How Central Banks Influence National Income

How might a central bank influence national income?

Central banks play an important role in the economy on a national scale, providing a number of functions. The Bank of England, for instance, defines the main function of all central banks as an institution that protects the value of its currency (Bank of England, 2012). Besides the protection of currency values, central banks control the supply of money in the economy, issue bank notes and effectively act as a bank to commercial and wholesale banks (Sloman et al, 2009: 511). Its main purpose, however, may be providing financial stability within a nation, usually by implementing monetary policies to control the amount of money in the economy. The policies central banks implement may have an effect on national income and while the policies suggest they were made to fix certain economic issues, they may effectively do the opposite.

National income, essentially, is the value of manufactured consumer goods and services that nations provide, usually assessed through the course of the year. National income or NI, can be determined in a number of ways, however, it can usually be measured by gross domestic product; this measures income as a result of output or work done (Sloman et al, 2009: 393). This suggests that a nation’s economic well-being can be assessed through GDP; however, there are a number of complications with this theory. First, GDP statistics only recall income generated through output, which suggests that voluntary work would not be included, despite output being generated. Second, it disregards the “underground economy” (Sloman et al, 2009: 396), such as the sale of illegal goods and services, including drugs or prostitution. Both of these complications suggests that GDP may be understated and that unaccounted income may indicate ‘leakages’ in the system; this is especially the case for Uganda as their black market represents a large proportion of the countries income (Choongwa, 2012).

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