Transcript Measuring National Income

Measuring National Income
THE ABSOLUTE BASICS
Measuring National Income
Copyright P Oldfield
What is National Income?
National income measures the total value of
goods and services produced within the
economy over a period of time
Measuring the level and rate of growth of
national income (Y) is important to economists
when they are considering:
Economic growth and where the economy is
in the business cycle
Changes to average living standards of
the population (GDP per capita)
 Making comparisons between countries
Measuring National Income
Copyright P Oldfield
Gross Domestic Product (GDP)
GDP includes the output of all firms in a country,
including the foreign owned firms in that country
There are three ways of calculating GDP - all of
which should sum to the same amount since by
identity:
National Output = National Expenditure (Aggregate
Demand) = National Income
Measuring National Income
Copyright P Oldfield
Expenditure/Aggregate Demand (AD)
AD is the sum of the final expenditure on goods and services
produced in a country 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
Measuring National Income
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Measuring N.I. By Expenditure
One thing to remember is that measuring by the expenditure
method can be distorted by subsidies and indirect taxes
Eg taxes on cigarettes would mean that expenditure on
cigarettes would look artificially high if measured at the
market price of cigarettes . In the UK the present price of a
packet is about 9 pounds. But this is not the true value of the
output produced because much of this price is due to
taxation (wine in Indonesia is similar)
Therefore to get to the true cost of the output (The factor
cost) we have to take away the taxation.
GDP at market prices-indirect taxes (+subsidies)=GDP at
factor cost
Measuring National Income
Copyright P Oldfield
GDP measured by the Income method
GDP is the sum of the final incomes earned through
the production of goods and services
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.welfare payments and
charity handouts)
 Private Transfers of money from one individual to
another
 Income that is not declared to the tax authorities
Measuring National Income
Copyright P Oldfield
GDP by Output method
This measures the value of output produced by each industry
using the concept of final output. So output of steel is not
included as it is included in the cost of the car.
We use these approaches to avoid the problems of doublecounting the value of intermediate inputs
Does not include output that is self produced eg housewife
or even charity work
Measuring National Income
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GDP and GNP
GDP is only concerned with incomes generated within the
geographical boundaries of the country.
So output produced by Ford in China counts towards Chinese
GDP but some of the profits made by Ford here are sent back
to US – adding to their GNP
GNP = GDP + Net property income from abroad (NPIA)
NPIA is the net balance of interest, profits and dividends
(IPD) coming into say Indonesia from Indonesian assets
owned overseas matched against the flow of profits and other
income out of Indonesia from foreign owned assets located
within Indonesia.
Measuring National Income
Copyright P Oldfield
Money GDP and Real GDP (UK Data)
Index of GDP at Current
Prices (1995=100)
Year
1995
1996
1997
1998
1999
2000
100.0
105.9
112.8
119.3
124.8
130.9
Price Index
1995=100
100.0
103.3
106.3
109.5
112.0
114.0
Index of Real GDP at Constant
Prices (1995=100)
100.0
102.6
106.0
109.1
111.5
114.8
The nominal value of GDP at current prices has grown each year – In monetary
terms, national output at the end of 2000 was 31% higher than at the start of 1995
But some of this is simply the result of higher prices in the economy
Making an adjustment for inflation (shown in the table below by the increase in the
general price index) gives a figure for real GDP expressed at constant 1995 prices.
Measuring National Income
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Difference between GDP and GDP per capita
China has the 2nd largest GDP of any country, therefore it
must be the 2nd richest country?
No! Because in order to measure the standard of living in a
country you need to divide the GDP by the population to see
on average, the income per person. This is known as GDP per
capita.
Remember if population is increasing by 5% per year, so
must GDP, just to keep the standard of living constant.
Measuring National Income
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GDP and Green GDP
GDP measures the total economic output in a country irrespective
of whether it is beneficial or not. Eg cleaning up an oil spill is
economic activity so is measured in GDP, but it would have been
better if it never happened in the first place. Equally if we destroy a
rainforest to plant palm trees for palm oil, there is only the
measurement of the output of palm oil .
Critics have pointed to the fact that we need to measure the
negative effects of economic growth and therefore:
Green GDP= GDP-the value of economic degradation/damage
Measuring National Income
Copyright P Oldfield
Gross and Net Figures (not in IB syllabus)
Sometimes (but rarely ) you may see Net National Product
figures.
This figure is the same as GNP except that depreciation (or
capital consumption ) has been deducted.
This it is argued is a truer reflection of the net increase in
income of a country as if there is a lot of depreciating assets
these have to be replaced before any real increase in income
is seen
Measuring National Income
Copyright P Oldfield