Measuring_National_Income for better understanding .ppt

good to learn national Income

1. AS Economics
PowerPoint Briefings 2006
Tutor2u &
Mrs G
Measuring National Income
AS Economics

2. Tutor2u &
Mrs G
National Income
•National income measures the total value of goods
and services produced within the economy over a
period of time
•National Income can be calculated in three main
ways
•1. The sum of factor incomesearned in
production
•2. Aggregate demandfor goods and services
•3. The sum of value addedfrom each productive
sector of the economy

3. Tutor2u &
Mrs G
Why is national income important?
•Measuring the level and rate
of growth of national income
(Y) is important to
economists when they are
considering:
–Economic growth and
where a country is in the
business cycle
–Changes to average living
standards of the
population
–Looking at the distribution
of national income (i.e.
measuring income and
wealth inequalities)

4. Tutor2u &
Mrs G
Gross Domestic Product (GDP)
•GDP measures the value of output produced
within the domestic boundaries of the country
•GDP includes the output of the foreign owned
firms with production plants located in the country
•There are three ways of calculating GDP -all of
which should sum to the same amount since by
identity:
•National Output = National Expenditure =
National Income
•Under the new definitions introduced in 1998, GDP
is now known as Gross Valued Added

5. Tutor2u &
Mrs G
Aggregate Demand (AD)
•AD is the sum of the final expenditure on produced
goods and services measured at current market
prices
•The full equation for GDP using this approach is
•GDP = C + I + G + (X-M)
•C: Household spending (consumption)
•I: Capital Investment spending
•G: General Government spending
•X: Exports of Goods and Services
•M: Imports of Goods and Services

6. Tutor2u &
Mrs G
Aggregate Demand Data for the UK
£ billion at constant 2002prices
C G I Stocks X M AD
1996 552.9 183.2 128.6 1.9 209.9 198.3 880.9
1997 572.8 182.3 137.1 4.0 227.2 217.7 908.7
1998 595.7 184.3 154.9 4.9 234.2 237.9 938.1
1999 622.1 191.6 158.1 6.4 244.2 256.7 966.6
2000 650.4 198.6 163.7 5.3 266.5 279.8 1005.5
2001 670.1 202.0 167.6 6.2 274.3 293.2 1027.9
2002 693.4 211.0 172.6 2.9 274.9 306.5 1048.5
2003 711.1 220.4 172.6 4.6 278.2 312.0 1074.9
2004 736.5 227.4 181.5 5.9 291.0 333.0 1109.1
2005 749.9 232.1 187.5 2.7 306.0 348.9 1129.2
So which
‘stock’
makes up
the largest
% of AD?

7. Tutor2u &
Mrs G
GDP by Factor Income
•GDP is the sum of the final incomes earned
through the production of goods and services
•The main factor incomes are as follows:
–Income from employment and self-employment
–Profits of commercial companies
–Rental income from the ownership of property
•= Gross Domestic product (by factor income)

8. Tutor2u &
Mrs G
GDP by Factor Income (2)
•Only factor incomes generated through the output
of goods and services are included in the
calculation of GDP by the income
•We exclude from the accounts:
–Transfer payments(e.g. the state pension, income
support and the Jobseekers’ Allowance)
–Private transfers of money from one individual to
another
–Income that is not registered with the Inland Revenue
–There is a sizeable shadow economy in which income
and spending is generated but no tax is declared

9. Tutor2u &
Mrs G
Welfare benefits
•Welfare benefits
are excluded
from the income
approach to
calculating
national income
•This is because
welfare benefits
are simply
transfers rather
than a reward
for factors of
production

10. Tutor2u &
Mrs G
GDP by Value Added from each Sector
•This measures the value of output produced by
each industry using the concept of value added
•Value added is the difference between the value of
goods as they leave a stage of production and the
cost of the goods as they entered that stage
•We use this approach to avoid the problems of
double-counting the value of intermediate inputs
•We try to calculate the value added at each stage
of the supply chain
•This is difficult when production is complex

11. Tutor2u &
Mrs G
GDP and GNP
•Gross National Product (GNP) measures the final value of
output or expenditure by owned factors of production
whether they are located in the country or overseas
•GNP = GDP + Net property income from abroad (NPIA)
•NPIA is the net balance of interest, profits and dividends
(IPD) coming into the country from country assets owned
overseas matched against the flow of profits and other
income from foreign owned assets located within the country

12. Tutor2u &
Mrs G
GDP and GNP
•GDP is the value of output produced by factors of
production located within a country
•Output produced by a country’s citizens,
regardless of where the output is produced, is
measured by gross national product (GNP)

13. Tutor2u &
Mrs G
Limitations of national income data
•Each method of estimating GDP is imprecise leading to
inaccuracies in the published figures
•Non-marketed output e.g. the value of housework and
voluntary activities are not yet part of official NY figures
•Undeclared economic activity eg shadow or informal
economy is excluded from official NY figures
•Transfer payments are excluded ie benefit payments
received with no corresponding output eg unemployment and
child benefits.
•Double acounting. In the output method of calculating GDP
we ignore intermediate output and count only value added –
but this is done by using a sample of firms from each industry
and calculating value added can be difficult

14. Tutor2u &
Mrs G
Shadow economy….
•According to the Institute for Fiscal Studies (2001)
more than £124 billion of goods and services (13%
of GDP) is undeclared to the government resulting
in lost tax revenue.
•GDP underestimates value added in the
construction industry, second hand cars and
personal services eg home, help.
•The shadow economy has grown very rapidly over
the last thirty years and it is a phenomenon that is
common to many countries

15. Tutor2u &
Mrs G
GDP and the standard of living
•Once GNP has been calculated it is
–Converted into US dollars at the official exchange
rate
–Divided by the country population
•This gives an average figure for GNP per head
•The standard of living refers to the amount of
goods and services consumed by households in
one year and is found by applying the equation:
–Standard of living = Real national income/Population
•A high standard of living means households
consume a large number of goods and services

16. Tutor2u &
Mrs G
Caution… just because an economy has a high
GDP… it can still have high elements of poverty.

17. Tutor2u &
Mrs G
Uk statistics ….June 2007

18. Tutor2u &
Mrs G
GDP per capita in 2004
GDP per
capita
Luxembourg 57 704EU15 28 741
United States 39 732Germany 28 605
Norway 38 765Italy 27 699
Ireland 35 767Spain 25 582
Switzerland 33 678Korea 20 907
United Kingdom 31 436Czech Republic18 467
Canada 31 395Hungary 15 946
Australia 31 231Slovak Republic14 309
Sweden 30 361Poland 12 647
Japan 29 664Mexico 10 059
France 29 554Turkey 7 687

19. Tutor2u &
Mrs G
GDP per capita of the world

20. Tutor2u &
Mrs G
Percent poverty world map

21. Tutor2u &
Mrs G
HDI –Human Development Index
•Read through article
•Use ICT –investigate the website
•http://hdr.undp.org/statistics/data/
•Try to work out why a GDP’s ranking is not always its HDI
order