The following points will highlight the five factors that determine the size of national income.
Factor # 1. Natural and Human Resources:
The quantity and quality of a country’s resources exert perhaps the most important influence on its national income. For example, fertile soil, ready sources of power, easily worked mineral deposits; a favourable climate, navigable rivers, etc. will have a beneficial effect on a country’s productive capacity.
Capital equipment may range from simple hand tools to the most up-to-date forms of industrial machinery. Generally, the achievement of an increasing output of goods is associated with increased investment in capital equipment. For example, a miner can extract a greater quantity of mineral resources from the earth with the aid of machinery than with only a pick and shovel. Thus, the effectiveness with which natural and human resources are used depends to a large extent on the capital equipment available.
The size of the working population is determined by factors such as the age structure of the population and social attitudes. For example, the social attitude towards women is important in this respect. If the community judges that ‘a woman’s place is in the home’, then the talents of many women may be wasted.
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The quality of the labour force will depend partly on the innate intelligence of the people and partly on the skills acquired through education and training.
Entrepreneurial skill, that is, the ability to make decisions, calls for sound judgment and some courage. The availability of the skill will affect the use of resources and, hence, the size of the national income.
Factor # 2. Technical Knowledge:
New methods of production and new ways of utilising resources may increase the output of goods and services. A community which is keen to try out new ideas or inventions in industry and commerce is likely to enjoy a higher standard of living than a country which is slow to adopt new ideas.
Factor # 3. Political Stability:
Political stability is essential for the expansion of business activities. War and internal revolution interfere with production because they add to normal commercial risks. Thus, peace and a stable government promote confidence and encourage production.
Factor # 4. Terms of Trade:
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Trade benefits all countries which engage in it, but the degree of benefit enjoyed by a particular country will vary according to changes in the price levels at which it sells its exports and imports. Favourable terms of trade occur if the prices of imports fall relatively to the prices of exported goods. This means that a larger quantity of imports can be obtained for a given quantity of exports. Hence, more goods are available and national income is increased.
Factor # 5. Foreign Investment:
A net income from foreign investment means that the creditor country can obtain goods and services from debtor countries without having to give goods and services in return. Thus, if two countries have the same Gross Domestic Products then the country with the more favourable net return from foreign investment will have the higher national income.