Transcript Measuring National Income - BSAK Business & Economics

Measuring National Income
AS Economics Presentation
2005
What is 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 incomes earned in production
• 2. Aggregate demand for goods and services
• 3. The sum of value added from each productive sector of
the economy
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)
Gross Domestic Product (GDP)
• GDP measures the value of output produced within the
domestic boundaries of the UK
• GDP includes the output of the foreign owned firms with
production plants located in the UK
• 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
Aggregate Demand (AD)
• AD is the sum of the final expenditure on UK 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
Aggregate Demand Data for the UK Economy
Components of Aggregate Demand
£billion, at constant 1995 prices
HouseGeneral Capital Investment
holds Government
297
122
78
1980
331
127
90
1985
416
133
119
1990
443
141
117
1995
546
153
152
2000
590
162
149
2002
Consumer
spending is the
largest single
component of
Aggregate
Demand
Current
government
spending
excludes welfare
spending and
capital spending
Change in Stocks
Exports
Imports
-5
1
-2
5
6
-1
111
128
157
204
285
285
103
126
177
207
331
344
Capital spending
is one of the
most volatile
components of
AD
The net balance
between exports and
imports of goods and
services is shown by the
trade balance
e.g. in 2001 the UK was
running a very large
trade deficit
GDP by Factor Income
• GDP is the sum of the final incomes earned through the
production of goods and services
• Main Factor Incomes
– Income from employment and self-employment
– Profits of companies
– Rental income from the ownership of property
• = Gross Domestic product (by factor income)
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
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 doublecounting 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
Knowledge-based industries
Value added by knowledge based services and
Finance, insurance, other business services,
industries
community, social and personal services
Communication services
G7 comparison, 2000
Per cent of total business sector value added
High and medium high tech manufacturing
50
40
30
20
10
0
Germany
Source: OECD
UK
France
Japan*
US
Italy
(*1998 data)
Supply chain example
Provide the hardware platform on
which games can be played
PC / Console
Manufacturer
Developers: Game conception,
design and programming
Developer
Publishers control the entire
production / distribution process
Publisher
Provides a channel to market for
developers & publishers without
direct access to retail channels
Distributor
Buy games software and hardware
from distributors and resell to
consumers
Retailer
Consumer
An example of value added
Value Added in the Production of a litre of petrol (Hypothetical
Numbers)
Stage of Production
Value of Sales
Value Added
(1) Oil drilling
45p
4
5
(2) Refining
64p
1
9
(3) Shipping
74p
1
0
(4) Retail sale
85p
11
Total value added
8
5
Regional Shares of Output by Sector
Percentage of gross domestic product derived from industry and
services, 1998
Percentages
Industry
United Kingdom
North East
North West
Yorkshire & the Humber
East Midlands
West Midlands
East
London
South East
South West
Wales
Scotland
Northern Ireland
Services
28.2
36.2
32.8
34.6
36.7
37.4
25.1
16.6
22.4
28.6
34.8
31.8
27.7
70.4
63.0
66.2
63.8
61.3
61.2
73.3
83.4
76.8
68.9
63.4
66.2
68.3
GDP and GNP
• Gross National Product (GNP) measures the final value of
output or expenditure by UK owned factors of production
whether they are located in the UK or overseas
• Output produced by Nissan in the UK counts towards our
GDP but some of the profits made by Nissan here are sent
back to Japan – 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 the UK from UK assets owned overseas
matched against the flow of profits and other income from
foreign owned assets located within the UK
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)
Limitations of national income data
• Each method of estimating GDP is imprecise leading to
inaccuracies in the published figures
• Non-marketed output e.g. DIY, 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 counting. 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
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