to be doing well the environment has to be protected for future productions similarly the sick population that the national income accounts reflects as a additional income in terms of the medical fees accrued by the doctors in the long run it is not an income to the economy in reality ( Ackerman, et al, 1997.pp 341 ).Since all productive activities in an economy are assigned dollar values in order to make it possible to calculate the GDP.
Destructive activities that are done to the environment are reflected in the GDP as income generating activities. Thus they are reflected as income adding activities to an economy and in the overall give a positive value to the GDP. Therefore such activities that deplete an economy off it natural resources are calculated in the national accounts as in terms of the final products that these activities generate. This is misleading in that these activities may add to the national income for the period but in reality they are likely to be costly to the economy in the future. The GDP therefore can positively reflect certain destructive productive activities as income generating while in the reality what these activities can amount to is destruction of the future economy. This is because when natural resources are depleted the possibility of having future negative effects to the economy is not reflected in the national income accounts in that period.
The outcomes which are not always positive may in future be reflected as reductions in the GDP. GDP therefore reflects illness, deforestation, environmental pollution as increases in national income while failing to account for the services that are provided to the society's social well being such as volunteering and parenting. In other words there are services that are crucial for the growth of the country and hence the economies that can not have dollar values assigned top them. When calculating the GDP these services are not accounted for since it is difficult to assign them monetary value. In reality without parenting the economy would perish since there would be no generations to replace the older one. Therefore the workforce would slowly go extinct leaving the world with no mean of production. But such services are not taken into account when calculating the GDP yet they are very crucial for an economy to develop. Similarly when environmental degrading activities are reflected as positive growths in the GDP their overall effects is that their future effects in future are ignored which can lead to economic devastation.
Gross National Happiness Index (GNH) is an alternative method of calculating the economic performance of a country. The method was developed by Bhutan an Asian country .They use this method measures economic performance of the country in terms of the happiness of the country population instead of economic growth in terms of the GDP. The country has as a strong social structure that advocates for a stronger family and community ties and culture. The country has a stable sustainable economy and high level of population happiness. Gross National Happiness Index is intended to measure the social well being of the economy by measuring the happiness of the country's population (Carpenter & Carpenter 2002.pp 92). Gross National Happiness Index simply measure the levels of happiness with higher the levels of happiness indicating higher development. In Bhutan happiness is measured in terms of absence of violence and family stability. Gross National Happiness Index therefore does not take in to account the country's output or income. Monetary values are also not assigned to their measure of development.
Since development implies improvements the levels of family stability and the more peaceful the society is and therefore there is no violence the more developed the country is (Carpenter & Carpenter 2002.pp 47). The measures that are intended to increase the country's population happiness include long term environmental sustainability policies. Therefore policies that are intended to protect the environment from degradation in the long run are encouraged. The overall effects are that economic growth in the long run is assured. The method ignores the economic performance in monetary terms and puts more emphasis on the social well being of the society and therefore is unable to quantify growth in monetary terms. It should be considered that when national income is computed by calculating the national income in monetary economic growth is indicated by increase in the GDP. In the reality these kinds of growth ignore the well being of the society. In that they only indicate improvements or growth in the GDP and largely ignore social well being.
In other words the GDP only indicates that the society in a given country can afford to buy most of their needs but ignores the fact that the ability to afford many material things does not directly imply that the members of the society are satisfied with the many material things they have. Therefore the society can be disintegrating by having many families breaking down but the economic indicators tell a story of a prospering society. In other words the GDP ignores the many underlying factors that accompany productive activities many which can indicate economical unsustainability in future. This is because economic improvements which imply better or improved living standards do not account for happiness.
Better living standards are only seen in terms of individual having the ability to afford most of their basic needs and luxuries in the economies that are more developed but their wellbeing is ignored. This implies that when calculating the GDP increase in a country GDP which indicates economic improvements is only seen in terms of the society having the ability to afford their requirements and therefore there is the assumption that capabilities in affording material requirements translates in to happiness. In Bhutan on the other hand the population is much happier as compared to developed economies such as the United States of America yet the Bhutan population can not afford most of the material thing as in the USA
Governments policies that are intend to intervene in the economy can have a number of implications to organizations in terms of their planning. To make corrections in the economy fiscal policy or monetary policy are used as intervention measures. Fiscal policy can be used to achieve certain effects in specific sectors in the economy. While monetary policies are mostly used to target the entire economy. Fiscal policies are often used to manage demand therefore a government can change its taxation policies or spending in order to counter external shock in the economy. Through such policies as direct taxation, indirect taxation or government spending an economy can be stimulated. Increase in taxation reduces the money circulation. This can also increase the cost of borrowing this therefore can affect an organization's planning in that if thee were plans to borrow in order to start or complete a project. An increase in cost of borrowing can therefore imply that if a specific amount was budget for a project it can either be shelved or changes made to reflect their likely increase in costs.
A government can also increase its spending in order to stimulate the economy. This therefore increases the money supply and can have the effect of lowering the interest rate s which means that the cost of borrowing is lowered. Similarly such an expansion in expenditure can be financed through domestic borrowing. This would imply that the government would be competing with the private sector for capital. The overall effect would be an increase in the interest rate which implies that the cost of borrowing increases. The effect on an organization's planning would be there would be an increase in the cost of capital affecting the budgeted costs. Fiscal policies are therefore used in an economy to expand the output and demand or to reduce the output and demand in specific or given sectors of the economy. Since fiscal policies can be used to increase or expand demand and output their can be used to positively affects in the business environment.
Monetary policies on the other hand are often used to increase or decrease the aggregate demand. These policies are normally not very effective when the economy is in recession. Monetary policies such as policies that reducing or increasing the interest rates in the economy. Are mainly used to control the money supply in the economy and therefore control inflation. By increasing interest rate the money supply in the economy is reduced this is because the prices of borrowing increases and this triggers saving since there is a higher return .conversely reduction in interest rates increases the money supply and reduces the cost of borrowing. Therefore when such policies are affected there can affect organizations since the cost of capital can increase if the interest rates are increased or capital becomes cheaper if the interest rates are reduced. The monetary policies also affect the business environment in that when affected to reduce inflation the cost of goods and serves decreases thereby triggering positive business environment.
Gross National Happiness Index (GNH) is an alternative method of calculating the economic performance of a country. The method which was developed by Bhutan an Asian country uses happiness as an indicator of development. Economic performance of the country s therefore considered in terms of the happiness of the country population instead of the GDP. This method therefore takes into account some of the factors that are ignored when GDP is used as an indicator of economic performance. Therefore factors such as environmental sustainability are taken into account as well as the populations' social well being. Considering that some of the critism that faces the national income method includes the possibility of including negative aspects of development as indicators of economic growth. Or in other words it is possible to include environmental degrading activities and have such activities reflected as positive growths in the GDP .yet they are capable of having their overall effects of destroying the economy in the future.
Therefore ignoring such crucial factors would imply that they can negatively effect future economic growth or lead to economic devastation. To compute the GDP all goods and services are assigned dollar values. This is made possible since services are provided at a cost and goods are sold at specific but variable. The prices that are assigned to the services and goods when calculating the GDP are valued at the current prices of the period under consideration. Therefore since the period is normally one year when calculating there is the likelihood of ignoring fluctuations in prices. To make corrections in the economy fiscal policy or monetary policy are used as intervention measures. Fiscal policy can be used to achieve certain effects in specific sectors in the economy. While monetary policies are mostly used to target the entire economy. These policies can therefore positively affect organizations planning or have negative effects.