NATIONAL INCOME

National income is defined as the total monetary value of all final goods and services arising out
of the productive economic activities of a country in a given period of time usually a year.
This is the same as national product and national expenditure
It is important to note the following
(i) National income considers only final goods and services
(ii) The goods and services considered are valued in monetary terms
(iii) The goods and services considered must have been produced in the given period of
time/year
(iv) The incomes considered should be received in exchange for goods or services
produced

CONCEPTS OF NATIONAL INCOME

These are the forms of national income or the different ways of expressing a country`s national
income

(1)GROSS DOMESTIC PRODUCT (GDP)

This is the monetary value of all final goods and services produced within a country by both
nationals and foreigners in a given period of time including the value of depreciation.
GDP only considers goods and services produced within the territorial boundaries of the country
(by both nationals and foreigners)
Gross domestic product is the same as Gross domestic income
GDP = C + I + G+(X-M)
Where C = Consumption expenditure by the household sector.
I = Investment expenditure by firms
G = Government expenditure
X = Export earnings (income from exports).
M = Import expenditure

(2) GROSS NATIONAL PRODUCT (GNP)

This is the monetary value of all final goods and services produced by the nationals/citizens of a
country both at home and abroad in a given period of time usually a year including depreciation.
GNP only considers goods and services produced by nationals (both within the country and
abroad)
GNP = GDP+ Net income from abroad
Or GDP = GNP – Net income from abroad

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Where net (property/factor) income from abroad is the difference between the total incomes
earned by nationals from abroad and the total incomes earned by foreigners from the country in a
given period of time

Or it refers to the difference between the total incomes that a country’s citizens and companies
remit from abroad and the total incomes that foreigners and overseas companies repatriate from
the country in a given period of time.

Question;(i) Convert GDP to GNP

(ii) Convert GNP to GDP
Solutions (i) GDP + Net income from abroad = GNP
(ii) GNP – Net income from abroad = GDP

(3) NET DOMESTIC PRODUCT (NDP)

This refers to the monetary value of all final goods and services produced within a country by
both nationals and foreigners in a given period of time excluding the value of deprecation.
Therefore GDP – Depreciation = NDP
Question; Adjust NDP to GDP
Solution ; NDP + Depreciation = GDP
Where Depreciation is the decrease in value of capital assets due to wear and tear (also known as
capital consumption)

(4) NET NATIONAL PRODUCT (NNP)

This refers to the money value of all final goods and services produced by citizens/ nationals of a
country both within the country and abroad in a given period of time excluding the value of
deprecation. Net national product is the same as Net national income
Therefore GNP – Depreciation = NNP
Question; Convert GDP to NNP
Solution ; GDP + Net income from abroad = GNP
GNP – Depreciation = NNP
Or simply GDP – Net income from abroad – Depreciation = NNP
Exercise ; 1) Adjust NNP to GDP
2) Given that a country`s GDP = $ 500, Net income from abroad = $100, and
capital consumption = $50. Calculate the NNP
(5) REAL NATIONAL INCOME
Real national income concepts are those valued at base year prices, therefore real national
income is the total monetary value of all final goods and services arising from the productive
activities of a country in a given period of time valued at base year prices
Question; Define real GDP

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(6) NOMINAL NATIONAL INCOME
Nominal national income concepts are those valued at current year prices, therefore nominal
national income the total monetary value of all final goods and services arising from the
productive activities of a country in a given period of time valued at current year prices
Question ; Define Nominal GNP
NB; In the base year prices are relatively stable or constant while in the current year prices are
unstable because of inflation/deflation therefore the nominal national income figure may be over
or under estimated
Nominal national income /GDP
Real national income/GDP = x 100
Price index

(7) NATIONAL INCOME AT FACTOR COST

National income concepts at factor costs are those obtained by adding the monetary
rewards/payments to the factors of production for their contribution in production of goods and
services in a given period of time.
For example GDP at factor cost is the monetary value of all final goods and services produced
within a country in a given period of time including the value of depreciation valued at payments
made/prices paid for the factors of production
Question ; Define the following terms
(i) National income at factor cost
(ii) NNP at factor cost
(8) NATIONAL INCOME AT MARKET PRICES
National income concepts at market prices are those that are valued/ obtained by adding the
payments made/prices paid for the final goods and services in the market.
Therefore national income at market prices is the monetary value of all final goods and services
arising out of the productive activities of a country in a given period of time valued at the prices
paid for the final goods and services
Question; Define GNP at market prices
GUIDELINES FOR DEFINING NATIONAL INCOME CONCEPTS

TERMINOLOGY INTERPRETATION
GROSS Including value of depreciation
NET Excluding value of depreciation
DOMESTIC Produced within the country(by nationals and foreigners)
NATIONAL Produced by the nationals(within and out of the country)
FACTOR COST Valued at prices paid for the factors of production
MARKET PRICES Valued at prices paid for final goods and services
REAL Valued at base year prices
NOMINAL Valued at current year prices

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 Adjustment from national income at market prices to national income at factor cost
They market prices paid for products include indirect taxes, but these indirect taxes are not
received by the factors of production as incomes. Additionally where producers are subsidized
by government, the factors of production receive rewards in excess of the payments made for
goods and services in the market. Therefore from national income figures at market prices
indirect taxes must be subtracted but subsidies must be added to obtain the national income
figures at factor cost.
NYMP – Indirect taxes + Subsidies = NYFC
Or NYFC + Indirect taxes – Subsidies = NYMP
Examples
a) Convert GDPMP to GDPFC
GDPMP – Indirect taxes + Subsidies = GDPFC
b) Adjust GDPMP to NNPFC
GDPMP + Net income from abroad - Depreciation – Indirect taxes + subsidies = NNPFC
c) Convert NNPFC to GNPMP
NNPFC + Depreciation + Indirect taxes – Subsidies = GNPMP
SUMMARY OF ADJUSTMENTS

ADJUSTMENT PROCEDURE
1 Gross to Net Subtract depreciation
2 Net to Gross Add depreciation
3 Domestic to National Add net income from abroad
4 National to Domestic Subtract net income from abroad
5 Market prices to Factor cost Subtract indirect taxes and add subsidies
6 Factor cost to Market prices Add indirect taxes and subtract subsidies

EXERCISE
1) Given GNPFC what adjustments should be made to obtain NNPMP
2) Given that the GDPFC = $1200millions, GNPMP = $1500millions, Depreciation = $20
millions, indirect taxes = $5millions, subsidies = $2millions
Calculate the net income from abroad
3) Study the table below and answer the questions that follow
ITEM VALUE (Billion shilling)
GDPMP 160,000
Net income from abroad 150,000
Capital consumption 800
Negative taxes 50,000
Outlays 20,000

Calculate (i) The GDPFC

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 (iii) The GNPMP
(iv) The NNPFC

Other concepts related to national income

1)PERSONAL INCOME
This is the total income received by the people in a country from all sources in a given period of
time. It includes the earned incomes (wages, interest, rent and land) as well as the transfer
payments (unearned incomes) ( incomes from productive activities as well as those from non-
productive activities)
2) DISPOSABLE INCOME/Take home pay
This is the total income that people are left with for spending or saving after deducting the
personal income taxes and other compulsory contributions
3) TRANSFER PAYMENTS/INCOMES
These are incomes received by individuals without a corresponding exchange for any goods or
services. They are also referred to as unearned incomes or non-quid pro-quo payments.
Examples of transfer payments include students` pocket money, Grants/donations, pension, gifts,
sick benefits/allowances
The sources of transfer payments include;
individuals such as relatives and friends
Institutions/organizations such as schools, banks
Government e.g central government, local governments

4) PER CAPITA INCOME

This is the average income of the population in a country in a given period of time
National income GDP /GNP
Per capita income = or
Toatal population Total population
Real per capita income is the average income of the population in a country in a given period of
time valued at base year prices whereas nominal per capita income is the average income of the
population in a country valued at current year prices
Real national income
Real per capita income =
Total population

5) DISCRETIONARY INCOME
This is the amount of income that individuals are left with for saving or spending after paying
taxes and covering all the essential expenses. Therefore discretionary income is for saving and
catering for nonessential expenses like investments, entertainment, home improvements, debt
repayment, luxuries e.t.c

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6) SOCIAL INCOME
This is the total value of all the benefits and services that an individual receives which are
beyond the monetary income. They include the social capital, public goods and services, social
benefits like insurance, social support networks e.t.c

7) NOMINAL INCOME
This is one’s income expressed in monetary terms.

8) REAL INCOME
This is income expressed in terms of goods and services it can buy.
OR: It is the purchasing power of nominal/money income.
Determinants of Real Income:
 Price levels/Rate of inflation.
 Amount/quantity of goods and services available.
 The size of nominal income.
 Level of taxation/size of disposable income.
 Level of money supply/ amount of money in circulation.
 Size of the monetary sector/ subsistence sector.

DETERMINANTS OF THE LEVEL OF NATIONAL INCOME /GDP

(Output of goods and services)
 The level of exploitation of natural resources. High level of exploitation of natural
resources leads to high supply of raw materials which leads to high volume of goods and
services produced and thus high levels of national income, while low level of exploitation
of natural resources limits supply of raw materials which leads to low volume goods
produced thus low levels of national income.

 Level of skills of workers/Availability of skilled labour force; High level of skills of

workers leads to high level of efficiency in production which leads to high volume of
goods and services produced and thus high levels of national income, on the other hand
limited skills of workers leads to low level of efficiency in production which leads to low
volume of goods and services produced and thus low level of national income.

 The land tenure system; A good land tenure system makes it easy to acquire land and
set up economic activities which leads to high volume of goods and services produced
thus high level of national income, while a poor land tenure system makes it hard to
acquire land which limits investment leading low level of output of goods and services
and thus low level of national income.
 Level of existing capital stock; Adequate liquid capital enable producers to acquire
sufficient factor inputs which leads to high production of goods and services and thus
high level of national income, on the other hand limited capital makes it hard for
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 producers to acquire sufficient factor inputs which limits production leading to low level
of national income..
 The techniques of production. Modern techniques of production lead to a high level of
efficiency in production which leads to a high volume of goods and services produced
hence a high level of national income but poor techniques of production lead to
inefficiency in production which leads to low output produced and thus low level of
national income
 The political atmosphere/political climate: Political stability encourages production
because producers settle down to carry out production without the fear of losing their
lives and property and thus high levels of national income, while political instability
discourages production because producers are scared of losing their lives and property
which leads to a low level of national income
 The market size. A large market size leads to a high level of sales and profits which
leads to high production of goods and services and therefore a high level of national
income but a small market size leads to a low level of sales and low profits or losses
which discourages production and thus leads to a low level of national income
 The level of monetization of the economy/size of subsistence sector; A large
subsistence sector/low level of monetization limits production because most people
produce on a small scale for their own consumption thus low level of national income,
while a small subsistence sector/high level of monetization encourages production
because most people produce on a large scale which leads to high output and thus high
levels of national income.
 The entrepreneurial ability/level of entrepreneurship; High level of entrepreneurial
ability leads to better organization of the factors of production which leads to high level
of production and thus high level of national income, while low level of entrepreneurial
skills leads to poor organization of the factors of production among producers which
leads to low levels of production and thus low levels of national income. .
 The level of infrastructural development; High level of infrastructural development
encourages production because it lowers the costs of production thus high levels of
national income, while underdeveloped infrastructure discourages production because it
leads to high costs of production thus low levels of national income.
 The price levels/Rate of inflation. Low rate of inflation encourages production due to
the low cost of acquiring factor inputs thus high level of national income, while high rate
of inflation discourages production because of high cost of acquiring factor inputs thus
low levels of national income.

 The population growth rate; High population growth rate leads to high dependence
burden which limits savings leading to low levels of investment and output, therefore low
levels of national income, while low population growth rate leads to a low dependence
burden which encourages savings thus high levels of investment and output leading to
high levels of national income.
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  Level of savings; High level of savings leads to increased investment because it leads to
accumulation of more funds for the investors to purchase inputs for investment which
increases production of goods and services thus high levels of national income, while low
levels of savings leads to limited accumulation of funds for investment which limits
production and thus low levels of national income.
 The level of accountability; High level of accountability attracts more investors because
they easily acquire licences without incurring costs of paying bribes to government
officials which encourages economic activities , leads to increased production thus high
levels of national income, while low levels of accountability discourages investors
because they find it hard to acquire licences and have to incur high costs of paying bribes
to the government officials which limits setting up economic activities leading to low
production and thus low levels of national income

 The degree or level of conservatism; High degree of conservatism limits production of

goods because many people stick to the traditional methods of production which are low
yielding and thus low levels of national income while low level of conservatism
encourages production of goods because many people embrace modern methods of
production which are high yielding and thus high levels of national income
 The attitude towards work; Positive attitude towards work leads to high volume of
output produced because workers put in more effort in doing economic activities thus
high levels of national income, while negative attitude toward work limits production
because people are lazy and not willing to put in extra effort to do economic activities
and thus low levels of national income.
.
 The government policy on investment/production. A favourable government policy on
investment e.g in form of tax holidays, subsidies reduces the cost of production and thus
motivates producers to produce more goods and services in order to earn more profits
hence high levels of national income. On the other hand an unfavourable government
policy on investment leads to high costs of production and thus discourage producers
from increasing output leading to low levels of national income.

Causes of low levels of national income in developing countries include:

 Low levels of natural resource exploitation

 Low levels of savings
 High rates of inflation/High general price levels
 Low levels of technology/poor state of technology/poor methods of production
 Small market size both local and foreign
 Low levels of infrastructural development
 Poor political climate/political instability

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 Low levels of existing capital stock/inadequate capital
 Low levels of entrepreneurial abilities/skills
 High population growth rate
 The existence of a large subsistence sector/low levels of monetization of the economy
 Low levels of education and training/low levels of skills
 Limited investment incentives
 Cultural rigidities/High degree of conservatism
 The poor land tenure system
 Low levels of accountability/High levels of corruption
 Negative attitude towards work

Causes of high levels of national income in an economy:

 High levels of resource exploitation

 High levels of savings
 Low rate of inflation/ low general price levels
 High levels of technology
 Large market size both domestic and foreign
 High levels of infrastructural development
 Presence of Political stability in the economy
 High levels of existing capital stock/Presence of adequate capita in the economy
 High levels of entrepreneurial ability/Skills in the country
 Low population growth rate in the country
 High levels of monetisation of the economy
 High levels of education and training/ high levels of skills.
 Presence of investment incentives
 Low levels of cultural rigidities/ Limited conservatism
 Presence of good land tenure system
 High levels of accountability
 Positive attitude towards work

Measures that can be adopted to increase the level of national income

 Increase the level of exploitation of natural resources. This will increase the supply of raw
materials for use in production and hence increase the level of output of goods and services
thus increase the level of national income.
 Improve the state of technology (Technology development/transfer). This will increase
the level of efficiency in production of goods and services thus increase the level of national
income.
 Equip labour with skills. This can increase the level of efficiency in production and thus
increase the volume of goods and services produced and hence increase the level of national
income.

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 Develop economic infrastructure This will reduce production costs which increase the level
of investments and production of goods and services and thus increase the level of national
income.
 Provide investment incentives. This will reduce costs of production which will lead to
increase in the level of investments and volume of goods produced hence increase level of
national income.
 Modernize the agricultural sector. This will facilitate production throughout the year in
addition to use of better technology which will increase output produced in the agricultural
sector and thus increase the level of national income
 Provide credit facilities to producers. This will enable the producers purchase enough
factor inputs to carry out investments which will increase the volume of goods and services
produced hence increase the level of national income.
 Encourage saving. This will facilitate accumulation of adequate funds for purchasing inputs
for investment and thus increase output produced and national income
 Expand markets. This will increase the level of sales and profits which will encourage more
investments and therefore increase output produced and thus increase national income
 Ensure political stability. This will increase security for lives and property of the
producers/investors and therefore increase investments and output of goods and services
 Control population growth rate. This will reduce the dependency burden, encourage saving
and investment which will increase output and national income
 Encourage economic diversification. This will increase the range of investments and
economic activities in the different sectors of the economy which will increase output and
national income
 Carry out further privatization of public enterprises. This is intended to promote
efficiency, increase volume of goods and services hence increase the level of national
income.
 Improve entrepreneurial skills. This will lead to better organization of the factors of
production which will increase output and national income
 Carry out further liberalization of trade. This will reduce production costs which will
encourage more investments and hence increase output and national income
Questions
1)(a)Account for the low level of national income in developing countries
(b)Suggest measures that can be adopted to increase the level of national income in an
economy
2(a)Distinguish between GDP and GNP
(b)Account for the differences in the GDP figures of the developing countries and those of
the developed countries

MEASUREMENT OF NATIONAL INCOME

(a)How is national income computed/measured in Uganda?

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(b)Explain the challenges encountered in measuring national income in Uganda

There are three approaches/methods for measuring/computing national income

(i) The income approach/method
(ii) The expenditure approach /method
(iii) The product or output method/value added method

The income approach/ method

This involves adding up the rewards/ incomes earned by the factors of production in the country
in a given period of time
This involves summation of the wages, rent, interest and profits earned by the factors of
production in a given period of time/year
i.e NY = W + I + R + P
(The national income obtained using the income approach is national income at factor cost)

Challenges/problems of using the income approach

 Inadequate information (about incomes)
 Double counting/difficulty of identifying transfer payments
 Difficulty of valuing the unpaid for services
 Difficulty of determining the net income from abroad
 Problem of illegal activities
 Problem of capital gains
 Limited skilled labour
 Inadequate facilities
The expenditure approach
This involves adding up all expenditures/amount of money spent on final goods and services by
all spending units/sectors in the economy in a given year
This involves adding up household expenditure on consumption, investment expenditure,
government expenditure, and net expenditure on exports
Thus NY = C +I + G + (X – M)
Where C = Consumption expenditure
I = Investment expenditure
G = Government expenditure
(X – M) = Net export expenditure
(The national income obtained using the expenditure method is national income at market
prices)

Challenges of using the expenditure approach

 Inadequate information (about expenditures)
 Price changes/fluctuations
 Double counting/difficulty of distinguishing between expenditures on final goods and
expenditures on intermediate inputs
 Limited skills
 Inadequate facilities
 Difficulty of estimating the net export expenditure

©Economics department 11
The output approach/Value added method
This involves adding up the monetary value of all final goods and services arising from the
productive activities of the country in a given year
Or it involves adding up the value added to output at each stage of production in the country in a
year
(N.B Value added = Value of output – Value of inputs)
Challenges of using the output approach/ value added method
 Problem of double counting/difficulty of distinguishing between final and intermediate
output
 Inadequate information
 Difficulty of valuing subsistence output
 Difficulty of determining the boundary of production
 Problem of valuing inventories and work in progress
 Inadequate skilled labour
 Inadequate facilities
 Price changes/fluctuations
 Difficulty of valuing services provided by government
Question 1 (a) How is national income estimated in Uganda? (04 mark)
(b) Explain the challenges faced in estimation of national income in Uganda
(16 marks)
2(a) How is the output approach used in estimation of national income? (04 marks)
(b)Which approach is most appropriate for estimation of national income in Uganda
and why?

General problems met in computation of national income

 Inadequate statistical information/data. People have many sources of income that are
not disclosed and, and many expenditures or output produced that is nor recorded
anywhere and therefore left out during compilation of national income which leads to
underestimation of the national income figures
 Double counting. This involves counting some activities/products/items more than once
which arises due to failure to differentiate between final and intermediate products. It
leads to over estimation of national income
 Difficulty of determining the boundary of production. It is hard to identify activities that
are productive and thus consider them in estimation of national income and then those
that are non- productive so as to exclude them during estimation of national income
 Difficulty of valuing government output/services. These are not paid for while others are
highly subsidized making it difficult to get estimate their value in monetary terms
 Difficulty of valuing subsistence output/non-marketed output. This output does not go
through the market and therefore does not have market prices attached making it hard to
value it in monetary terms
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  Challenges of valuing unpaid for services. These include the services of house wives,
services of charitable organizations e.t.c which are not paid for yet happen to be
productive and hence the difficulty of valuing them in monetary terms
 Difficulty of determining the net income from abroad. Some of the country`s nationals
get incomes from abroad that are not very clear and through unofficial channels making it
difficult to identify them and include them in the country`s national income figures
 Problem of inventories and work in progress(Difficulty of timing production). Some
goods are produced in one year but not sold within that year (inventories) making it hard
to attach a monetary value to them and to determine the time period to which to attach
them. Production of some goods extends over several years and therefore happen to be
incomplete at the end of the accounting period (Work in progress)
 Price changes. Price fluctuations with the accounting period results into a challenge of
determining the appropriate prices to attach to the goods and services produced in order
come up with the actual monetary value of the output produced. As prices increase the
nominal national income figure increases even without an increase in the real output
 Difficulty of determining the value of depreciation. The wear and tear of
machines/capital assets during the process of production is difficult to determine and
express in monetary terms
 Inadequate facilities. These include the computers and other gadgets used for collecting
and storing information. This results into loss of some of the information collected.
 Limited skills of the statisticians. This results into inefficiency during the process of
collecting and processing the information which results into inaccurate figures of national
income Problem of illegal activities. Incomes from illegal activities are not supposed to
be included in estimation of national income however its sometimes difficult to identify
such incomes so as to exclude them
 Problem of errors of omission and commission. Some activities /output or incomes are
left out where as they should have been included while others are considered where as
they should have been excluded which results into underestimation or over estimation of
the country`s national income respectively
 Problem of illegal activities. Incomes from illegal activities are not supposed to be
included in estimation of national income however its sometimes difficult to identify such
incomes so as to exclude them

Difference between conceptual and statistical problems of measuring national income

Conceptual problems are the problems related to understanding and interpretation of the
concept of national income. They basically involve determining what to include and what
to exclude in estimation of national income and the appropriate valuation methods. In
some countries some activities are considered in estimation of national income while in
©Economics department 13
 other countries they are left out due to lack of a uniform/universal interpretation of the
concept
The conceptual problems include the following
 Problem of determining the boundary of production
 Problem of unpaid for services
 Difficulty of distinguishing between final and intermediate products
 Problem of inventories and work in progress/timing production
 Problem of determining the legal and illegal activities
 Problem determining the transfer payments and the earned incomes
 Limited skilled manpower
Statistical challenges are problems related to collection, compilation and analysis of
information/data,.
The statistical problems include
 Limited statistical information
 Difficulty of determining the net income from abroad
 Difficulty of determining the value of depreciation
 Problem of double counting
 Problem of price changes
 Difficulty of valuing subsistence output
 Problem of valuing inventories and work in progress
 Difficulty of valuing government services
 Problem of valuing unpaid for services
 Errors of omission and commission
 Limited skilled manpower
IDENTICAL/SAME RESULTS OF THE THREE APPROACHES OF
ESTIMATION OF NATIONAL INCOME

The income approach, expenditure approach and the output approach are
identical/equivalent because in principle they are expected to give /yield the same figure
of national income (O ≡ Y ≡ E)
This because of the following
(i) The monetary value of the output produced by the firms is equal to the
expenditure by households on the final goods and services in the market, thus the
output approach is equivalent/identical to the expenditure approach (O ≡ E ¿
(ii) The monetary value of the output produced by the firms in form of receipts from
the sale of output is equal to their expenditure on payments to the factors of
production , thus the output approach is equivalent to the income approach
(O ≡Y ¿
(iii) The factor income payments received by households are spent on purchasing final
goods and services in the market, therefore the income approach is equal to the
expenditure approach (Y ≡ E ¿
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 Identity of the three approaches is illustrated by the circular flow of income

THE CIRCULAR FLOW OF INCOME (AND EXPENDITURE)

This describes how incomes flow from the business sector/ firms to the households sector and
from the house holds sector back to the business sector. The households sector receives incomes
in form of payments for the factor services and in turn the business sector receives income in
form of payments for the goods and services supplied to the households sector.
Assumptions of the circular flow of income (and expenditure)
 There are only two sectors i.e the households sector and the business sector
 All factors of production are owned by the household sector
 All goods and services are produced and supplied by the business sector
 All incomes received by the households sector are spent on goods and services produced by
the business sector (No saving by house holds)
 All incomes received by the firms/business sector are spent on hiring factors of production
 All output produced by the business sector is sold in the market
 The economy is assumed to be closed (No exportation and no importation of goods and
services)
 There is no government intervention (No taxation and no subsidization)
 Tastes and preferences are assumed to be constant
Illustration of the circular flow of income

From the diagram

(i) Factor income payments received by households(arrow 3) are equal to households
expenditure on the final goods and services(arrow 4), thus Y≡ E

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 (ii) The monetary value of the goods and services supplied by the business sector
(arrow 2) is equal to the payments made for the goods and services by the house
holds(arrow 4), thus O≡E
(iii) Receipts from the sale of goods and services got by the firms(arrow 4) are equal to
the payments made for factor services(arrow 3), thus O ≡Y

USES/IMPORTANCE OF COMPUTING NATIONAL INCOME STATISTICS

 Determines the rate of economic growth/economic performance. This is indicated by
the rate at which the country`s national income/GDP increases from one time period to
another.
 Used to calculate the country`s per capita income. This is done by dividing the national
income/GDP figure by the population
 Used to for economic analysis, research and planning. The information/data obtained
e,g on consumption expenditure, investment expenditure, exports e.t.c is applied in
formulation of policies for national development such as in budgeting, employment
policies, investment policies, redistribution policies e.t.c
 Used to measure the standard of living. This is by use of income per capita in that a high
per capita income figure indicates a high standard of living and a low one indicates a low
standard of living
 National income figures are used in soliciting for foreign aid. International donor
agencies need the national income statistics to identify the sectors to be funded
 They are used to compare standards of living between countries. This is done by
comparing the income per capita of the different countries in that the standard of living is
higher in a country with a higher income per capita and lower in a country with a lower
income per capita
 Used to compare the standard of living within a country over time. The standard of
living is higher during a time period/year when the income per capita is higher and lower
in a time period when income per capita is lower.
 Used to show the distribution of income. Information obtained from the income approach
shows the proportion of the country`s national income received by labour as wages, by
owners of capital as interest, by owners of land as rent and by entrepreneurs as profits
 Helps to expenditure patterns in the country. The expenditure approach reveals
information about the proportion of the country`s national income that is spent on
consumption, investment, Government activities, imports e.t.c
©Economics department 16
  Indicates the leading and lagging sectors in an economy. The output approach reveals
the different productive sectors in the economy and their respective contribution to the
total output. The leading sector is one with the highest contribution and the lagging sector
is one with the lowest contribution to the national output.
 National income figures/statistics indicate the level of exploitation of the country`s
resources. A high national income figure indicates a high level of exploitation of the
country`s resources and a low one indicates a low level of exploitation of resources
 They indicate the extent of dependence on other economies or a particular sector.
A high level of exports and imports implies a high level of dependence on other
economies or The country greatly relies on a sector with the highest contribution to the
country`s GDP

Question ; Why do countries compile national income statistics

Solution ;
 To determine the rate of economic growth
 For economic planning and analysis
 To calculate the country`s per capita income
 e.t.c

THE EQUILIBRIUM POSITION /LEVEL OF NATIONAL INCOME

(NATIONAL INCOME EQUILIBRIUM)
National income is in equilibrium when aggregate demand is equal to aggregate supply. This
occurs when the total injections are equal to the total leakages. At this position there is no
tendency for the level of the country`s national income to increase or reduce
Injections and leakages
Injections are elements which add to the circular flow of income. They include the following;
(i) Investment expenditure
(ii) Government expenditure
(iii) Export earnings
(iv) Capital inflows
Leakages/withdrawals are elements that reduce the circular flow of income. They include the
following;
(i) Taxes
(ii) Savings
(iii) Import expenditure
(iv) Capital outflows
Open and closed economies
An open economy is one that participates in international trade with other economies.
It exports and imports goods and services from other economies.
A closed economy is one that does not trade with other economies. It does not export and does
not import goods and services. In a closed economy the injections exclude export earnings and
capital inflows while the leakages exclude import expenditure and capital outflows
Question ; Outline (i) two injections
(ii) two leakages

©Economics department 17
 In a closed economy
Aggregate demand and aggregate supply
Aggregate demand is the total demand for goods and services in an economy in a given period
of time or the total planned expenditure on goods and services in an economy in a given period
of time. In an open economy Aggregate demand = C + I + G +( X – M), therefore the
components of aggregate demand are;
(i) Consumption expenditure (C)
(ii) Investment expenditure (I)
(iii) Government expenditure (G)
(iv) Net expenditure on exports (X – M)
However in a closed economy Aggregate demand = C + I + G
The determinants of aggregate demand include
 The general price level
 Income level
 Population size
 Government policy of taxation/subsidization
 Availability of credit
 The existing stock of capital
 The level of money supply
 The exchange rate
Question (a) Account for the negative slope of the aggregate demand curve
(b) Explain the conditions that may lead to a change in an aggregate demand in an
economy
Aggregate supply is the total supply of goods and services in an economy in a given period of
time. The determinants of aggregate supply include;(similar to determinants of total
output/national income)
 The level of aggregate demand/size of the market
 The general price level/rate of inflation
 Government policy on production/investment
 Political climate
 The techniques of production
 Level of development of infrastructure
 The land tenure system
 Level of entrepreneurial skills/number of producers
 Availability of factor inputs e.g capital
 Level of labour skills
 Level of accountability
 The costs of production
Question ; (a) Distinguish between market supply and aggregate supply
(b) Examine the factors that determine the level of aggregate supply in an economy

NATIONAL INCOME / MACROECONOMIC DISEQUILIBRIUM

This occurs when aggregate demand is either greater or less than aggregate supply at the full
employment level of income/resources, This implies existence of either an inflationary gap or a
deflationary gap respectively

©Economics department 18
 The inflationary gap/negative output gap
This is where aggregate demand is greater than aggregate supply at the full employment level of
national income /resources. In this case there is excessive aggregate demand for goods and
services over the aggregate supply

Illustration of an inflationary gap

Ye = the equilibrium level income (level of income where aggregate

Aggregate demand = aggregate supply)
Yf = the full employment level of income (level of income attained
When the country`s resources are fully utilized)

Factors that lead to an inflationary gap(those that increase aggregate demand)

 Adoption of an expansionary monetary policy
 Increase in government expenditure
 Reduction in direct taxes/taxes on incomes
 Increase in wages
 Increase in exportation of goods and services
 Decrease in imports
Effects of existence of an inflationary gap in an economy
 Leads to inflation/increase in the price level
 Leads to increase in the level of investment
 Leads to increase in the level of resource utilization

©Economics department 19
  Leads to increase in demand for factor inputs
 Leads to an increase in output/economic growth
 Leads to an increase in tax revenue
Policy measures that can be adopted to close/reduce an inflationary gap
(Basically those that reduce aggregate demand)
 Increase direct taxes. This can reduce the disposable income and aggregate demand and
hence reduce the inflationary gap
 Reduce government expenditure. This will reduce money supply and hence reduce
aggregate demand
 Adopt a restrictive monetary policy. This will reduce the amount of money in circulation
and hence reduce aggregate demand
 Adopt wage control measure (such as the wage freeze and wage restraint). This will
control aggregate demand in the economy
 Encourage importation. This will increase the supply of goods and services in the
economy
 Discourage exportation. This will avail more goods for consumption in the domestic
market
 Adopt maximum price legislation. This will prevent further increases in the prices and
thus control the gap

The deflationary gap/positive output gap

This is where aggregate supply is greater than aggregate demand at the full employment level
of income resources in an economy.

©Economics department 20
 Illustration of a deflationary gap

Ye = Equilibrium level of income

Yf = Full employment level of income

Factors that may lead to deflationary gap(Basically those that reduce aggregate demand)
 Adoption of a restrictive monetary policy
 Increase in direct taxes
 Decrease in government expenditure
 Increase in importation of goods and services
 Decrease in exportation of goods and services
 Decrease in wages

Effects of existence of a deflationary gap in an economy

 Leads to a decline in the price level/deflation
 Discourages investment
 Leads to underutilization of resources
 Leads to unemployment
 Leads to a reduction in government revenue
 Leads to low rate of economic growth
Policy measures that can be adopted to close/reduce a deflationary gap
(Basically these increase aggregate demand)
 Use an expansionary monetary policy. This can increase the amount of money in
circulation which increase aggregate demand and hence reduce the gap

©Economics department 21
  Increase government expenditure. This will increase money supply and eventually
increase aggregate demand
 Reduce direct taxes. This will increase the people`s disposable income and hence
increase aggregate demand
 Encourage exportation. This will dispose off the excess supply of goods and services by
taking them to other countries
 Discourage importation. This will reduce the excess supply of goods and services
coming from other countries
 Increase wages. This will increase the people`s purchasing power and hence increase
aggregate demand
Question;(a) Distinguish between an inflationary gap and a deflationary gap (04 marks)
(b) Explain the measures that can be used to close
(i) an inflationary gap,
(ii) a deflationary gap,
In an economy. (16 marks)

NATIONAL INCOME DETERMINATION

Since Income = consumption + Savings (Y = C + S)

Consumption, Savings and Investment are important variables in determination of national

income. Consumption and savings encourage investment which increases output of goods and
services produced

CONSUMPTION
Consumption is the proportion of income spent by households on final goods and services that
yield utility /satisfaction of human wants
Or a process of utilizing/using final goods and services to get satisfaction/utility
The level of consumption is related to the level of national income in a way that a high level of
consumption leads to a high level of investment which leads to a high level of output hence a
high level of national income and a low level of consumption discourages investment which
leads to low output produced and thus a low level of national income

©Economics department 22
Concepts related to consumption
 Consumption expenditure. This is the amount of money spent on final goods and
services to provide utility/satisfy human wants(either individually or collectively)
 Marginal propensity to consume. This the proportion of the additional income which is
Change∈consumption
spent on consumption, MPC =
Change∈income
 Average propensity to consume. This is the proportion of the total income which is
Total consumption
spent on consumption. APC =
Total income
 Autonomous consumption. This is consumption which is independent of the level of
income
 Induced consumption. This is consumption which depends on the level of income
 Consumption function. This is a statement indicating the level of consumption and the
level of income in an economy
Determinants of consumption/consumption expenditure
 Level of income. High level of income leads to a high level of
consumption/consumption expenditure because of the high purchasing power but a low
level of income leads a low level of consumption due to the low purchasing power
 Level of taxation/subsidization. A high level of taxation(or low subsidization) leads to
low levels of consumption because of the low disposable income while low levels of
taxation lead to high levels of consumption because of the high disposable income
 The population size. A large population size leads to a high level of consumption
because of the large number of people that buy the consumer goods but a small
population leads to low levels of consumption because of the small number of people that
buy the consumer goods
 The price level/rate of inflation. A high price level leads to low levels of consumption
because goods and services are very expensive and un affordable for most of the
consumers but a low price level leads to high levels of consumption
 Availability of goods and services. Adequate supply of goods and services leads to high
levels of consumption because the goods and services turn out to be cheap and affordable
but inadequate supply of goods and services leads to low levels of consumption
 The level of monetization/size of the subsistence sector. A large subsistence sector/low
level of monetization leads to high levels of consumption because of the high output and
incomes but a low level of monetization leads to low levels of consumption
 Level of speculation/expectations of future prices changes. Expectation of future
increase in the prices leads to high levels of consumption so as to avoid buying the goods
expensively while expectation of future decrease in prices leads to low levels of
consumption as many people wait to buy the goods in future when prices have reduced
 The marginal propensity to consume /save. A high MPC leads to high levels of
consumption because as incomes increase a bigger proportion of income is spent on
consumption but a low MPC leads to low levels of consumption because as incomes
increase a small proportion of income is spent on consumption
 Availability of credit. Availability of enough credit leads to high levels of consumption
because people without cash able to borrow money and buy the consumer goods while
limited availability of credit leads to low levels of consumption because people without
enough cash find it hard to borrow money for buying the consumer goods

©Economics department 23
  Seasonal factors. Favourable seasonal factors leads to high consumption because the
goods and services are needed for use in that period/season but unfavourable seasonal
factors lead to low levels of consumption
 The rate of interest. A low rate of interest on savings in financial institutions leads to a
high level of consumption because most people are discouraged from saving by the low
benefits but a high rate of interest on savings leads to low levels of consumption because
people are encouraged by the high benefits to save more and more
Question1 (a) Distinguish between marginal propensity to consume and average
Propensity to consume (04 marks)
(b) Account for the low levels of consumption in an economy (16 marks)
Question 2(a) Explain the factors that influence consumption expenditure in Uganda
(10marks)
(b) What policy measures can the government adopt to minimize
Consumption expenditure in Uganda (10 marks)

Saving/savings

Saving(s) is the proportion of the disposable income not spent on current consumption but kept
aside for future use.
Or it is a process of foregoing current consumption in order to raise funds/money for future use.
The types of savings include; personal savings, corporate savings, forced/compulsory savings,
Government savings

Concepts related to saving(s):

 Marginal propensity to save: This is the proportion of the additional income which is
Change∈savings
saved. MPS =
Change∈income
 Average propensity to save. This is the proportion of the total income which is saved.
Totai savings
APS =
Total income
 Savings function. This is a statement indicating the relationship between the level of
savings and the level of income .It can be represented by an equation or a graph
 Negative saving/Dissaving. This is a situation where individuals use past savings to pay
for current expenses/consumption

Determinants of the level savings

 The level of income .A high level of income leads to a high level of savings because
people are left enough money for saving after spending on consumption but a low level
of income leads to a low level of savings

©Economics department 24
  Level of taxation/subsidization. A high level of taxation leads to a low level of saving
because it results into a a low disposable income left for spending on consumption and
saving but a a low level of taxation leads to a high level of saving
 The rate of inflation/price level. A high rate of inflation leads to a low level of saving
due to the high expenditure on consumption and a low rate of inflation leads to a high
level of savings because of the low expenditure on consumption
 The level of development of the (financial)infrastructure. A high level of
development of the financial infrastructure leads to a high level of savings because
people find it easy to open up saving accounts but a low level of development of the
financial infrastructure leads to a low level of savings because it becomes difficult to
open up saving accounts
 The population growth rate. A high population growth rate leads to a high dependency
burden which leads to high expenditure on consumption which leads to a low level of
savings while a low population growth rate leads to low expenditure on consumption
hence a high level of savings
 The rate of interest on savings. A high rate of interest on savings leads to a low level of
savings because of the low returns on savings in the banks but a high rate of interest on
savings leads to a high level of savings
 The level of liquidity preference. High liquidity preference leads to a low level of
savings because people prefer to have cash with them to saving in financial institutions
which prompts them to spend more and more, but low liquidity preference leads to a
high level of saving because people prefer keep their wealth in form of savings in
financial institutions
 Level of monetization/commercialization. A high level of monetization leads to a high
level of savings because of the high level of incomes earned as many people produce for
sale in the market but a low level of monetization/large subsistence sector leads to low
savings because most people produce on a small scale for personal/family consumption
which results into low incomes
 Level of accountability in the( financial sector). A high level of accountability in the
financial sector leads to a high level of savings because people are confident that their
savings in the financial institutions won’t be misappropriated but a low level of
accountability leads to a low level of savings
 The marginal propensity to save. A high MPS leads to a high level of saving because
as people`s income increase a bigger proportion of their incomes is saved but a low
MPS leads to a low level of saving
 The government policy on saving. Afavourable government policy on saving leads to
high level saving because saving is made to be compulsory but unfavourable government
policy on saving leads to a low level of saving because saving becomes voluntary
 The time preference/Peoples spending habits. Positive time preference leads to a low
level of saving because people prefer to spend a bigger proportion of their incomes on
consumption in the current period but negative time preference leads to a high level of
saving because people prefer to spend on consumption in future periods
 The existing stock of wealth. A large stock of wealth leads to a high level of saving
while a low stock of wealth leads to low level of savings
Questions 1(a) Distinguish between saving and investment (04 marks)
(b) Analyse the factors influencing the level of savings in Uganda(10 marks)

©Economics department 25
 2(a) Account for the low level of savings in Uganda (10 marks)
(b) Suggest measures that can be adopted to increase the level of savings in
Uganda (10 marks)
Measures that can be adopted to increase the level of savings
 Ensure price stability
 Increase incomes
 Encourage development of the financial sector/infrastructure
 Increase the level of monetization
 Encourage compulsory savings
 Increase the interest rate on savings
 Promote accountability in the financial sector
 Reduce taxes on incomes/subsidize the consumers
 Sensitize the population about the importance of saving
 Control the population growth rate
 Ensure even distribution of financial institutions in the country


INVESTMENT
Investment is the process of devoting part of person`s or nation`s income to production of capital
goods. An investment is a business activity established or asset purchased with an aim of
generating income. Investment expenditure is the amount of money devoted to
creation/increasing the existing stock of capital
Types of investment
 Induced investment. This is investment that varies with the level of income.
 Autonomous investment. This is investment which is independent of/does not vary with
the level of income.
 Gross investment. This is the total amount of investment undertaken (which includes
that for increasing the capital stock and that for replacing worn out capital) in a given
period of time. It includes net investment and replacement investment.
 Net investment. This is the expenditure on creation of new capital goods. Net investment
increases on the existing stock of capital goods
 Replacement investment. This is the expenditure on repair and replacement of worn out
capital.
N.B ; Gross investment = Net investment + Replacement investment
 Real /physical investments. These are investments in tangible or physical assets
 Financial investments. These are investments or expenditure on purchase of financial
securities

Determinants of the level of investment (induced investment)

 Income levels. High income levels leads to high levels of saving that leads to high levels
of investment but low incomes lead to low saving and low levels of investment
 Size of the market. A large market leads to a high level of sales and profits which leads
to high levels of investment but a small market leads to low sales and low profits which
leads to a low level of investment
 Level of skills of workers/Availability of skilled labour force; High level of skills of
workers leads to high level of efficiency in production which leads to a high level of

©Economics department 26
 investment on the other hand limited skills of workers leads to low level of efficiency in
production which leads to low levels of investment
 The land tenure system; A good land tenure system makes it easy to acquire land and
set up economic activities which leads to a high level of investment while a poor land
tenure system makes it hard to acquire land which limits investment
 Level of existing capital stock; Adequate liquid capital enable producers to acquire
sufficient factor inputs which encourages investment on the other hand limited capital
makes it hard for producers to acquire sufficient factor inputs which limits investment
 The techniques of production. Modern techniques of production lead to a high level of
efficiency in production which leads to high levels of investment but poor techniques of
production lead to inefficiency in production which leads to low investment
 The political atmosphere/political climate: Political stability encourages production
because producers settle down to carry out production without the fear of losing their
lives which leads to high levels of investment while political instability results into the
fear of losing their lives and property which leads to a low level of investment
 The level of monetization of the economy/size of subsistence sector; A large
subsistence sector/low level of monetization limits investment because most people
produce on a small scale for their own consumption while a small subsistence sector/high
level of monetization encourages investment because most people produce on a large
scale for the market which leads to high levels of investment
 The level of entrepreneurial ability High level of entrepreneurial ability leads to better
organization of the factors of production which leads to high levels of investment while a
low level of entrepreneurial skills leads to poor organization of the factors of production
among producers which leads to low levels of investment.
 The level of infrastructural development; High level of infrastructural development
encourages investment because it lowers the costs of production while underdeveloped
infrastructure discourages investment because it leads to high costs of production
 Rate of inflation. Low rate of inflation encourages investment due to the low cost of
acquiring factor inputs while high rate of inflation discourages investment because of
high cost of acquiring factor inputs
 The population growth rate; High population growth rate leads to high dependence
burden which limits savings leading to low levels of investment while low population
growth rate leads to a low dependence burden which encourages savings thus high levels
of investment
 Level of savings; High level of savings leads to increased investment because it leads to
accumulation of more funds for the investors to purchase inputs for investment while low
levels of savings leads to limited accumulation of funds for investment hence low levels
of investment
 The level of accountability; High level of accountability attracts more investors because
they easily acquire licences without incurring costs of paying bribes to government
officials which leads to high levels of investment, while low levels of accountability
discourages investors because they find it hard to acquire licences and have to incur high
costs of paying bribes to the government officials which leads to low levels of
investment
 The degree or level of conservatism; High degree of conservatism limits investment
because many people stick to the traditional methods of production which are low

©Economics department 27
 yielding while a low level of conservatism encourages investment because many people
embrace modern methods of production which are high yielding .
 The government policy on investment. A favourable government policy on investment
e.g in form of tax holidays, subsidies reduces the cost of production and thus leads to
high levels of investment on the other hand an unfavourable government policy on
investment leads to high costs of production which leads to low investment
 The marginal efficiency of capital. A high marginal efficiency of capital leads to a high
level of investment because of the high expected returns on an additional unit of capital
employed but a low marginal efficiency of capital leads to low levels of investment
because of the low expected returns on an additional unit of capital employed
N.B Marginal efficiency of capital is the expected rate of return on an additional
unit of capital employed. Its determinants are ; The price level, level of taxation, level of
output, size of the market, rate of depreciation of capital, rate of interest

Factors that limit/lead to low levels of investment

 Low levels of income of the people.
 Low levels of savings.
 Under developed infrastructure/poor state of infrastructure.
 Political instability
 -Limited market
 Low levels of technology/poor state of technology.
 High interest rate on borrowed capital.
 Unfavourable government policy on investment/limited investment incentives,
 Low levels of existing capital stock.
 Limited entrepreneurial skills.
 low profit levels.
 High level of inflation.
 Low levels of accountability/High levels of corruption.
 Limited skills.
 Poor land tenure system.

Measures that can be adopted to increase the level of investments

 Improve the state of technology (Technology development/transfer). This will increase

the level of efficiency in production of goods and services thus increase investment
 Equip labour with skills. This can increase the level of efficiency in production and
therefore increase investment
 Develop economic infrastructure This will reduce production costs which increase the
level of investments
 Provide investment incentives. This will reduce costs of production which will lead to
increase in the level of investments
 Modernize the agricultural sector. This will facilitate production throughout the year in
addition to use of better technology which will increase investment

©Economics department 28
  Provide credit facilities to producers. This will enable the producers purchase enough
factor inputs to carry out investments and hence increase investment
 Encourage saving. This will facilitate accumulation of adequate funds for purchasing
inputs for investment and thus increase investment
 Expand markets. This will increase the level of sales and profits which will encourage
more investments
 Ensure political stability. This will increase security for lives and property of the
producers/investors and therefore increase investments
 Control population growth rate. This will reduce the dependency burden, encourage
saving and increase investment
 Encourage economic diversification. This will increase the range of economic activities
in the different sectors of the economy which will increase investment
 Carry out further privatization of public enterprises. This is intended to promote
efficiency and increase investment
 Improve entrepreneurial skills. This will lead to better organization of the factors of
production which will increase investment
 Carry out further liberalization of trade. This will reduce production costs which will
encourage more investment

Questions 1(a) Account for the low level of investments in developing countries

(b) Examine the measures being used to increase the level of investment in Uganda

2(a) What is an investment ?

(b) Explain the benefits of an increase in the level of investments in an economy.

3(a) Distinguish between gross investment and net investment

(b) Explain the factors that influence the level of investment in the private sector in
Uganda

The concept of the multiplier

Multiplier is the number of times by which an initial change in a given expenditure multiplies
itself to give a final change in the level of national income. The initial change in expenditure
could be in consumption expenditure, investment expenditure, Government expenditure e.t.c
which determines the type of multiplier

©Economics department 29
 Change∈income
The multiplier M =
Change∈expenditure

∆Y
M=
∆E
Operation of the multiplier/size of the multiplier is greatly influenced by the magnitude of the
marginal propensity to consume (MPC) and marginal propensity to save(MPS)
MPC is the proportion of the additional income which spent on consumption.
∆C
MPC =
∆Y
MPS is the proportion of the additional income which is saved.
∆S
MPS =
∆Y
Relationship between MPC and MPS
MPC + MPS = 1 or 1 – MPC = MPS
Relationship between MPS, MPC, and the size of the multiplier
1) The greater the size of the MPS the smaller the magnitude of the multiplier and the
1
smaller the MPS the bigger the multiplier thus M =
MPS
2) The bigger the MPC the bigger the magnitude of the multiplier and the smaller the MPC,
1 1
the smaller the magnitude of the multiplier thus M = =
MPS 1−MPC

Types of multipliers
 Investment multiplier
This is the number of times by which an initial change in investment expenditure
multiplies itself to give the final change in income
Change∈income ∆Y
Investment multiplier = =
Changei n investment expenditure ∆I

 Income multiplier: This refers to the number of times by which an initial change in
total expenditure multiplies itself to give a final change in the level of (national) income
.

Change∈income ∆Y
Income multiplier = =
Change∈total expenditure ∆ T exp

 Consumption multiplier: This refers to the number of times by which an initial change
in consumption expenditure multiplies itself to give a final change in the level of income.

Change∈income ∆Y
Consumption multiplier = =
Change∈consumption expenditure ∆C

 Government multiplier

©Economics department 30
 This refers to the number of times by which an initial change in government
expenditure multiplies itself to give a final change in the level of income.

Change∈income ∆Y
Government multiplier= =
Change∈ government expenditure ∆G

 Export multiplier/Foreign trade multiplier

This refers to the number of times by which an initial change in export earnings
multiplies itself to give a final change in the level of income.
:

Change ∈ncome ∆y
Export multiplier = =
Change∈ export earnings ∆x
NB;1) Marginal propensity to export is the proportion of the additional income which is
Change∈export earnings
earned from imports. MPX =
Change∈income
2)Average propensity to export is the proportion of the total income which is
Export earnings
earned from exports. APX =
Total income
 Import multiplier
This refers to the number of times by which an initial change in import expenditure
multiplies itself to give the final change in income

Change∈income ∆Y
Import multiplier = =
Change∈import expenditure ∆ M
NB ; 1)Marginal propensity to import is the proportion of the additional income which is
Change∈import expenditure
spent on imports. MPM =
Change∈income
2)Average propensity to import is the proportion of the total income which is spent
Import expenditure
on imports. APM =
Total income

 Tax multiplier
This refers to the number of times by which an initial change in the level of taxes
multiplies itself to give a final change in the level of income.
 Employment multiplier
This is the number of times by which an initial change in employment multiplies itself to
give the final change in income
 The balanced budget multiplier

©Economics department 31
 Calculations involving the multiplier
1) Given that MPC = 75%, determine the MPS
From MPC + MPS = 1
0.75 + MPS = 1
MPS = 1 – 0.75
MPS = 0.25 or 25%
2) Calculate the magnitude of the multiplier if the MPC = 80%
1
M=
1−MPC
1 1
= = = 5 times
1−0.8 0.2
3) Given that the investment multiplier is 4 times, calculate the
(i) The MPC
(ii) The MPS
Solution
1
(i) M=
1−MPC
1
4 =
1−MPC
4(1-MPC) = 1
4 – 4MPC = 1
4MPC = 3
3
MPC = = 0.75
4
(ii) MPC + MPS = 1
0.75 + MPS = 1
MPS = 1 – 0.75 = 0.75
4) Due to an increase in investment expenditure from $100millions to $200millions, the
country`s GDP increased from $1000millions to $1500millions, calculate;
(i)The investment multiplier
(ii)The MPS
Solution
Change∈income
(i) M=
Change∈investment expenditure

1500 millions−1000 millions

= 200 millions−100 millions

500 millions
= 100 millions = 5times
1
(ii) M=
MPS
1
5=
MPS
5MPS = 1

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 1
MPS = =0.2
5
5) Given that the MPC = 75%, if investment expenditure is increased by shillings
100billions, determine
(i) The final change in income
(ii) The final level of income, if the initial level of income was shilling 1200billions
Solutions
1
(i) M=
1−MPC
1
M=
1−0.75
M = 4 times
∆Y
From M = or ∆ Y =¿M x ∆ I
∆I
∆ Y = 4 x 100billions
=shillings 400 billions
(ii) Final level of income = initial level of income + final change in income
Y2 = Y1 + ∆ Y
Final level of income = 1200billions + 400billions
= shillings 1600billions
Exercise
1) Given that the marginal propensity to consume is 80%, and the change in income is
Shillings 1,000,0000, calculate the
(i)Multiplier
(ii) Change in investment
2) Given that the marginal propensity to consume in a two sector economy is 80%,
initial investment is shillings 20 billions, initial equilibrium level of income is
shillings 80 billions. If investment is increased by shillings 5 billions, calculate the;
(i) Multiplier value
(ii) New equilibrium level of income
3) The level of consumption is shs 600 millions and the level of income is shs 1000
millions. If the level of consumption is increased by shs 20 millions and increase in
the level of income is shs 100 millions, calculate the;
(i) Average propensity to consume
(ii) Average propensity to save
(iii) Marginal propensity to consume
(iv) Marginal propensity to save
4) Given that the current level of national income is shilling 200 billions, if the MPS =
40% and investment expenditure is increased by shillings 20 billions, calculate the
final level of national income
5) Given that the marginal propensity to save is equal to 0.4, if the change in income is
shillings 200,000 calculate the change in consumption expenditure

©Economics department 33
 Operation/Working of the investment multiplier

Question; Given that the MPC = 80% and the increase in investment expenditure is
shillings 1000 millions, how does the investment multiplier operate in the
economy?
 An increase in investment expenditure leads to increased production and income in
period one.
 The increase in income in period one generate increase in consumption expenditure and
saving depending on the MPC and MPS
 The increase in consumption expenditure in round/period one creates an increase in
production and income of the same amount in period two
 The increase in income in period two creates farther increases in consumption
expenditure and savings
 The process continues till no further increases in income and expenditure are possible

Time Change in Change in consumption Change in savings

period income (
∆ Y mn shs ¿ (∆ C mn shs ¿ (∆ S mn shs )

A 1000 80 x 1000 = 800 20 x 1000 = 200

100 100
B 800 80 x 800 = 640 20 x 800 = 160
100 100
C 640 80 x 640 = 512 20 x 640 = 128
100 100
D - - -
E - - -

The final change in the level of income is given by

∆ Y =M x ∆ I
1 1
∆Y = x∆I = x 1000millions = shillings 5,000 millions
1−MPC 1−0.8

Factors that affect the size/operation of the investment multiplier

 Income levels. High income levels leads to high levels of saving that leads to high levels
of investment and output hence encouraging operation of the investment multiplier but
low incomes lead to low saving and low levels of investment which leads to low output
thus limiting operation of the investment multiplier
 Size of the market. A large market leads to a high level of sales and profits which leads
to high levels of investment and output produced hence effective operation of the
investment multiplier but a small market leads to low sales and low profits which leads

©Economics department 34
 to a low level of investment, low output produced and thus limited operation of the
investment multiplier/small investment multiplier
 Level of skills of workers/Availability of skilled labour force; High level of skills of
workers leads to high level of efficiency in production which leads to a high level of
investment and production hence effective operation of the investment multiplier and on
the other hand limited skills of workers leads to low level of efficiency in production
which leads to low levels of investment, low output produced hence limited operation of
the investment multiplier
 The land tenure system. A good land tenure system makes it easy to acquire land and
set up economic activities which leads to a high level of investment which increases
output and hence encourages operation of the investment multiplier while a poor land
tenure system makes it hard to acquire land which limits investment, limits output and
thus limits operation of the investment multiplier
 Level of existing capital stock; Adequate liquid capital enable producers to acquire
sufficient factor inputs which encourages investment, increases output and therefore
encourages operation of the multiplier and on the other hand limited capital makes it
hard for producers to acquire sufficient factor inputs which limits investment, limits
output and hence limits operation of the investment multiplier
 The techniques of production. Modern techniques of production lead to a high level of
efficiency in production which leads to high levels of investment, increases output and
hence encourages operation of the investment multiplier but poor techniques of
production lead to inefficiency in production which leads to low investment and low
output thus limited operation of the investment multiplier
 The political atmosphere/political climate: Political stability encourages production
because producers settle down to carry out production without the fear of losing their
lives which leads to high levels of investment and output thus effective operation of the
multiplier while political instability results into the fear of losing their lives and property
which leads to a low level of investment , low output and thus limited operation of the
multiplier
 The level of entrepreneurial ability. High level of entrepreneurial ability leads to
better organization of the factors of production which leads to high levels of investment
and output produced hence effective operation of the investment multiplier while a low
level of entrepreneurial skills leads to poor organization of the factors of production
among producers which leads to low levels of investment, low output and thus limited
operation of the multiplier
 The level of infrastructural development; High level of infrastructural development
encourages investment because it lowers the costs of production which increases output
and hence effective operation of the multiplier while underdeveloped infrastructure
discourages investment because it leads to high costs of production which limits output
and thus limits operation of the multiplier
 Rate of inflation. Low rate of inflation encourages investment due to the low cost of
acquiring factor inputs which increases output and therefore encourages operation of the
investment multiplier while high rate of inflation discourages investment because of high
cost of acquiring factor inputs which limits output and hence limits operation of the
multiplier

©Economics department 35
  The population growth rate; High population growth rate leads to high dependence
burden which limits savings leading to low levels of investment, low output which limits
operation of the investment multiplier while low population growth rate leads to a low
dependence burden which encourages savings thus high levels of investment that
increase output and therefore encourage operation of the multiplier
 Level of savings; High level of savings leads to increased investment because it leads to
accumulation of more funds for the investors to purchase inputs for investment which
increases output and therefore encourages operation of the investment multiplier while
low levels of savings leads to limited accumulation of funds for investment hence low
levels of investment, low output and limits operation of the investment multiplier
 The level of accountability; High level of accountability attracts more investors because
they easily acquire licences without incurring high costs of paying bribes to government
officials which leads to high levels of investment and output which encourages effective
operation of the investment multiplier while low levels of accountability discourages
investors because they find it hard to acquire licences and have to incur high costs of
paying bribes to the government officials which leads to low levels of investment and
low output and thus limits operation of the multiplier
 The government policy on investment. A favourable government policy on investment
e.g in form of tax holidays, subsidies reduces the cost of production and thus leads to
high levels of investment and high output produced hence effective operation of the
investment multiplier on the other hand an unfavourable government policy on
investment leads to high costs of production which leads to low investment and low
output produced thus limited operation of the multiplier
 The marginal propensity to import. A high marginal propensity to import results into
increased importation of better quality goods which leads to low sales and low profits
made by the local firms, discourages investment and production and thus limits effective
operation of the investment multiplier but a low marginal propensity to import results a
high level of sales and profits for the local firms which encourages investment and
production thus encourages operation of the investment multiplier
 The level of liquidity preference. High liquidity preference leads to low savings in the
financial institutions because people prefer to keep their wealth in cash form and thus
spend most of it, this leads to low investment and low output and thus limits effective
operation of the investment multiplier but low liquidity preference leads to a high level
of savings and investment which increases output and thus encourages operation of the
investment multiplier
In class exercise
1 (a) Explain the conditions necessary for effective operation of the investment
multiplier in an economy
(b) Examine the factors that tend to limit effective operation of the investment
multiplier in developing countries
2(a) Distinguish between income multiplier and investment multiplier
(b) Suggest measures that government can adopt to encourage effective operation
Of the investment multiplier in an economy

Conditions necessary for effective operation of the investment multiplier

©Economics department 36
  Existence of political stability
 There should be price stability/low rate of inflation
 Existence of a large market
 Low population growth rate
 High level of entrepreneurial skills
 High level of accountability
 Existence of developed infrastructure
 Low liquidity preference
 Low marginal propensity to import
 Availability of adequate capital
 Favourable government policy on investment
 Favourable land tenure system
 Low interest rates
 Presence of modern/efficient techniques of production
 Presence of adequate skilled labour

Factors that limit effective operation of the investment multiplier

 Limited market
 Political instability
 Low entrepreneurial skills
 High population growth rate
 High marginal propensity to import
 High liquidity preference
 High interest rates
 High rate of inflation
 Low supply of skilled labour
 Poor land tenure system
 Poor state of technology
 Poor government policy on investment
 Underdeveloped infrastructure
Measures that can be adopted to encourage effective operation of the investment multiplier
 Provide investment incentives
 Improve infrastructure
 Improve the state of technology (Technology development/transfer)
 Equip labour with skills.
 Develop economic infrastructure
 Provide investment incentives
 Provide credit facilities to producers
 Encourage saving
 Expand markets
 Ensure political stability
 Control population growth rate
 Carry out further privatization of public enterprises
 Improve entrepreneurial skills
 Carry out further liberalization of trade
 Encourage compulsory saving

©Economics department 37
The accelerator principle
This explains the relationship between a change in consumption expenditure and the resultant
change in the level of investment in an economy
The accelerator is the number of times an initial change in the consumption expenditure
multiplies itself to give the final change in the level of investment

Change∈investment ∆I
Accelerator = =
Change∈consumption expenditure ∆ C

Question; Due to an increase in consumption expenditure by $20millions, the level of

investment expenditure increased from $ 500millions to $600millions. Calculate the value of
the accelerator.

Per capita income and welfare/standard of living

Per capita income is the average income of the population in a country in a given period of time.
It is calculated by dividing the country`s national income/GDP by the population size
Uses of income per capita
 Used to measure the standard of living/people`s welfare
 Used to compare the standard of living in a country over time
 Used to compare the standard of living between countries
 Used to measure rate of economic growth/performance
 Used to for economic analysis and planning
 Used to determine the level of resource exploitation/utilization
 Used when soliciting for foreign aid
Question (a) Why is it necessary to calculate income per capita in developing countries?
(b) Account for the low per capita income figures in developing countries
(Due to factors that lead to low levels of national income )

Standard of living
This is the socio-economic welfare of an individual or society as measured by the basket of
goods and services enjoyed. It refers to the conditions of life/quality of lives in which people live
as determined by the quantity and quality of goods and services that people are able to enjoy
Determinants of the standard of living
 Level of income
High income levels lead to high standard of living since people have enough income to afford
more goods and services thereby making life more comfortable and low income levels limits the
amount and quality of goods and services consumed thereby leading to low standard of living.
 Level of employment/ unemployment
High levels of employment lead to high income levels thereby leading to high standard of living
in an economy because many people are able to afford enough goods and services while high
levels of unemployment lead to low income levels and low standard of living.
 Degree of political freedom.

©Economics department 38
A high degree of freedom leads to a high standard of living because people have freedom of
speech, movement, and association but a low degree of freedom leads to low standards of living
because of lack of freedom of association and speech
 Political atmosphere/ climate.
Political stability enables individuals to enjoy comfortable lives because they have peace of mind
and security for lives and property hence high standard of living. On the other hand, political
instability leads to low standard of living because of lack of security for lives and property
 The general price level in an economy/ rate of inflation.
A high price level/rate of inflation leads to a low standard of living because goods and services
are expensive and unaffordable for most people but a low price level leads to a high standard of
living because the goods and services are cheap and affordable for most people
 Nature of goods produced ( capital goods or consumer goods)
Production of consumer goods at the expense of capital goods leads to a high standard of living
because such consumer goods provide direct satisfaction to the users but production of capital
goods at the expense of consumer goods leads to a low standard of living because the capital
goods don’t provide direct satisfaction
 The quality of goods produced/consumed
Production and consumption of poor quality goods and services leads to a low standard of living
because such goods negatively affect people`s health and lives but better quality goods and
services lead to a high standard of living because such goods improve people`s health and lives
 Level of social costs/pollution.
High levels of pollution create a bad environment that negatively affects people`s health and
lives which lowers the welfare of people while low levels of pollution create a good environment
which improves people`s health and lives thus a high standard of living
 Availability of time for leisure/Number of hours worked for.
Lack of leisure leads to a low standard of living because people are over worked and don’t have
enough time for resting and relaxing but enjoyment of enough leisure leads to a high standard of
living because people have enough time for resting
 Nature of income distribution.
High levels of income inequality lead to a low standard of living because most of the people are
low income earners who cannot afford to purchase and enjoy enough goods and services but
even distribution of income leads to a high standard of living because most of the people have
enough incomes that enable them purchase and enjoy enough goods and services cons
 The nature/pattern of government expenditure
High government expenditure on non- productive activities e.g luxuries for government officials
and expensive ceremonies leads to a low standard of living because it limits provision of
essential goods and services for the people but high government expenditure on provision of
social services for the people leads to a high standard of living
 The working conditions/ occupational hazards.
Favourable working conditions lead to a high standard of living because workers are provided
with enough welfare facilities and occupational hazards at the place of work are reduced but poor
working conditions lead to a low standard of living because of lack of welfare facilities and the
high level of occupational hazards
 Level of education and skills.
A high level of education and skills leads to a high standard of living because many people are
high efficient in production which leads to high output and incomes while low levels of

©Economics department 39
education and skills lead to inefficiency in production which leads to low output and low
incomes earned and thus limited enjoyment of goods and services

 Level of development of infrastructure.

Well developed infrastructure leads to low costs of production which leads to high output and
consumption of the goods at low and affordable prices but poor infrastructure leads to high costs
of production and hence low output and limited enjoyment of goods and services
 The techniques of production
Poor techniques of production lead to inefficiency in production which leads to production of
low output and of a poor quality which leads to a low standard of living but modern techniques
of production lead to a high level of efficiency in production hence high output and of a better
quality which leads to a high standard of living
 Level of taxation.
High level of taxation leads to low disposable income which limits people`s ability to purchase
and enjoy goods and services hence a low standard of living but low levels of taxation lead to a
high disposable income and thus enable people to purchase and enjoy enough goods and services
which leads to a high standard of living.

Questions;(1)(a) Account for the low standards of living in developing countries

(b) Suggest measures that can be adopted to improve people`s standards of
living in developing countries
(2)(a)Describe the indicators of low standards of living in Uganda
(b)How is the standard of living measured in developing countries?

Indicators of low standards of living in developing countries

 Low incomes/per capita income
 High level of unemployment
 Under developed infrastructure
 Low life expectancy
 Low degree of political freedom
 Political instabilities
 Uneven distribution of income
 Low level of technological development
 High level s of environmental pollution
 Low level of education and skills
 High levels of illiteracy
 Poor housing and sanitation
 Poor feeding and nutrition
 Over working and lack of leisure
 Consumption of poor quality goods and services
 High level s of conservatism
 High price level/high rate of inflation

©Economics department 40
Measures that can be adopted to improve people`s standards of living
 Develop labour skills/reform the education system
 Provide affordable credit
 Improve infrastructure
 Ensure political stability
 Control the population growth rate
 Encourage subsidization of the low income earners
 Encourage environmental protection to reduce pollution
 Fight conservatism
 Reform the land tenure system
 Develop entrepreneurship skills
 Liberalize trade
 Control inflation/ensure price stability
 Adopt progressive taxation
 Increase political freedom
 Encourage production/consumption of quality goods and services
 Increase government expenditure on provision of social services

Measurement of the standard of living

The basic measure for standard of living is per capita income. A high per capita income implies
a high standard of living and a low per capita income implies a low standard of living
Other measures include; national income/GDP figures, the life expectancy, access to basic
necessities, human development index e.t.c
However per capita income may not be a good measure for standard of living in a country,
in that income per capita may be high but when the standard of living is low and vice versa. This
is because it ignores the important factors that affect the standard of living, hence the limitations
of using income per capita.
Three different types of questions
1) Explain the limitations of using per capita income for measuring the standard of living
in an economy
2) Explain the limitations of using per capita income for comparing standard of living in
between countries
3) Explain the limitations of using per capita income for comparing standards of living in
a country over time

Limitations/weaknesses of using per capita income in measuring the standard of living in

an economy
 It does not take into account the distribution of income.
Per capita income figure may be high when there is a high degree of income inequality in the
economy i.e. when incomes are concentrated in the hands of few individuals and majority of the
population is poor implying that most people cannot afford to buy and enjoy enough goods and
services but even distribution of income leads to a high standard of living despite income per
capita being low
 It ignores the nature/pattern of government expenditure

©Economics department 41
High government expenditure on non- productive activities results into a low standard of living
despite per capita income being high because such expenditures don’t improve people`s welfare
but high government expenditure on provision of social services leads to a high standard of
living even when per capita income is low because such expenditures improve people`s welfare
 It does not take into account the nature of goods produced.
Per capita income figures may be high but when the economy is producing large volumes of
capital goods at the expense of consumer goods yet capital goods do not directly improve
peoples’ welfare which instead leads to a low standard of living but production of more of
consumer goods leads to a high standard of living despite per capita income being low
 It does not consider the amount of leisure foregone./number of hours worked for
Per capita income figures may be high but when high output levels are as a result of over
working labour which leads to a low standard of living because people have no time for resting
but if they enjoy enough leisure the standard of living will be high despite income per capita
being low
 It does not take into account the working conditions of the people.
Individuals working in very poor conditions are exposed to occupational hazards which are
likely to reduce their welfare despite the high per capita income figure in the country but good
working conditions lead to a high standard of living even with per capita income being low

 It does not consider the price levels/ rate of inflation.

Per capita income may be high but if the price level/rate of inflation is also high then the
standard of living tends to be low because goods and services are expensive and unaffordable yet
if the price level is low , the standard of living is likely to be high even when per capita income is
low
 It does not take into account the political climate in the country.
Per capita income figures may be high but when some parts of the country are experiencing
political instabilities and economic welfare is poor in such areas because people are always in
fear of loosing lives and property but political stability leads to a high standard of living despite
income per capita being low
 It does not take into account the quality of goods produced.
Per capita income figures may be high but if the goods and services produced and consumed by
the people in the economy are of poor quality then the standard of living will be low because the
poor quality goods and services negatively affect people`s health but production of better quality
goods leads to a high standard of living despite income per capita being low
 It does not consider social costs like pollution.
Per capita incomes figure may be high but if the economy is exposed to social costs such as
pollution the standard of living is likely to be low because such social costs negatively affect
people`s health but a low level of social costs leads to a high standard of living despite income
per capita being low
 Per capita income ignores the level of unemployment in the country.
Per capita income figures may be high yet the rate of unemployment is also high which leads to a
low standard of living because many people are jobless, have no incomes and therefore unable to
enjoy enough goods and services but if the rate of unemployment is low then the standard of
living is likely to be high even with a low income per capita
 Per capita income ignores the degree of accuracy in the national income and
population figures used for calculating the per capita income.

©Economics department 42
Over estimation of the national income and under estimation of the population results into an
over estimated figure for the income per capita implying that the standard of living tends to be
low despite a high income per capita
 It does not consider the subsistence output.
Per capita income may be low due to the presence of a large subsistence sector where people do
not earn incomes but produce their own goods and services for consumption which improves
their welfare
 It ignores the level of taxation in the country
A high level of taxation leads to a low standard of living despite a high per capita income
because people are left with a low disposable income and therefore unable to enjoy enough
goods and services but low taxation leads to a high standard of living despite income per capita
being low

Limitations/weaknesses of using per capita income to compare standard of living between

countries:
It does not consider differences in the distribution of income between countries.
Per capita income may be higher in one country but when the incomes are unevenly distributed
and therefore many people are very poor implying that they cannot afford the basic necessities of
life and therefore low standards of living for the majority of such people yet in another country,
the per capita income may be lower but when the income is more evenly distributed implying
that the majority of the people can afford to meet the basic necessities of life which implies
better welfare of the majority of the people.
It does not take into account the differences in the pattern of expenditure between
countries.
In a country with a higher per capita income, most of the income may be spent on non-
productive activities and therefore not improving the standard of living of the people yet in
another country where per capita income is low, national income may be spent on things that
improve welfare implying that people in the country with lower per capita income may be
enjoying better standard of living than in a country with a high per capita income.
It does not consider differences in the composition/nature of goods produced between
countries.
It may be high in a country which produces more of capital goods which do not improve
economic welfare directly and therefore implying low standard of living of such people yet in a
country with a lower per capita income consumer goods which directly improve people’s welfare
are produced leading to a higher standard of living
It does not take into account the differences in the amount of leisure enjoyed between
countries
. It may be high in a country where the people work hard for longer hours which reduce their
standard of living and yet this leisure may be enjoyed by the nationals in a country with a low
per capita income which leads to a higher standard of living.
It does not consider the differences in the working conditions between countries.

©Economics department 43
 The per capita income may be high in a country where people experience a lot of occupational
hazards which negatively affect their welfare and yet in a country where there is low per capita
income people may not be suffering from such occupational hazards hence enjoying better
economic welfare.
It does not consider differences in the level/size of subsistence sector between
countries .
The per capita income may be low in a country where there is a large subsistence sector or non-
monetary output which greatly contributes to peoples welfare yet in another country with a small
subsistence sector but with a higher per capita income the standard of living is lower
It does not consider the differences in the general price levels/rate of inflation between
countries.
Per capita income figure may be high in a country where there is a high rate of inflation which
implies high cost of living leading to low economic welfare and yet in another country where per
capita income is lower, there may be low rate of inflation or price stability which implies low
cost of living and hence better economic welfare.
It does not consider the differences in the political climate between countries.
Per capita income may be high in a country where there are wars which negatively affect
people’s welfare because of the constant fear of loss of lives and property yet per capita income
may be low in a country where there is political stability and the people in such a country are
enjoying high standard of living despite the low per capita income.
It does not consider the differences in the quality of goods and services produced
between countries;
Per capita income may be high in a country where the commodities produced are of low quality
which negatively affects their health and lowers their standards of living and yet per capita
income may be low in another country where goods produced are of a high quality which
implies better standards of living of such people.
It does not consider the differences in the degree of accuracy of statistical data
between countries i.e. in terms of population size and national income figures.
The per capita income may be high in a country when the statistical data was inaccurate
especially concerning the population size and yet in another country where per capita income is
low, they may be having accurate statistical data, this makes the standard of living lower in a
country with a higher per capita income
It does not take into account the differences in social costs between countries such as
pollution.
The per capita income may be high in a country where there are high problems of social costs
especially pollution which negatively affects people`s health. this lower people’s standards of
living in such a country despite the high per capita income. Yet in another country with a low per
capita income such social costs may be minimal implying better standards of living of the people
in such a country.
It does not take into account the differences in requirements for confortable living
between countries. Countries experiencing winter need substantial conditioning of houses and
©Economics department 44
warm clothing like winter cloth and therefore those facilities must be produced. In tropical
Africa for instance, expenses on warm heating and warm clothing may not be essential and
therefore no need for producing such commodities. In a cold country, per capita income figures
may be high because of heating expenses; however this does not mean that people in such
countries are better off, than those who live in hot countries with lower per capita income but not
requiring heating expenses.
It does not take into account the differences in employment levels between countries.
The per capita income figure may be high in a country where there is a high rate of
unemployment which implies that the majority of the people are not earning and therefore they
are unable to meet the basic necessities of life which leads low standards of living of people yet
in another country the per capita income may be low when the rate of unemployment is very low
i.e. majority of the people are earning a living and therefore can afford the basic necessities of
life which implies better standards of living of such people.
It does not consider the differences in the level of taxation of income/wealth between
countries;
The per capita income may be high in a country where the rate of tax on peoples income is very
high, this reduces their disposable income and therefore lowering their standards of living
because they have less amount of money for buying goods and services yet in another country,
with a lower per capita income, the rate of tax on peoples income may also be low which
implies that people are left with enough disposable income and such income enables them to buy
a number of goods and services which leads to improvement of their standard of living.
It does not take into account of the differences in the transport and distribution costs
of goods between countries.
In a country experiencing higher transport and distribution costs the standard of living tends to
be lower despite its income per capita being higher because of the high costs of obtaining the
goods and services
It does not consider differences in the value of currencies .
The value of the currency of the country with a higher income per capita may be lower implying
a lower standard of living because such a currency purchases a smaller quantity of goods and
services compared to the one of a country with a lower income per capita but of a higher value
.
It does not consider differences in the boundary of production .
Some activities may be left out when compiling national income in a country with a lower
income per capita yet they improve peoples welfare which results into a higher standard of living
compared to another country with a higher income per capita but where very many activities are
considered in computation of national income
It ignores differences in tastes and preferences between the countries
In a country where the goods produced and considered are not the ones preferred by the people
the standard of living is likely to be lower although its income per capita is higher yet in another
country with a lower per capita income but where the goods produced are the ones preferred the
standard of living happens to be higher

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 Limitations/weaknesses of using per capita income to compare standards of living in a
country over time:
 It does not consider changes in income distribution in economy overtime.
In a period when per capita income is high but there may be wide income disparities, implying
that the majority of the people are not in position to buy the basic necessities of life, yet in
another period when per capita income is low there may be even distribution of income implying
that the majority of the people are in position to buy the basic necessities of life and thus better
standard of living.
 It does not consider changes in the quality of goods produced in economy overtime.
In a period when per capita income is high there may be production of poor quality products
which leads to low standard of living, yet in a period when per capita income is low there may be
production of high quality goods and better standard of living.
 It does not consider the changes in the degree of accuracy of the statistical data in an
economy over time.
In a period when the per capita is high there may be inaccurate statistical data e.g. wrong
population figures which may not give a good picture of people’s standard of living, yet in
another period the per capita income may be low when there is accurate statistical data and
people enjoy better standard of living
 It does not consider the changes in tastes and preferences in an economy over time.
In a period when per capita income is high, the goods and services produced may not favour
people’s tastes and preferences thus low standards of living yet in another period the per capita
income may be low when the goods and services produced are favourable to the people thus high
standards of living.
 It does not consider changes in the price level / inflation in country overtime.
In a period when per capita income is high there may be high rate of inflation which leads to
high cost of living and thus low standard of living, yet in a period when there is low per capita
income there may be low general price levels which leads to low cost of living and thus better
standard of living.

 It does not consider changes in the amount of leisure foregone in an economy over
time.

In a period when per capita is high people may be working for very long hours and thus having
very little time for leisure and thus low standard of living, yet in a period when per capita income
is low, people may be working for fewer hours and therefore having ample time for leisure, thus
a better standard of living.

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  It does not consider changes in the pattern of government expenditure in an economy
over time.

In a period when per capita income may be high but when the government spends her income
mostly on activities which are not directly productive and therefore not improving the standard
of living of the people e.g. heavy expenditure on the military hard ware/military sector, yet in a
period when per capita income may be low the government may be spending her income mostly
on activities which are directly productive and therefore improving the standard of living of the
people.

 It does not take into account changes in the composition/types of goods produced in
an economy overtime.

In a period when per capita income may be high there may be more capital goods produced
which do not improve people’s welfare directly and thus low standard of living, yet in a period
when per capita income is low there may be production of more consumer goods which improve
people’s welfare directly and thus a better standard of living.

 It does not take into account changes in the political climate in economy overtime.

In a period per capita income is high there may be wars/insecurity in the country which
negatively affects people’s welfare, yet in a period when per capita income is low there may be
high levels of security of live and property and thus better standard of living.

 It does not take into account changes in the level of taxation on income/wealth
overtime

. In a period when per capita income is high there may be high levels of taxation on people’s
income/wealth which reduces their disposable income leading to low volume of goods and
services enjoyed by such people thus low standard of living, yet in a period when per capita
income is low there may be low levels of taxation on people’s income/wealth which leads to high
level of disposable income leading to high volume of goods and services enjoyed by such people
and thus better standard of living.

 It does not take into account changes in the level of employment/unemployment level
in economy overtime.

In a period when per capita income is high there may be high levels of unemployment due to
heavy use of capital intensive technology implying that majority of the people are unable to buy
the basic necessities of life since they are not earning and thus low standard of living, yet in a
period when per capita income is low there may be high employment levels in the economy and

©Economics department 47
thus majority of the people are in position to meet the basic necessities of life due to the incomes
earned and thus better standard of living.

 It does not take into account changes in the working conditions in an economy over
time.

In a period when per capita income is high, there may be high levels of occupational hazards
which negatively affect people’s standard of living, yet in a period when per capita income is
low there may be low levels of occupational hazards leading to better standard of living of the
people.

Question (a) Distinguish between per capita income and personal income

(b) Explain why an increase in a country`s per capita income may not necessarily

translate into an improvement in people`s standards of living

National income/GDP and standard of living

High national income/GDP figures imply a high standard of living while low national income
/GDP figures imply a low standard of living. However this may not always be correct because
like per capita income, national income or GDP figures ignore the same factors that greatly affect
people`s standards of living

Question(1) Explain the weaknesses of using national income statistics/figures for

comparing standards of living between countries

Solution;

 They ignore differences in the price levels of goods and services between the countries
 They ignore differences in the distribution of income in the different countries
 The national income figures ignore differences in the political climate between the
countries
 e.t.c

The cost of living and price indices

The cost of living refers to the amount of money required by an individual to sustain the
standard of living/lifestyle he/she is accustomed to. The cost of living depends on the general
price level of goods and services in that if the price level is high then the cost of living is high,
and if the price level is low , then the cost of living is low.

Relationship between the cost of living and the standard of living

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If the cost of living is high then the standard of living turns out to be low because the goods and
services are expensive and unaffordable for most people, but if the cost of living is low the
standard of living tends to be high

Measurement of changes in the cost of living

The cost of living/changes in the cost of living are measure by calculating the changes in the
general price level which is done by use of price indices.

Price indices are numbers/figures used to measure the average change in prices of a basket of
goods and services from the base year to the current year

A base year is a year when prices were relatively stable and therefore the price index for the
base year is always 100. The current year is the year for which the prices are being compared
with the stable prices of the base year i.e the price index that is computed is for the current year.
The price index computed (for the current year ) may be greater than 100 indicating that on
average the general price level increased from the base year to the current year, but it may be less
than 100 indicating that on average the price level reduced in the current year compared to that in
the base year. If the computed price index is equal to 100, then on average the price level in the
current year remained the same as that in the base year

Types of price indices

 The price relative/simple price index for each commodity

This is a ratio of the current year price to the base year price of one commodity.

Current year price

Price relative = . This is the simple price relative
Base year price

Current year price

 Weighted price relative = x weight for the commodity
Base year price
N.B weighted price relative = simple price relative x weight
 Consumer price index

This is a figure that measures relative changes in the retail prices of consumer goods over a
period of time

 Retail price index

This is a figure that measures relative changes in the retail prices of commodities in an economy
from one time period to another

 Wholesale price index

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This is a figure that measures relative changes in the wholesale prices of commodities in an
economy over a period of time

 Cost of living index

This is a measure of relative changes in expenditure on a basket of goods and services in an

economy over a period of time

 Simple price index/un weighted index

This is a price index computed that does not take into consideration of the weights/relative
importance of the commodities in the basket of goods

 Weighted (price)index

This is a price index is a price index/statistical measure that takes into consideration of the
weights/relative importance of the commodities in the basket of goods

Procedures/steps for computing price indices (consumer price index, cost of living index
e.t.c)

Question; How is the cost of living index/consumer price index computed in an economy

 Selection of the representative basket of goods. This consists of commodities consumed

by all or most of the people
 Selecting the base year. This must be a year when prices were relatively stable.
 Getting prices of the commodities in the representative basket in both the base year and
in the current year
 Calculation of the price relatives/simple price index for each commodity. This is
Current year price
calculated using; price relative = x 100
Base year price
 Calculation of the average simple price index/average price relative (un weighted

price index). ASPI =

∑ Pricerelatives
Numb er of commodities
 Weighting of the commodities/attaching weights to the commodities in the
representative basket. Weights are numbers which show the relative importance of the
commodities in the representative basket to the consumers in that a commodity which is
most important is assigned the biggest weight compared to one that is less important.
 Calculation of the weighted price index for each commodity/weighted price relative
WPI = Price relative x weight

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  Calculation of the average weighted price index

AWPI =
∑ Weighted price index for each commodity
∑ Weights
Or
∑ (Price relative x weght )
∑ Weights
Example:

1(a) Study the table below and answer the questions that follow.

Commodity Prices in year Price index for Prices in year 2001 Weight.
2000 year 2000 (shs)

(shs)

A 6000 100 7000 4

B 4000 100 5000 3

C 5000 100 3000 2

D 3000 100 3000 1

i) Calculate the simple price index for each commodity in 2001. (04 marks)

ii) Average simple price index for 2001. (02 marks)

iii) The weighted price index for each commodity in 2001. (04 marks)

iv) The average weighted index for 2001. (02 marks)

(b) Explain the challenges encountered in computation of price indices in Uganda (08 marks)

SOLUTION

From the table the base year is year 2000 (because that the year where the price index for each
of the commodities is indicated as 100)

Current year price

(i)Simple price index for each commodity (price relative) = x 100
Base year price

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 7000
SPI for commodity A = x100 = 116.7
6000

5000
SPI for commodity B = x 100 = 125
4000

3000
SPI for commodity C = x 100 = 75
4000

3000
SPI for commodity D = x 100 = 100
3000

(ii)Average simple price index for the year 2001(simple price index/un weighted index for the
year 2001)

ASPI =
∑ Price relatives =
116.7+125+ 75+100 416.7
= = 104.175 =104.2
Nunber of commodities 4 4

(ii)Weighted price index for each commodity (weighted price relative)

WPI for each commodity = price relative x weight

WPI for commodity A = 116.7 x 4 = 466.8

WPI for commodity B = 125 x 3 = 375

WPI for commodity C = 75 x 2 = 150

WPI for commodity D = 100 x 1 = 100

(iv)Average weighted price index for year 2000(weighted index for year 2000)

AWPI =
∑ Weighted price indices = 466.8+375+150+ 100 = 1091.8 = 109.18 = 109.2
∑ Weights 1+ 2+ 3+4 10

(NB ;Price indices have no units and are not expressed as percentages)

(b)(Get challenges in relation to the steps/procedure)e.g

 Selection of the base year is difficult

 Choice of the representative basket is difficult
 Attaching of weights is difficult
 Price fluctuations
 Inadequate information
 Limited skills
 Limited facilities e.g the computers

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  Emergence of new commodities and exit of old ones
 Changes in tastes and preferences
 Non uniformity of prices
 Absence of standard weights and measures
 e.t,c

In class exercise

(1)Study the table below and answer the questions that follow

Commodity Base year Current Price Weights Weighted

prices(2013)(shs) year relatives price index
prices(2016) for 2016
(shs)
P 800 - 125 2 -
Q 1000 - 120 1 -
R 600 - 80 4 -
S 1200 - 100 3 -

(a)Calculate the;

(i) Current year price for each commodity (05 marks)

(ii) Simple price index (02 marks)

(iii) Weighted price relatives (05 marks)

(iv) Weighted index (02 marks)

(b) Why is there a need to compute price indices in developing countries? (06 marks)

2(a) Study the table below and answer the questions that follow

Basket of goods Price index for year Price index for year Weights

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 2018 2016
Sugar 100 150 4
Salt 100 130 2
Beans 100 90 1
Fuel 100 120 3

(i) Compute the un weighted consumer price index (06 marks)

(ii) Compute the weighted consumer price index (06 marks)

(b) Why may the consumer price index be an unrealistic indicator of changes in the general
price level in an economy?

(Answers are similar to challenges but those in form of factors that lead to
unrealistic/inaccurate figures of the price indices)

Uses/importance of computing price indices(consumer or cost of living price index)

 Used to measure changes I the value of money/measure the rate of inflation or

deflation. If the price index for the current year is greater than that of the current year,
then there is inflation/increase in the general price level and a decline the value of money
but if it less, then there is a deflation and therefore the value of money has increased
e.g if the computed price index for the current year if 108, then the rate of inflation is 8%
 Used in wage determination. If the current year price index is greater than 100 the it
implies that prices have increased hence the need to increase the wages to enable the
workers afford enough goods and services, but if its less than 100, then there is no need
to increase the wages.
 Used to determine tax rates. If the price index for the current year is greater than 100,
indicating existence of inflation the its necessary for government to increase taxes on
incomes to reduce the disposable income and aggregate demand in order to control the
inflation but if its less than 100 implying that the general price level has reduced then it is
not necessary to increase direct taxes
 Used to measure changes in the cost of living. If the current year index is greater than
that of the base year (100) then the price level and coat of living has increased but if it is
less, then the general price level and cost of living has reduced
 Used to measure the terms of trade. If the price index of exports is greater than the price
index of imports then the country has favourable terms of trade, but if the price index of
exports is less than that of imports, then the country has unfavourable terms of trade.
 Used to convert nominal national income/GDP figures to real national income/GDP
figures

©Economics department 54
 Nominal national income
Real national income = x 100
Price index

Questions

(1)Given that the nominal GDP is shs 150 billions and the consumer price index is 105,
calculate the real GDP

(2) Calculate the nominal national income if the real national income is $ 100 millions and
the rate of inflation in the economy is 10%

Challenges met in computation of price indices

 Difficulty in selecting a representative basket of goods and services. This is because

people consume different goods and services making it hard to obtain commodities
consumed by all people
 Choice of the base year is difficult. This is because of existence of price fluctuations that
make it hard to get a year with stable prices
 Price fluctuations within the year. This brings a challenge of determining the actual
prices to use for the current year so as to get a reliable price index
 Weighting of the commodities is difficult. This is because the level of importance
attached to the commodities by the different consumers varies
 Changes in tastes and preferences. This makes it difficult to choose the commodities to
consider for the representative basket because the consumers keep substituting the
commodities they consume
 Emergence of new commodities and exit of old ones. As new commodities emerge on
the market as some disappear, it becomes necessary to make continuous adjustment in
the representative basket so as to get a realistic price index
 Limited information. This brings a challenge of determining the commodities that people
consume, the prices and their expenditures so as to accurately compute the price indices
 Absence of standard weights and measures. Commodities are sold in different units e.g
some in kilograms, tins, heaps, baskets e.t.c which have different prices hence the
difficulty getting the prices to use
 Variation in prices in the different areas of the country. This makes it hard to determine
the appropriate prices to use in order to come up with appropriate price indices valid for
the whole country
 Limited facilities e.g the computers. This leads to delays in collection and analysis of
data and sometimes loss of some of the data
 Limited skilled personnel. This results into inefficiency in collection and analysis of the
data and thus failure to get accurate price indices
 Improvement in quality of the commodities which affects their prices

©Economics department 55
  Changes in importance attached to the commodities due changing conditions which
affects the weights

The distribution of income and wealth in developing countries

Incomes and wealth in developing countries are unevenly distributed implying that there is
income inequality/uneven distribution of income
Income inequality is defined as the disproportionate/uneven distribution of earnings in a country
where majority of the people are low income earners and the minority are high income earners
Measurement of the of income inequality
The degree of income inequality in an economy can be measured by use of;
(i) The Lorenz curve
(ii) The Gini coefficient/index
The Lorenz curve is a graph showing cumulative percentages of the country`s national income
received by cumulative percentages of the population
The graph is drawn by plotting cumulative percentages of the population against cumulative
percentages of the population

The Gini coefficient/index is a statistical measure of the degree of income inequality that ranges
between 0 and 1 where by the bigger its magnitude, the greater the degree of income inequality
The Lorenz curve and Gini index are used to;
 Measure the degree of income inequality in an economy at a particular period of time
 Compare the income inequality/distribution of income in different countries
 Find out changes in the distribution of income in an economy over time

Forms of income inequality

 Individual income inequality. This is the inequality between individuals where some earn
higher incomes than others due to factors like differences in levels of education and skills
 Regional/geographical inequality. This is the inequality between regions where
individual in more developed regions earn higher incomes than others in underdeveloped
regions eg due to differences in natural resource endowments, differences in the political
climate etc.For example in Uganda urban areas are more developed than the rural areas
 Sectoral inequality. This is the inequality between sectors where by individuals working
in sectors that are more developed get higher incomes than their counterparts employed
in sectors that are less developed. For example the inequality between the formal and the
informal sector
 Intra-sectoral inequality. This is the inequality within the same sector where by some
individual employed in a given sector get higher incomes than their counterparts
employed in the same sector
 International inequality. This is the inequality between countries where some countries
are more developed than others and the people in such countries get higher incomes than
those in underdeveloped countries

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 Causes of income inequality/uneven distribution of incomes and wealth
Question; (a)Account for the uneven distribution of income and wealth in developing
countries.
(b)Explain the implications of existence of income inequality in developing
countries.
 Differences in the level of education and skills/training. Highly educated individuals
earn higher incomes because they tend to be more efficient in production and thus
produce more output but those with low levels of education and skills earn lower incomes
because they are less efficient in production end therefore produce low output
 Differences in natural resources endowment. People who live in areas which are
endowed with abundant natural resources produce more goods and services which help
them to earn more income than those who live in areas which are endowed with less
natural resources who produce lower output
 Differences in talents and natural abilities. People with special abilities like artistes,
soccer stars etc get higher incomes than those without such abilities because they posses
rear skills that make them more efficient and productive
 Differences in family/social background. People who come from rich families get higher
income than those from poor families because they are able to inherit income generating
assets unlike their counterparts from the poor families

 Differences in the amount of output produced; People who produce more output earn
more income than their counter parts that produce less output in case they are paid
according to the output produced(peace rate)

 Differences in the elasticity of supply of labour; Labourers with inelastic supply earn
higher income due to the fact that it is not easy to acquire such labourers which leads to
low labour supply yet those with elastic supply earn low income because it is very easy to
acquire them whenever the need arises
 Differences in trade unions ability to bargain; Workers who are organized under strong
trade unions get higher incomes because such trade unions are able to use various
methods to compel the employer to increase their pay unlike for those who are members
of weak trade unions
 Differences in employer’s ability and willingness to pay; workers whose employers have
the financial ability and willingness to pay better wages earn higher incomes than their
counterparts whose employers do not have the financial ability to pay better wages

©Economics department 57
 because their employer make profits that enable the employer to give workers a higher
pay
 Differences in the accessibility to developed infrastructure; People who live in areas
with well-developed infrastructure in terms of roads, railways, banks carry out a number
of economic activities because of the low costs of production which help them to earn
higher incomes than their counterparts who live in areas with poor infrastructure or less
developed infrastructure who are unable to produce enough output because of high costs
of production
 Discrimination in the labour market on the basis of gender, race, age, or religion.
Individuals who are discriminated at places of work get lower incomes because they are
of the unfavoured race, religion etc but those that are favoured get higher incomes
because they are of the desired race or religion

 Differences in the nature of occupations. People who are employed in highly risky jobs
get higher incomes because of low supply of labour to those occupations unlike those
employed in less risky jobs who get low incomes because of the high supply of labour to
those jobs
 Differences in the ability of individuals to bargain for incomes. People with high
bargaining power earn high income because they are to convince their employers to give
them better incomes than those with low bargaining power who fail to convince their
employers to give them better incomes.
 Differences in the number of hours worked. People who work for long hours earn
higher incomes than those who work for a few hours in case of time rate system of wage
payment because they are able to produce more output.

 Differences in the cost of living: People who work in areas where the cost of living is
high e.g. in urban areas tend to earn higher incomes to enable them afford goods and
services which are expensive compared to those working in areas where the cost of living
is low.
 Differences in access to credit facilities /contracts. People who have access to credit
facilities and able to use up such facilities to start income generating activities, earn
higher incomes than their counterparts who do not have easy access to such facilities and
therefore earn low incomes.
 Differences in the degree of political climate/state of security: People living in areas
which are politically stable are able to carry out a number of economic activities which
help them to earn higher incomes because they are assured of the security for their lives
and property unlike those who live in areas which are politically unstable who are unable
to effectively engage in economic activities because of the constant fear of loss of lives
and property leading to low incomes earned .
 Non-matching wage policy by the employers. Employers especially government pays
their workers different wages depending on the nature of the assignments/departments
where they are deployed. Workers in departments which are favoured by the employers
tend to earn more incomes than those deployed in less favoured departments.

©Economics department 58
  Political influence in the allocation of resources in favour of certain regions/sectors.
People in those areas favoured in terms of resource allocation for infrastructural
development, industrial establishment, job creation are in position to engage in a number
of economic activities which are highly paying hence earn higher incomes than those
who stay in areas which are not favoured in terms of infrastructural development, and job
creation who fail to engage in different economic activities and thus leading to low
incomes earned by such people.
 Differences in the level of experience/expertise/seniority/responsibility. People with a
high level of experience get higher incomes because they tend to be more efficient and
therefore able to produce more output and of better quality compared to those with
limited experience.
 Differences in elasticity of demand for the product that labour produces. People
producing commodities that have inelastic demand get higher incomes because its
possible cover up the costs of the high payment by increasing prices of the final products
without greatly reducing sales unlike those who produce commodities that have elastic
demand

Merits of income inequality (positive effects/implications)

Question; Why may income inequality be desirable in an economy?
 Encourages hard work among the low income earners. They work harder to earn more
so as to enjoy better standard of living like their rich counterparts
 Leads high tax revenue for government. This is through progressive taxation where the
high income earners are taxed at a higher rate than the low income earners
 Leads to provision of cheap labour by the low income earners which lowers
production costs. This because the low income earner are usually desperate to work.
 Encourages labour mobility. The low income earners move from job to job or area to
area looking for better paying opportunities.
 Encourages harmonious existence between the employer and the employees.
Employees who are low income earner tend to be obedient and respectful to the employer
so as to be assured of their jobs
 Encourages investment by the high income earner. This because they able to save and
accumulate funds for investment.
 Leads to a high level of savings. The high income earners have surplus income and thus
able to save
 Awakens government to undertake appropriate redistributive development policies
so as to help the low income earners in miserable conditions
 Promotes creativity and innovativeness among the poor so as to earn more incomes
and raise their living conditions
 Unpleasant tasks get done. These are done by the low income earners who are usually
desperate and have limited options
 Leads to a high level of resource utilization and economic growth due to the high level
of investment by the high income earners

Demerits of income inequality (negative effects/implications)

Question; Account for the need to redistribute incomes and wealth in Uganda?

©Economics department 59
  Leads to rural urban migration and the associated evils. The low income earner tend
to move to urban areas looking for better paying opportunities to increase their earnings
 Leads to low aggregate demand/small market. Many of the low income earners are
unable to purchase enough goods and services which discourages investment
 Makes government unpopular/leads to resentment towards government. The low
income earners blame government for failing to help them to come out of the miserable
conditions
 Leads to high government expenditure. This is on provision of social services like
health care and education for the poor
 Leads to brain drain. Low income earners with high level of skills move to work in
other countries so as to get higher incomes
 Leads to low tax revenue for government. Many of the poor don’t pay direct taxes
because of very low or no incomes
 Leads to exploitation of the poor by the rich. This is through underpaying them
because they are usually desperate.
 Results into social evils like thefts and prostitutions as the low income earners try to
look for money to sustain their livelihood
 Leads to low savings because the poor have low marginal propensity to save
 Leads to apathy among the poor. This is because the low incomes discourage them
from working hard
 Leads to a high dependency burden because the poor depend on their rich relatives and
friends when it comes to education and medical care for their families
 Leads to low standards of living among the poor because they are unable to purchase
and enjoy enough goods and services
 Leads to creation of social classes. That is those for the poor and those for the rich
which leads to social tensions
 Leads to misallocation of resources because business people tend to produce and import
more of luxuries for the rich instead of essential goods for the poor

Measures that can be adopted to reduce income inequalities/redistribute incomes and

wealth
 Reform the education system. This will leads to production of more of job creators than
job seekers who will set up investments and create jobs for themselves and others and
therefore increase their incomes
 Impose progressive taxes: This involves taxing the high income earners at a high rate and
low income earners at a lower rate so that they are left with some money for saving and
investment to generate more income
 Improve infrastructure such as roads, railways, power facilities. This will reduce costs of
production and thus encourage more investments and economic activities that will create
more jobs for the unemployed and raise their incomes

©Economics department 60
  Modernize agriculture. This will enable farmers produce more output for commercial
purposes and be able to earn more incomes
 Provide affordable credit. This will avail the low income earners with funds to purchase
inputs for investment and be able to create employment for themselves and others and
hence generation of more incomes for the poor
 Control the population growth. This will reduce the dependency burden, encourage
saving and investment which will increase income generating activities for the poor
people in the country
 Decentralize governance. This will transfer power and decision making from the center to
the local authorities to and enable them invest in infrastructure and job creation for the
people in different localities for them to earn incomes
 Ensure political stability. This will ensure security for lives and property which will
facilitate more investments and create more jobs for the unemployed poor to increase
their incomes
 Government should subsidize the poor e.g when it comes to education to enable them
acquire skills for employment and income generation.
 Reform the land tenure system. This will make land more accessible for investment
purposes and therefore create more employment opportunities for income generation
 Encourage diversification of the economy. This will increase the number of investments
and economic activities in the different sectors of the economy and hence create more
employment opportunities for income generation.
 Encourage liberalization of the economy. This will lower production costs and hence
attract more investments and create jobs for the unemployed poor for them to earn more
incomes

 Raise wages of low income groups. This will enable the low income earners save part of
their incomes for investment and income generation
 Encourage development of small-scale industries/ enterprises. This create more
employment opportunities as they use labour intensive methods of production and
eventually raise incomes for a large number of poor people
 Continue empowering disadvantaged groups. This will enable them access education
and training, credit facilities and employment and therefore enable them participate in
income generating activities
Questions; (1)(a) Why is income inequality a problem of great concern to government in
in Uganda?
(b) Examine the strategies being used to reduce income inequalities in
Uganda.
(a) Explain the forms of income inequality in Uganda
(b) “ The government of Uganda should adopt all possible strategies to redistribute
incomes and wealth in Uganda” Discuss

©Economics department 61