INTRODUCTION

This article contains information compiled on national income and why is its
measure important to when looking at economic performance.
 NATIONAL INCOME

What is National Income?

National income is a measure of the money value of the flow of output of goods and services

produced within an economy over a period of time.

Why is National Income measure important?

The measuring of National Income is important such an important factor as National Income

basically shows whether an economy is doing well or not. It is an important when looking at:

 The rate of economic growth,

 the average living standards of the population,

 the distribution of income between different groups within the population  (i.e. measuring

the scale of income and wealth inequalities within society)

A country’s economic performance is based on several different factors, local and international.

The strength of the country’s currency, the amount of Imports, the amount exported and the

country’s ability to react to changes in the international market. Several means are used to

calculate based on some of these factors or more and assess the country’s economic

performance, these are:

Gross Domestic Product (GDP) measures the value of output produced within the domestic

boundaries of the country over a given time period. An important point is that GDP includes the

output of foreign owned businesses that are located in the country, following foreign direct

investment in its economy. There are three ways of calculating GDP - all of which should sum to

the same amount since the following identity must hold true:

National Output = National Expenditure (Aggregate Demand) = National Income

Calculating GDP

The Expenditure Method of calculating GDP (aggregate demand)

This is the sum of spending on the produced goods and services of the country, measured at

current market prices. The full equation for GDP using this approach is GDP = C + I + G + (X-

M) where

C: Household spending

I: Capital Investment spending

G: Government spending

X: Exports of Goods and Services

M: Imports of Goods and Service

The Income Method of calculating GDP (the Sum of Factor Incomes)

Here GDP is the sum of the incomes earned through the production of goods and services. The

main factor incomes are as follows:

Income from people employment and in self-employment

Profits of private sector companies

Rent income from land

Gross Domestic product (by factor income

STANDARD OF LIVING

What is Standard of Living?

Standard of Living is defined as the financial position of a population, as measured by the

quantity of consumption by the members of that population. The measure most frequently used

to estimate standard of living is gross national income per capita. One drawback to the standard

of living measurement is that it does not take into account some factors which are important but

hard to quantify, such as crime rate or environmental impact.

The use of the National Income measurement to determine the standard of living within a
country has several problems which makes it insufficient, such as:
 Regional Variations in income and spending: National GDP data can hide regional

variations in output, employment and income per head of the population. The table below

provides some evidence for this with household disposable income per head in Inner

London over seventy-five per cent higher than the national average and several of our

major cities having disposable incomes per head at only three quarters of the average (or

less). The Office for National Statistics provides a useful regional snapshot which offers

economic and social information on each of the UK’s major regions.

 Inequalities of income and wealth: The Lorenz Curve and the Gini-coefficient are two

ways of measuring inequality and relative poverty– an outward shift in the Lorenz

Curve would indicate a widening of income and wealth inequality. Since 1979, there has

been a rise in inequality as the gap between the rich and poorer sections of society has

widened.

 The value of non-marketed output including work done in the home: Much useful

and valuable work is not produced and sold in markets at market prices. The value of the

output of people working unpaid for charities and of housework might reasonably be

added to national income statistics.

 Changes in life expectancy: Improvements in life expectancy have a huge impact on

people’s living standards but don’t always show through in the GDP accounts.
 Reductions in infant mortality have been accompanied by the prevention or cure of

diseases that might have led to the premature death of even the richest of our ancestors at

any time. Putting a monetary value on the benefits of increased longevity is difficult, but

surely it must be factored into any overall assessment of living standards and the quality

of life.

When assessing living standard several other factors comes into play, factors such as:

 Life expectancy

 Number of years in school

 Level of literacy

 Inflation

 Crime rates