Limitations of National Income as Welfare Measure in Ghana

Lecturer: Dr. Emmanuel A. Codjoe & Dr. Michael Danquah Contact Information: ecodjoe.ug@gmail.com College of Education School of Continuing and Distance Education 2014/2015 2016/2017

Session Overview Session Overview: This session takes a look at the limitations of using the national income as a measure of welfare. It also discusses how national income accounting developed in Ghana and concludes with the methods that are employed in calculating the national output in Ghana. Goals/ Objectives: At the end of the session, the student will Know the limitations of utilizing national income as standard of welfare. Be able to discuss how national income accounting developed in Ghana Understand how national income accounting is computed in Ghana. Slide 2

Session Outline The key topics to be covered in the session are as follows: Topic One: Limitation Of National Income (Per Capita) As A Welfare Measure Topic Two: National Income/Output of Ghana Topic Three: The Computation Of National Income Accounting In Ghana Slide 3

Reading List Refer students to relevant text/chapter or reading materials you will make available on Sakai Slide 4

Topic One LIMITATIONS OF NATIONAL INCOME (PER CAPITA) AS A WELFARE MEASURE Slide 5

Use of Total Population as the Deflator The first problem relates to the use of total population as the deflator. Some authors have argued for the use of occupied population (those who are either working or seeking work) as a deflator. What is the justification for this measure? Let us assume that the population increases because of large families. While these extra numbers are still below working age, no increase in national income is expected. Thus, during this period when the extra people have not reached working age, changes in economic welfare would be misrepresented by a decline in national output per capita. A better measure of economic progress suggested by J.R. Hicks (The Social Framework) is the movement of Real National Income per head of occupied population. There is also the question of deciding to give equal treatment in deflating national income by population. For example, should some children be treated equally as of adults? As consumers, they could be treated as being the equivalent of half an adult. But there are some kids who do consume more than adults. This problem is not important if the population of children does not change markedly over time. Slide 6

The Issue of Real Income Another problem relates to what to consider as real income flowing to persons. If national income is divided equally, the share that goes to everybody measures income per capita. This means that people get their share of consumption goods and services, as well as additions to wealth such as ovens, factories, etc, which are not real income in themselves but stores of income. A solution to this problem would be to treat only consumer s expenditures and government expenditures. With government expenditures, a problem arises. While some government expenditures such as health and education may be real income, other parts such as national defense are not. It has been argued that defense does not add up to economic welfare of households and should therefore be excluded. Slide 7

Exclusion of Certain Items Some items which form part of economic welfare are excluded in the national income estimates. The services of housewives are excluded from national income, but there is no method of putting values on work performed by them. The national income thus become a poor measure of welfare if we argue that welfare is enhanced by the production of goods and services in the homes. Slide 8

Issue of Leisure Another commodity which is left out in the computation of income is leisure. Producing a given national output with shorter working hours which increases the supply of leisure ought to represent an increase in real national product. Slide 9

Issue of Social Costs The conventional measure of national income does not take into account social costs such as: i. exhaustion of natural resources, ii. pollution of the environment, iii. psychological disadvantages of changing the traditional way of life Slide 10

Topic Two NATIONAL INCOME/OUTPUT OF GHANA Slide 11

Development of National Income Account in Ghana National income accounts in Ghana have traditionally been based on the expenditure approach, because of the lack of suitable data on the output of many producing units and also on income flows for the economy. An attempt has been made to construct national income from the production and income side / (Brown (1972), and Singal and Nartey (1971) Slide 12

Cardinal (1931) Estimates of the National Income Sir A. W Cardinal made the first attempt in 1931 to estimate the national income in Ghana. His estimates were for the financial year 1930/31 and he tried using production approach. His estimates are in Table 3.1 Slide 13

Table 3.1 Abstract of Cardinals Estimate of National Income of the Gold Coast in 1930 Productive Agency Value in External and Internal Trade 30, 556, 757 Liberal Profession 2,557,906 Agriculture and Forestry 18,509,398 Fishing 1,983,000 Meat Trade 2,397,643 Mining 697,877 Motor Industry 1,853,216 Municipal Revenue and Wages 25,000 Total National Income 58,809,993 Slide 14

Omaboe (1960) Estimates of the National Income Cardinal s estimates for 1930 have been revised by Omaboe (1960) who argued that there was an over- estimation of national income by about 22 million. The estimates by Cardinal involved double counting, for as Omaboe puts it, one wonders whether his estimate is a value added or gross output . Omaboe s revised estimates which are also based on the product approach are presented in Table 3.2 The breakdown of Omaboe s revised estimates is more detailed than the attempt by Cardinal. Cardinal considered eight sectors whilst Omaboe disaggregated the economy into eleven sectors with the Agriculture and Forestry sector sub-divided into five sectors. Slide 15

Table 3.2 National Income in 1930 (Omaboes Revised Estimates) 000 Agriculture and Forestry Export products (fOO) Food crops for local consumption Forest produce for export Forest produce for local Consumption Livestock Fishing Transport, Communication Distribution Minerals Buildings and Construction Ownership of Buildings Domestic Services Missions Banks, Insurance and Other Profession Government Miscellaneous Total GDP 6,995 9,650 341 6,747 393 1,983 5,667 1,956 500 250 50 250 250 2,258 1,000 38,390 Slide 16

Estimates from 1957 Economic Survey Some official series involving all the three approaches of estimating national income (product, expenditure and income) were made for the years 1950-1957 by the Central Bureau of Statistics ( the then Statistical Office) in 1958. The income and expenditure series of this paper in current prices were published in 1957 Economic Survey. The 1950 and 1957 are given in Table 3.3. The series break down income into wages and salaries, gross profits of companies, operating surplus of boards and corporations, government income from property, rent, cocoa farmers and brokers incomes, miscellaneous incomes. The expenditure breakdown follows the traditional methods of estimating national income. Slide 17

Estimates from 1960 Economic Survey With the publication of the 1960 Population Census, the higher levels of income made it necessary to revise national income estimates. The 1960 Economic Survey published revised estimates of expenditure. Columns (1) and (2) of Table 3.4 present new estimates for 1957 and 1960. Slide 18

Table 3.3 Ghana National Income and Expenditure, 1950 and 1957 in current prices ( 000) Expenditure Private Consumption Public authorities current consumption on good and services (a)Central Government (b) Local authorities Gross Domestic Capital formation a) Fixed Capital a) Change in stock of exports a) Change in Stock of imports Net investments from abroad Gross national expenditure Less taxes Subsidies Gross national expenditure at factor cost 1950 145,001 1957 247,969 6,542 1,731 21,967 4,500 16,857 4,038 1,521 20,079 195,769 -7,954 114 187,929 36,840 -6,467 -690 -14,433 289,416 -18,845 178 270,749 Income Wages and salaries Gross profits of companies Operating surplus of boards and corporations Government income from property Rents Incomes of cocoa farmers and brokers Miscellaneous incomes GDP Net income from abroad GNP 26,185 13,740 21,829 10,687 2,342 30,061 89,362 195,206 -6,277 187,929 61,291 16,291 - 18,570 4,753 30,007 145,160 275,991 -5,242 270,749 Slide 19

Estimates from the 1961/62 National Household Expenditure Survey The 1961/62 National Household Expenditure Survey provided data for re-appraisal of existing national income estimates. Dorothy Walters, a social accounting expert prepared new series of the national income accounts based on the survey using both the product and expenditure methods for the period 1955 to 1961. Table 3.4, columns (3) and (4) provides Walters estimates for 1957 and 1960 for comparison with the estimates by the Central Bureau of Statistics (CBS). Walters estimates tend to be lower than the estimates provided by CBS which reflects the inadequacies in the data used. Slide 20

Table 3.4: National Expenditure and Product Estimates 1957 and 1960: Cbs and Walters Estimates In Current Market Prices ( Million) CBS 1957 WALTERS 1957 1960 1960 Expenditure Private Consumption Government Consumption 34.4 346 393 49.1 291 33 359 48 Gross Domestic capital formation Change in inventories Exports Imports Gross domestic product 53.4 105.9 56 96 -0.4 116.2 -109.3 440.3 +10.0 145.6 -147.4 565.5 -6.0 96 -107 363 11 123 -148 469 Net factor income from abroad GNP PRODUCT Cocoa production Cocoa marketing Agricultural exports and others Food production and distribution Forestry and sawmilling -20.8 -23.5 -3 -5 419.5 533.0 360 464 - - - - - - 30 14 1 45 30 3 - - 128 139 - - 17 26 Mining Manufacturing Construction, private Industries, other private - - - - - - - - 22 5 13 45 21 9 18 57 Slide 21

Browns Estimates of the National Income Another revision of the national income was made by Brown (1972). Brown s major contribution to the national income estimation was his derivation of the national income using the income approach. Brown found a discrepancy between Public Finance Accounts and the National Accounts in respect to Government Consumption Expenditures. He thus had to revise the estimates of the government consumption basing the estimates on published public finance data. Slide 22

Singal and Nartey (1971) Singal and Nartey s estimates of the national income were the first detailed estimates by industrial origin. The economy was divided into 14 sectors and estimates of output, intermediate products and the value added are made for each sector. The 14 sectors include: (i) Agriculture, (ii) Forestry , (iii) Fishery, (iv) Mining and Quarrying, (v) Manufacturing, (vi) Electricity, (vii) Construction, (viii) Wholesale and Retail Trade and Restaurants and Hotels; The rest are: (ix) Transport, Storage and Communication; (x) Banking and Insurance, (xi) Real Estate and Business Services,(xii) Social, Recreational and Related community services, (xiii) Personal, household and private Non-profit services to households, (xiv) Producers of government services Slide 23

Economic Survey (1969) 1,463 Brown (1972) 1,463 Singal & Nortey (1971) 1,198.5 Singal and nortey (1971) Brown (1972) Private consumpti on Governme nt consumpti on Agriculture&livestock 440.0 Wages 1347.5 363 171 285.3 Cocoa 184.4 Incomes from property and enter- prise 187.6 Forestry and logging 63.4 Taxes on Production and Consumption less subsidies Depreciation 211.6 Gross domestic fixed consumpti on formation Changes in inventorie s Exports 224 224 186.8 Fishing 18.4 128.3 2 2 2 Mining and quarrying 42.1 269 369 396.1 Manufacturing Electricity 213.9 16.8 GDP 1875.0 -39 Imports -354 -354 369.5 Construction Distributive trade Services Transport and Communication 72.9 228.1 353.5 62.6 836.0 -128.3 1707.7 GDP 2067 1,875 1,700.5 Net factor income from abroad GNP -39 -39 -50.3 Slide 24 2028 1,836 1,649.9 GDP 1700.2

Topic Three THE COMPUTATION OF NATIONAL INCOME ACCOUNTING IN GHANA Slide 25

Who does the accounting in Ghana? The Ghana Statistical Service Mandated to undertake the exercise at least once a year. In recent times the GSS provides quarterly estimates of the GDP. (www.statsghana.gov.gh) Slide 26

How is this done? There are three main approaches: Income approach Product approach Expenditure approach In Ghana, two approaches output and expenditure are used although the expenditure approach tends to be used most. Slide 27

How it is done? Cont d The output approach used in Ghana measures the value of goods and services produced, in terms of output, within the different sectors of the economy: Agriculture Industry Services Slide 28

How it is done? Cont d (Output Approach) Slide 29

How is it done Cont d (Expenditure Approach) The expenditure approach measures the value of goods and services produced, in terms of expenditure, by the various institutional sectors: Households Government Financial Non-financial and non-profit institutions serving households To these are added net exports (X M) Slide 30

How is it done? Cont d (Expenditure Approach) Slide 31

References Slide 32