AS Economics

PowerPoint Briefings 2006

Measuring National Income

AS Economics
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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
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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)

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AS Economics
PowerPoint Briefings 2006

Your task

Put the following economies into a rank of size from largest to smallest for the top 10.latest statistics is for 2006.
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Not all of these are obviously in the top 10!

Australia Belgium Brazil Canada France Germany India Italy Japan Mexico Netherlands People's Republic of China Russia Saudi Arabia South Korea Spain Sweden Switzerland Turkey United Kingdom United States

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Countries with largest GDP in 2005

Country World economy European Union 1 United States 2 Japan 3 Germany 4 People's Republic of China 5 United Kingdom 6 France 7 Italy 8 Canada 9 Spain 10 South Korea 11 Brazil 12 India 13 Mexico GDP (millions of USD) 44,433,002 13,446,050 12,485,725 4,571,314 2,797,343 2,224,811 2,201,473 2,105,864 1,766,160 1,130,208 1,126,565 793,070 792,683 775,410 768,437 766,180

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14 Russia

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Has the world economy grown or shrunk over this period?

2005
World economy European Union 44,433,002 13,446,050

2006
Gross world product 48,245,198 European Union 14,609,836

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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
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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
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M: Imports of Goods and Services

 billion at constant 2002 prices

Aggregate Demand Data for the UK

C G I Stocks X M AD

So which stock makes up the largest % of AD?

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

552.9 572.8 595.7 622.1 650.4 670.1 693.4 711.1 736.5 749.9

183.2 182.3 184.3 191.6 198.6 202.0 211.0 220.4 227.4 232.1

128.6 137.1 154.9 158.1 163.7 167.6 172.6 172.6 181.5 187.5

1.9 4.0 4.9 6.4 5.3 6.2 2.9 4.6 5.9 2.7

209.9 227.2 234.2 244.2 266.5 274.3 274.9 278.2 291.0 306.0

198.3 217.7 237.9 256.7 279.8 293.2 306.5 312.0 333.0 348.9

880.9 908.7 938.1 966.6 1005.5 1027.9 1048.5 1074.9 1109.1 1129.2

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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)

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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 The shadow economy may be as high as 10% of the UKs annual GDP

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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

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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
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Sectors of the economy

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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

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GDP and GNP

GDP is the value of output produced by factors of production located within a country Output produced by a countrys citizens, regardless of where the output is produced, is measured by gross national product (GNP) For the UK, GNP is higher than GDP

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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 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
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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

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A high standard of living means households consume a large number of goods and services

Caution just because an economy has a high GDP it can still have high elements of poverty.

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Uk statistics .June 2007

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GDP per capita in 2004

GDP per capita Luxembourg United States Norway Ireland Switzerland United Kingdom Canada Australia Sweden Japan France 57 704EU15 39 732Germany 38 765Italy 35 767Spain 33 678Korea 31 436Czech Republic 31 395Hungary 31 231Slovak Republic 30 361Poland 29 664Mexico 29 554Turkey 28 741 28 605 27 699 25 582 20 907 18 467 15 946 14 309 12 647 10 059 7 687

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GDP per capita of the world

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Percent poverty world map

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HDI Human Development Index

Read through article Use ICT investigate the website http://hdr.undp.org/statistics/data/ Try to work out why a GDPs ranking is not always its HDI order Which country has the highest HDI? WHY? Which country has the lowest HDI? WHY? Where is the UK ranked for its HDI? WHY? Tutor2u & Mrs G

Homework.
Textbook. Yes that orange thing! Read unit 25 P158 do Q 3 & Q4 Make notes on comparing NI over time & with other countries.

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