Standard of Living & Quality of Life

• Standard of living refers to the level of

wealth, material goods & necessities
available to persons within a country.

• Quality of life refers to the level of

freedom, justice, security, leisure and
even happiness experienced by persons
within a country. It assesses the extent
to which a population enjoys the benefits
of its wealth.
Factors Affecting Standard of Living
• Level of Income- how much money is available for the
consumption of goods and services.

• Size of family or population-the average amount of

disposable income of the population.

• The level of taxation- how high are the percentages of

taxes levied on the citizens.

• The level of outstanding national debts.

• The literacy rate-what percentage of the population is

literate.
Factors Affecting the Quality of life of
a Country’s Citizens
• The extent of security enjoyed. This refers to the level of
criminal activities in the country.

• The availability of health, educational and recreational

activities facilities in the country.

• Diet and Nutrition

• Life expectancy

• Rate of infant mortality

• Access to public utilities.

National Income
• The total money value of all goods and services
produced by a country during a one-year period
after deducting depreciation.

• National income is a loose expression for Net

National Income at factor cost.
Ways used to measure National Income
• Income method

• Expenditure method

• Output method

N.B. all three methods must

yield the same results.
Income Method
This method of National Income determination

involves the summation of all factor incomes

earned in an economy. Factor incomes refer to

the rewards earned by employed factors of

production.
Income method
• This is the addition of all incomes earned in the economy
over the year.

• The income method consist of the addition of all incomes

earned in the production of goods and services within the
year.

• The factor incomes = wages and other payments earned

from employment + profit payments to entrepreneur and
other risk takers + rent payments made to owners of land
+ interest earned from investments of capital.

(wages + rent + interest + profit)

income method
+ income from employment
+ profits and rents
+ profits from rent
+ net property income from
aboard
= GNP
- depreciation
= national income
Things not calculated in income
method – Transfer Payment
• This is where there is no corresponding good or
service such as a state pension. A pensioner is
making no contribution to output when he or
she receives the pension.

• Services of a housewife such as cleaning are very

valuable to the economy but are not counted.
However if the family had to pay a maid those
incomes would be counted.
Class activity
• Calculate the GDP using the
income method for the year
2005.
income from employment $10m
profits of firms $6m
rent $8m
interest earned $2m
Output method
• Measures the monetary value of all goods and
services (output) produced in the country
whether by government or private individuals
within a year.

• This is done by using the concept of value added.

Output Method
• Value added is the increase in the value of a product at
each successive stage of the production process. This
approach is used to avoid the problems of
double-counting the value of intermediate inputs.

• The output of one firm is the input of another firm and

must not be counted twice.

• Output from various industries such as agriculture,

mining and energy, manufacturing and communication.
Prevention of double counting in
Output method
Product Value of output Intermediate Value added
$ goods $ $
Sugar cane grower 100 0 100
refiner 150 100 50
Rum distiller 250 150 100
Rum retailer 300 250 50
500 300
PRODUCTION COST OF A CHAIR

STAGE 2 STAGE 3 STAGE 4

STAGE 1
Lumber Carpenter Retailer
Planter
pack
$600 $1600 $2000
$1000

$600 $400 $600 $400 $2000

 Intermediate and Final Goods and
services
• Intermediate Goods and Services – These are
goods that are used as input by other firms in the
production process.

• Final Goods and Finals – These refer to those

goods and services which reach the final
consumers. Consideration of only final goods
and services eliminate the problem of double
counting.
Class activity
• Calculate the GDP for Jamaica in 2004 using the
output method.
manufacturing and mining $7,260,000,000
agriculture $770,000,000
The expenditure method
• Is the addition of all final
expenditures.

• This method involves

totaling the amount spent on
investment and consumer
goods and services produced
during the course of the
year.
The Expenditure Method
• Once again the expenditure on intermediate
goods must not be double counted.

• Also do not include government expenditures on

transfer payment.
Expenditure method
• Aggregate expenditure = consumption
expenditure + investment + government
expenditure and expenditure on exports less
expenditure on imports.

AE =GNP= C + I + G + X – M
National Income=GNP-Capital Consumption
Expenditure Method
• C – household spending (consumer spending)
• I – capital investment spending
• G – general government spending
• X – exports of goods and services
• M – imports of goods and services
Class activity
• Calculate GDP using the expenditure method.
Consumer spending $ 5m
Investment $ 2m
Government spending $ 3m
Expenditure on export $ 5m
Import $3m
Relationship of the three measures of
national income
• GDP
+ Net property income from abroad
= GNP
- Capital consumption (depreciation)
= NNP/National Income
- taxes
+ subsidies
= net national income at factor cost
Market prices and factor prices
• Market prices contain indirect taxes and
subsidies.

• Taxes must be subtracted and subsidies added to

turn market prices into factor cost

• GDP or GNP at market prices is the

subtraction of indirect taxes plus
subsidies = GDP or GNP at factor cost.
Advantages of Using National Income
• It is useful in comparing income over time.

• Also to compare national income among

countries.

• Determine the rate at which the national income

is growing.
 Disadvantages of Using national
Income
• Some of the information used is inadequate or
incorrect because it is based on estimates, also some
income earners are not included.

• Double counting can distort the figures, this can

result from the inclusion of transfer income that was
previously calculated and from increases in the value
of stock due to inflation.

• The hidden economy or black market which

comprises unregistered businesses is not included.
Gross domestic product (GDP)
• This refers to the total sum of money value of all
final goods and services produced/provided
within a country during a one year period.
Gross national Product (GNP)
• This refers to the total sum of all final goods and
services produced by nationals of a country in a
given year.

• The GNP is calculated as follows:

GNP=GDP+(Net property income).

• Net Property Income is the difference between

property income from aboard and property
income going abroad.
Net property income from abroad
• This is the net balance of interest, profits and dividends
coming into Jamaica from Jamaican assets owned overseas
matched against the flow of profits and other income from
foreign owned assets located within Jamaica.

i.e. NPIA = output of countries citizens that is made abroad –

output of foreigners that is made in our country.

• Such property income comes from investments in land,

property, business and banks.

• NPIA can be positive or negative in the GNP accounts

depending on whether your citizens are making more money
abroad than foreigners are making in your country.
Net National Product (NNP)
• This refers to the sum of all final goods and
services produced by the resources of a country
in a given year less capital consumption
(depreciation or loss in the value of capital as a
result of operations).

• NNP= GNP-Capital Consumption/depreciation

Net National Product (NNP)
• Capital goods depreciate with use and age. The country’s
capital depreciates. Depreciation must be subtracted
GNP.

• Depreciation means the fall in the value of capital goods

through age and wear and tear.

• Capital goods are goods used to make other goods e.g

machines and factories.

• Depreciation is called Capital consumption.

Difference between GDP and GNP
• GDP focuses on what is produced at home using
the factors of production owned by citizens or
foreigner in the country, whereas GNP focuses
on what is produced at home or anywhere in the
world using resources owned by citizens.
National Income as a Measure of
Standard of Living of a country
• National income figures do not indicate the type of

life that people enjoy. An increase in the NI may be

due to people working longer hours under poor

conditions or even travelling longer distances to

work.
National Income as a Measure of
Standard of Living of a country
• National income only takes into account those goods and

services which reach the market place. There are many

goods that do not reach the market place but are very

important contribution to standard of living . These are

crops that you grow on your own land and consume

yourself.
National Income as a Measure of
Standard of Living of a country
• National income is a material measure and does

not include such things as freedom, justice,

security, leisure and even happiness. All of these

are very important in our quality of life.

Do not read The Concept of National
Income and its Variants
National Income-total value of a country’s final output of
all new goods and services produced in one year.
• To measure economic growth and standards of living we need a
measure of national income, by finding the flow of income received
by people living in a country.
• Three methods are used:
o income method- adding total incomes received by the factors of
production
▫ Output method -adding additional money value of output at each
stage if production
▫ Expenditure method-adding all value of expenditure for exports
less import expenditure
Do not read Problems in calculating
total income
• Income not wealth-wealth is savings in a bank while flow
of income-rent received from house.

• Double counting- eg. The total value of output of the oil

industry added to the total value of output of the
chemical industry-the oil used for chemicals will be
counted twice.

• Informal economy- income received without any record

of payment. (jobs on the side)