3 Important factors determining National Income

3 Important factors determining National Income

There are a number of influences which determine the size of the national income in a country. It is on account of these influences that one country may have a larger National Income than another. The three main influences are:

  1. Quantity and Quality of factors of production;
  2. The state of Technical know how; and
  3. Political stability.

Let us discuss these three influences in a greater detail.

Important factors determining National Income

Important factors determining National Income

1. Quantity and Quality of Factors of Production

The quantity and quality of a country’s stock of factors of production is one of the most important influences on its national income. The quantity and quality of land, the climate, the rainfall, etc. determine the quantity and quality of agricultural production and the size of the national income.

The quantity of labour has a double influence since labour is both a factor of production as well as the consumer of what is produced. The quality of labour depending upon intelligence, education, training, etc. influences the volume of industrial production.

Capital may comprise of simple and primitive tools or the most modern equipment. The quantity and quality of capital is one of the greatest influence on total output. Likewise, the quantity and quality of entrepreneurial ability is also an important element to reckon with in the determination of the size of national income of a country.

2. The state of Technical know-how

This is another important influence operating in the output and national income of the country. A country with a poor technical knowledge cannot have a large-sized national income, because, it will not be in a position to make the best possible use of its resources.

Apart from other factors, the capital formation in a country is determined by the extent of technical know-how and technology of production. Even with abundant resources, a country will still be dormant without any development when it doesnt exploit its resources scientifically. Natural resources combined with advanced technology will go a long way to increasing the size of national income or economic development

3. Political Stability

This is an essential prerequisite for maintaining production at the highest level. The economic development of several countries, particularly the South American Republics and African countries, have been hindered in the past by political instability.

The key to development and increase in National income rest on important factors like Natural resources, Capital formation, technical know-how, political stability and above all the national character of the people. In backward economies, all these factors will be deplorably lacking and the size of the national income will be small.