National income can be defined as the part of the objective income of the community including income derived from abroad which can be measured in money i.e the money value of goods and services which is produced and made available for consumption in an economy for a particular period which is usually a year. National income is usually denoted as Y and is measured in countries to see the rate at which the economy grows as well as the changes in average living standards and changes in the distribution of income between groups in the population. National income is measured using Gross Domestic Product (GDP). Below is the national output of the United Kingdom measured in GDP from 1990-2012.

FIG1:

Tracking UK economic activityThe full equation for calculating GDP is; Y=C+I+G+(X-M)

Where C=household spending/ consumption

I = capital investment

G= government spending

X= exports of goods and services

M= imports of goods and services.

There are three methods that can be used to calculate GDP and they are;

The expenditure method

The income method

The value added method.

The limitations of using the GDP to calculate National Income is that even though it measures economic activity it is not the same as economic wellbeing because it measures only goods and services that are priced and sold in markets such as leisure time and other non-market economic activities.

MAIN THEORIES AND FRAMEWORKS OF ECONOMIC GROWTH.

There are two main theories that discuss the role of various factors that determine economic growth; the neo-classical theory which is based on Solow’s growth model which talks about investment and savings and also emphasizes that increase in inputs say labour and capital would increase national income and also the theory of endogenous growth by Romer and Lucas such as the AK model which emphasizes that human capital, innovation capacity and knowledge have contributed greatly to the growth rate of national income (Petrakos et al, 2007).

SOLOW’S GROWTH MODEL

The neoclassical theory based on Solow’s growth model (1956) emphasizes that the increase in inputs i.e labour and capital and technical progress are the determinants of economic growth. It also gives an overview of how savings affect the economy over time. The Solow model takes on the assumptions of Harrod-Domar model except the assumption of fixed proportions of input. The model states that there is only one good produced in an economy (Yt) and some of it is consumed (Ct) while the rest is saved (St). The economy is assumed to be a closed one so savings equal investment and the good is produced by Labour (Lt) and Capital (Kt). So we have the production function; Given the model, Yt =F ( Kt, AtLt);