Uses, difficulties and determinants of national income

40 min

How do you count beans that were never sold?

A household in Nyamagabe harvests beans and sweet potatoes, and eats most of them. A moto-taxi rider in Huye earns cash all day and keeps no accounts. A cross-border trader in Rubavu buys in one country and sells in another. Each of them produces real value, and each is a problem for a statistician. NISR's Labour Force Survey for 2025 found that 81.3% of employed people worked in the informal sector, and that about 1.5 million people of working age outside the labour force were mainly growing food for their own households. Their output is real, but it leaves few written records. This lesson asks what national income figures are used for, why they are hard to measure in a country like Rwanda, and what determines how large national income is.

Why national income figures matter

Measuring economic performance and growth. Changes in real GDP show whether the economy is expanding or shrinking, as in 2020, when Rwanda's real GDP fell by 2.8% (NISR).
Comparing living standards over time and between countries, using income per head.
Planning and policy. National plans set targets in terms of growth, investment and sector shares, and the government's budget is built on forecasts of GDP. Ratios such as tax revenue, public debt and the budget deficit are all expressed as a percentage of GDP.
Showing the structure of the economy: the share of each sector (in 2025 services produced 52.3% of Rwanda's GDP), and so where jobs and growth are coming from.
Showing how income is distributed between wages, profits and rent, and, with household surveys, between rich and poor.
International uses. The World Bank classifies countries by GNI per head, which affects their access to cheaper loans; international bodies set members' contributions by national income; investors compare markets.
Forecasting and research, for example estimating how much revenue a new tax would raise.

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Difficulties of measurement in developing countries

Difficulty	Why it arises
Subsistence output	Food grown and eaten at home is never sold, so it has no market price. Its quantity and value must be estimated from surveys, and the estimate may be too high or too low.
A large informal sector	Unregistered businesses keep no written accounts and pay little tax, so their output is estimated from surveys rather than recorded.
Poor record keeping and low literacy	Many small producers cannot say exactly what they produced, spent or earned.
Double counting	It is hard to separate intermediate from final goods when the same producer sells both, for example maize sold to a mill and to households.
Valuing government services	Schools, health centres and security are not sold, so they are valued at what they cost (mainly salaries), which may not reflect their worth.
Estimating depreciation	The wear on roads, buildings and machines must be estimated to move from gross to net figures.
Changing prices	Inflation raises money values without any extra output, so figures must be deflated using a price index of good quality.
Transfer payments and second-hand sales	These must be identified and removed, which needs detailed data.
Limited staff and funds	Statistical offices need regular, costly surveys. Methods are also updated: NISR now values real GDP at 2024 prices, which revised earlier growth figures.

Worked example 1: how much does subsistence output matter?

A district has 40,000 farm households. A survey finds that each eats, on average, 600 kg of beans a year that it grew itself. The average farm-gate price of beans is Frw 900 per kg (illustrative figures).

\text{Imputed value} = 40\,000 \times 600 \times 900 = 21\,600\,000\,000 \text{ Frw} = 21.6 \text{ billion Frw}

If the survey's average were 10% too high, GDP would be overstated by Frw 2.16 billion. Nothing was sold, yet this output is as real as beans bought in a market: leaving it out would make rural households look much poorer than they are.

Worked example 2: the share of informal employment

NISR's Labour Force Survey 2025 counted 4,772,704 employed people, of whom 3,882,077 worked in the informal sector.

\frac{3\,882\,077}{4\,772\,704} \times 100 = 81.3\%

About four out of every five workers are in units that keep no written accounts. Their output enters GDP through survey-based estimates, which is one reason GDP figures are revised as new surveys arrive.

Warning

Difficulties are not the same as limitations. A difficulty of measurement makes the number inaccurate (subsistence output, informal firms). A limitation of the figure remains even if the number is perfectly accurate: GDP was never designed to measure leisure, inequality or the environment. Exam questions often ask for one and not the other; Lesson 5 deals with the limits.

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What determines the level of national income?

Natural resources: the amount and quality of land, minerals, water and climate. Rwanda's fertile volcanic soils and minerals such as tin, tantalum and tungsten ores add to output; its small land area limits farm output.
The labour force: its size, health, education and skills. A better-trained workforce produces more per hour.
The stock of capital: machines, buildings, roads and power lines. Investment adds to it.
Technology and enterprise: better methods and organisation get more output from the same inputs.
Aggregate demand: Keynes showed that output also depends on spending. If households, firms, government and foreign buyers spend too little, resources stand idle.
Political stability and good governance, which encourage saving and investment.
Infrastructure: energy, transport and communications lower costs for every producer.
Foreign trade, investment and aid: access to markets, imported capital goods, and the terms of trade.
Weather and climate, especially where agriculture is a large share of output: a poor rainy season lowers farm output and incomes.
Government policy: taxes, spending, regulation and support for particular sectors.

Important

Discuss. Suppose NISR improved its survey of subsistence farming and found that households were growing 15% more food than previously estimated. GDP would be revised up. Has the country become richer? Who might use the revised figure, and for what?

Khan Academy, "Limitations of GDP" (about 8 minutes). He lists what GDP leaves out, such as home production and the informal economy. As you watch, sort each item into the "estimated" or "mostly left out" column of the diagram above.

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Practice

Give five uses of national income statistics to the government of Rwanda.
Explain why subsistence output makes national income difficult to measure, and how statisticians deal with it.
State four other difficulties of measuring national income in developing countries.
A sector has 25,000 households that each consume 300 kg of their own sorghum, valued at Frw 700 per kg (illustrative). Calculate the imputed value of this output.
In a labour force survey, 2,400,000 people are employed and 1,980,000 of them work in the informal sector. Calculate the informal share of employment.
Distinguish between a difficulty of measuring national income and a limitation of national income figures, with one example of each.
Explain how (a) investment in education and (b) a fall in export prices could affect the level of national income.
"Better statistics would solve the problem of measuring national income in developing countries." Evaluate.

Show answersHide answers

Any five: measuring growth; comparing living standards; planning and setting targets; forecasting the budget and expressing tax and debt as shares of GDP; showing the structure of the economy; showing income distribution; international comparisons and World Bank classification; attracting investors.
Food grown and eaten at home is never sold, so it has no recorded value; statisticians estimate the quantity from household surveys and value it at market (farm-gate) prices, which may be inaccurate.
Any four: large informal sector; poor records and illiteracy; double counting; valuing government services; estimating depreciation; changing prices; separating transfer payments; shortage of staff and funds.
25,000 × 300 × 700 = Frw 5,250,000,000 (Frw 5.25 billion).
1,980,000 ÷ 2,400,000 × 100 = 82.5%.
A difficulty makes the figure inaccurate, such as estimating subsistence output; a limitation remains even with perfect data, such as GDP ignoring leisure or inequality.
(a) It raises labour productivity, so capacity and income rise, mostly in the long run. (b) It lowers export earnings and incomes in export industries, reducing spending and national income (and worsening the terms of trade).
Better surveys and records would reduce errors from subsistence and informal output. But some problems are conceptual: unpaid work, valuing public services at cost, environmental damage and inequality would remain even with perfect data. So statistics help, but do not remove all problems.

Sources and credits

Employment, informal sector and subsistence figures: Labour Force Survey 2025, Annual Report, NISR (Figure 4.10 and the overview of the labour force: 4,772,704 employed; 3,882,077 in the informal sector; 48.7% of the 3,092,165 people outside the labour force in subsistence agriculture). The 1.5 million is calculated by Ganzaa.
Growth in 2020 and service share in 2025: GDP National Accounts 2025 (annual tables, released 17 March 2026), National Institute of Statistics of Rwanda (NISR).
Video: Limitations of GDP, Khan Academy, embedded from YouTube.

Written by Ganzaa: the text, both diagrams, the table, the worked examples and the practice items. The district and sorghum figures are illustrative.

1How do you count beans that were never sold?

2Why national income figures matter

3Difficulties of measurement in developing countries

4What determines the level of national income?

How do you count beans that were never sold?

Why national income figures matter

Difficulties of measurement in developing countries

What determines the level of national income?