Transcript NATIONAL INCOME - Head Teacher's Update | Knox Academy

NATIONAL INCOME
Macroeconomics
TOPIC 1
WHAT IS NATIONAL INCOME?
 NI is the value of all goods and services produced in
the economy in a year.
 It measures the economic performance of a country.
MEASURING ECONOMIC PERFORMANCE
This can be done in 3 ways:
1.
GROSS DOMESTIC PRODUCT (GDP)
This measures the goods and services that are
produced in the UK no matter who owns the
resources.
2.
GROSS NATIONAL PRODUCT (GNP)
Measures the output produced by UK OWNED
resources.
Differs from GDP in that output produced in this
country by foreign firms is taken out and output by
UK firms producing abroad is added.
GNP = GDP + Net Property Income from Abroad –
Foreign Income from the UK
3.
NET NATIONAL PRODUCT (NNP)
GNP minus the loss in value of capital goods e.g.
machinery. This is called DEPRECIATION
A rise in any of the 3 measures would be deemed to be
ECONOMIC GROWTH, most people would use GDP.
NOMINAL AND REAL TERMS
 Each of the 3 measures of economic performance can
be expressed in Nominal or Real Terms.
Nominal Terms
 Nominal terms is also called money terms. Value is
calculated using CURRENT PRICES
 However by doing this it makes it difficult to compare
one years output to another.
 This is because of INFLATION. Which is the general
increase in prices. This could mean that NI has gone
up due to an increase in price and not an increase in
output.
Real Terms
 In order to measure changes in output you have to
convert the figure into real terms.
 This expresses the change in economic performance
as if their was no inflation – CONSTANT PRICES
 To adjust the figure you have to remove inflation.
 Method: Real NI = Nominal National Income divided
by 1 multiplied by Price Index of Base Year divided by
Price Index of Current Year
CALCULATING NATIONAL INCOME

There are 3 ways of calculating National Income.
1.
THE OUTPUT METHOD
Adds the value of all goods and services produced
by all firms
Must ensure there is no DOUBLE COUNTING – this
means counting the same output more than once
2.
THE INCOME METHOD
This is the total amount of incomes earned
from the owners of resources e.g. rent, wages,
profit
Does not include transfer income such as
pensions or benefits as they are not involved in
producing output
3.
THE EXPENDITURE METHOD
This is total expenditure of all individual citizens,
firms and the Government on goods and services
It does not include expenditure on imports which
are the output of another country
USES OF NI STATISTICS
NI stats which measures economic activity has many uses:
1.
2.
3.
4.
5.
Measure economic growth and changes in standard of
living
Aid government decision making – helps assess the state
of the economy
Comparison of economic growth and standard of living
between countries.
Identify countries that are in need of aid – those with low
NI
Calculate contributions that countries should make to
international organisations such as the World Bank and EU
PROBLEMS MEASURING NI
NI stats need to be accurate however there are problems
1.
2.
3.
4.
5.
Errors and omissions – data not collected or calculated
incorrectly
Black economy – people don’t show what they earn or
produce – to escape tax or claim benefit
Under-recording of output - some goods and services
not included because money doesn’t change hands e.g.
housework, barter, DIY
Over-recording through double counting
Over-recording through including transfer incomes
DIFFICULTIES IN USING NI STATS FOR
MAKING COMPARISONS
NI figures are used to make comparisons over time and between
countries but there are problems:
1.
2.
3.
4.
5.
Methods of calculating NI may differ over time or between
countries
Level of self-sufficiency may differ
Standard of living is measured by income per head so
population figures need to be correct as well
Stats need to be adjusted for inflation so inflation figures
need to be correct
Stats do not show differences in range, design and quality of
products
DIFFICULTIES IN USING NI STATS FOR
MAKING COMPARISONS
6.
7.
8.
9.
Stats do not show differences in working conditions,
leisure time or hours worked
No differences in income distribution are shown
Social costs such as pollution are not taken into
account
Spending on defence or space research may increase
output but does little for standard of living of people
Macroeconomics
TOPIC 1
CIRCULAR FLOW OF INCOME
TWO SECTOR ECONOMY
 In its simplest form an economy has firms and
households.
 Households own the factors of production which they
provide to firms.
 In return firms give households income, such are rent
and wages.
 Households then spend this income on the output
that firms produce.
 This expenditure becomes income for firms, which is
used to pay incomes to households.
 This creates the circular flow of income.
RESOURCES
FIRMS
INCOME
CONSUMER
SPENDING
HOUSEHOLDS
OUTPUT
CONSUMER SPENDING
 This is how much consumers demand in goods and services
over a period of time.
 When incomes increase so does consumer spending.
 Average propensity to consume
 APC = consumption/income
 Marginal propensity to consume
 MPC = Increase in consumption/Increase in income
Macroeconomics
TOPIC 1
LEAKAGES AND INJECTIONS
INJECTIONS
 Injections to the circular flow of income is any
spending that is not consumer spending.
 Three types of injections exist.
 Investment
 Exports
 Government Spending
INVESTMENT (I)
 This is spending by firms. This is normally on capital
goods, e.g. machinery.
EXPORTS (X)
 This is the money spent by overseas firms and
individuals on British goods.
 The amount spent is determined by the national
income in foreign countries.
 Can also be determined by the price and quality
of our exports compared to domestic products
and the delivery times and after sales service
provided.
GOVERNMENT SPENDING (G)
 This is the spending in the economy of the public
sector.
 The level spent is determined by government
decisions
LEAKAGES
 This is a withdrawal of money from the circular flow
of income. It is any money that does not go on as
consumer spending.
 There are 3 types:
 Savings
 Imports
 Taxation
SAVINGS (S)
 This is money that consumers save from their income.
 The higher the level of income the higher the
proportion saved.
IMPORTS (M)
 This is the amount spent by UK firms and individuals
on foreign goods and services.
 The amount spent on imports is determined by the
level of income in the UK, prices of imports compared
to UK goods and the quality of the imports.
TAXATION (T)
 This is the amount of revenue collected from
central and local government.
 The amount of tax collected is dependent on the
level of income and the level of spending in the
economy.
 The higher the income the more revenue the
government gets. The higher the spending the
more revenue the government needs.
Macroeconomics
TOPIC 1
DETERMINING NATIONAL
INCOME
KEYNESIANISM
 Named after the economist John Maynard Keynes.
 This theory states that it is aggregate demand that
determines national income.
 Is looking at the DEMAND SIDE OF THE ECONOMY
KEY POINTS
 Link between national income and employment –
the higher the level of national income, the
greater the number of workers needed to
produce it.
 Full employment level of national income – this is
the maximum output that could be made if all
resources are employed in producing products
which an economy is best at.
NATIONAL INCOME IN A TWO-SECTOR
ECONOMY
 A two-sector economy assumes there is no
government sector and there is no foreign trade. This
is called a CLOSED ECONOMY.
 Therefore the only injection is investment and the
only leakage is savings.
 The equilibrium level is where aggregate demand
(C+I) is equal to income/output or where savings
equal investments.
CHANGES IN EQUILIBRIUM
 Changes in propensity to save. If consumers save
more of their income, then consumption will fall.
 This means that Aggregate Demand will fall,
income/output will fall, as will employment. National
Income will fall until a new equilibrium is achieved.
 Changes in investment. If firms increase investment
then Aggregate Demand will also rise.
 National Income will increase until a new equilibrium
has been reached.
 However, any change in investment will result in a
bigger change in national income. This is due to the
MULTIPLIER EFFECT.
THE MULTIPLIER
 Any change in any component of aggregate demand
will have a multiplier effect.
 Often explained by looking at the INVESTMENT
MULTIPLIER
 The investment multiplier measures the change in
national income resulting in a change in investment.
 Change in national income = change in investment x
multiplier
 Assume we have a closed economy with no imports or
government.
 MPC is 0.9 and MPS is 0.1
 A car manufacturer invests £1000 in new equipment. This
£1000 becomes income to households. Households will
save £100 and spend £900.
 The £900 of consumer spending becomes £900 of income
to households. These households will save £90 and spend
£810.
 The £810 of consumer spending becomes the income
to households, who would save £81 and spend £729
 This process continues until national income is back at
equilibrium. At this point savings will equal
investment. In this example once savings is £1000.
 The size of the multiplier is dependent on the % of
income that is spent and % saved with each round of
income.
 All depends on the marginal propensity to save
(MPS).
 MPS = Change in savings
Change in income
 Multiplier = 1
MPS
or
1
1-MPC
 If the MPS is 0.1 then the multiplier would be 10. This
means that national income would increase by ten times
the amount of the increase in investment.
 In our example this means that the new equilibrium
of national income would be £10000 more than it was
before.
 Savings would have increased by £1000 to equal the
increase in investment.
NATIONAL INCOME IN AN OPEN
ECONOMY
 An open economy means that there is
government activity and international trade.
 This changes the components of aggregate
demand.
 AD in a closed economy is C+I
 AD in an open economy is C+I+G+(X-M)
 Equilibrium is still when AD equals income/output.
 Or where leakages = injections. However it is more
than just savings and investments.
 In an open economy leakages are Savings (S), Imports
(M) and Taxation (T) and injections are Investment (I),
Exports (X) and Government Spending (G).
THE MULTIPLIER IN AN OPEN
ECONOMY
 The theory of the multiplier remains the same.
 Any increase in an injection will lead to a bigger
increase in national income.
 However, this time it is not only Investment that
might have a multiplier effect; it is also Government
Spending and Exports.
 Working out the multiplier is still the same, however,
this time you have to take in to consideration not only
MPS, but also Marginal Propensity to Import (MPM)
and the Marginal Rate of Tax (MRT).
 Therefore the multiplier can be worked out as:

1
1-MPC
or
1
MPS+MPM+MRT
THE IMPORTANCE OF THE
MULTIPLIER
 An increase in any injection into the circular flow of
income will increase national income by more than
the increase in injection.
 A decrease in any injection will decrease national
income by more than the initial decrease.
MONETARISM
 This theory differs from Keynesianism as this believes
that the main determinant of national income is
aggregate supply not aggregate demand.
 They believe that it is the quantity of resources
available and how productive they are.
 Keynesians believe that demand creates supply
 Monetarists believe that supply creates demand.
QUANTITY AND EFFICIENCY

Monetarists believe that an economy can increase
the quantity and efficiency of its resources if it has
the following characteristics.
1.
Private enterprise – having competitive markets,
with little government involvement. Producers will
be profit driven.
2.
Low taxes on incomes – having high taxes does not
encourage firms to earn high profits and
discourages workers from earning high incomes.
3.
A flexible labour market – it should be easy for
firms to change level of wages and staffing
dependent on demand. There should be low
unemployment benefit.
4.
Governments should keep regulations to a
minimum – this is very important if it would add to
the costs of a firm.
5.
Governments should concentrate its efforts on
improving the quality and efficiency of the
workforce through training and education.
TRADE CYCLES
UNIT 2
TOPIC 1
 Every economy will see income and employment
fluctuate regularly over time.
 These fluctuations are called BUSINESS CYCLES or
TRADE CYCLES.
 An economy can be experiencing one of four cycles.
1.
PEAK OR BOOM

The following would be experienced:
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
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High income and employment
Wages and profits will be increasing
Consumption and investment spending will be high
There will be inflationary pressure
Demand for imports will be high
Tax revenues will be high
2.
RECESSION

A recession is said to exist when there has been 2
successive quarters of negative growth in real GDP.

This means that real GDP is falling.
 Following things may happen:
 Income and employment will fall. Although
unemployment is a “lagging indicator”.
 Wage demands are moderate
 Consumption and investment spending falls
 Inflationary pressures are moderate
 Tax revenues begin to fall and government spending
increases. (BENEFITS)
3.
SLUMP

This is when economic activity is low compared to
surrounding years.

These things happen:
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Mass unemployment
Consumption and investment are low
Few inflationary pressures
Demand for imports are low
Tax revenues are low and large demand for state benefits.
4.
RECOVERY


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Income, output and employment begin to increase.
Consumption and investment rise
Inflationary pressures mount as workers feel more
confident about asking for increases
Import spending rises
Tax revenues start to rise and spending on benefits
falls.

