National income statistics

National
income: the total income for an
economy.
The most widely used to measure of
national income is known as gross domestic
product (GDP).
GDP is calculated by adding up:
1. Consumer spending (C)
2. Government spending on goods and
services (G)
3. Total investment & changes in stocks
(I)
4. The difference between exports and
imports (X-M)
 Gross National Income (GNI): the total output
produced by a country’s citizens where they
produce it.
 GNI = GDP + net property income from abroad.
 Net property income from abroad is the income
that the country’s residents earn on their
physical assets (factories etc.) owned abroad
and foreign financial assets (shares, bank
loans) minus the returns on assets held in the
country but owned by foreigners.
The ways of measuring GDP
1. The output measure
This method measures the value of
output produced by industries - such as
manufacturing, construction, distributive,
hotel and catering and agricultural
industries.
Itis important to avoid counting the same
output twice. For example, if the value of
cars sold by manufacturers is added to the
value of output of tyre firms, double
counting will occur.
Value added is the difference between the
sales revenue and the cost of raw materials
used.
If a TV manufacturing firm buys
components costing $280,000 and uses
them to make TVs that it sells for
$350,000, it has added $70,000 to output.
It is this $70,000 that will be included in
the measure of output.
2. The income method
 The value of an output produced is based on
the costs involved in producing that output,
including wages, rent, interest and profits.
 All these payments represent income paid to
factors of production.
 It is important to include only payments
received in return for providing a good or
service (production). So transfer payments
(benefit) are not included.
3. The expenditure method
If addition to stocks are added to expenditure
on goods and services, a measure is
obtained that will equal output and income.
It is necessary to add expenditure on exports
and deduct expenditure on imports.
It’s necessary also to add subsidies and
deduct indirect taxes.
 The components:
 Household/consumer expenditure
 Producer expenditure/gross investment
 Government expenditure
Total domestic expenditure
+ Exports
- Imports
= Gross domestic expenditure (at MP)
Money and real GDP
 Money (or nominal) GDP is GDP measured in
terms of prices operating in the year in which
output is produced. It’s a measure that has not
been adjusted for inflation.
 Money GDP may give a misleading impression.
This is because the value of money GDP may
rise not because more goods and services are
being produced but merely because prices have
risen.
 Real GDP = money GDP x price index in base year
price index in current year
The price index used to convert money into real
GDP is called the GDP deflator.
 In 2016 a country’s GDP is $800 billion and the
price index is 100. Then in 2017, money GDP is
$900 billion and the price index is 120.
 What is the real GDP?
Comparison of economic growth
performance over time and between
countries
 Changes in GDP are used to calculate
economic growth rate.
 The real GDP of Indonesia was USD 836.8
billion in 2012 and USD 878 billion in 2013,
this means the economic growth rate was
5.8%.
Cautions in comparing growth rates
1. The official real GDP figures may
understate the true change in output. This is
because the existence of the shadow,
hidden or underground economy
(undeclared economic activities). Two
reasons: A. to evade paying tax. B. the
activity itself is illegal.
 Ifthe size of the shadow economy is constant,
the rate of economic growth maybe reasonably
accurate. However a shadow economy can
make international comparison difficult
because the size of the hidden economy
varies between countries.
2. Official GDP may not be accurate because of
low level of literacy – difficult to gather
information. Some people may be unable to fill
out tax forms/fill them out inaccurately.
3. Official GDP may not be accurate because
non-marketed goods and services may be
unrecorded such as domestic services
provided by homeowners, painting and
repairs by homeowners, voluntary work.
Goods produced but are not traded go
unrecorded.
4. Because of the difficulties of measuring
government spending.
Comparison of living standard over
time
Real GDP per head has been used as one
of the main indicators of living standards.
However even if real GDP per head
increases, the country’s inhabitants do not
always enjoy higher living standards.
Because:
1. Real GDP is not evenly distributed so,
while it is possible that real GDP per head
may rise, not everyone will be better off.
Some people’s income may even fall.
2. Changes in the type of products produced
must be considered. During war, output
may rise because more weapons are
being produced but the quality of life may
not improve.
3. More consumer goods and services raise
people’s living standards. A shift of resources
from consumer goods to capital goods will
enable more consumer goods to be produced
but only in the future. In the short run less
consumer goods will be produced.
4. More goods and services do not mean
people are happier. The desire for more and
better products may increase at a faster rate.
Real GDP measures the quantity of output
produced but not the quality. Output could
rise but the quality may decline.
If real GDP per head stays constant but
working condition rise/working hours fall,
living standards will rise.
The quality of environment declines as a
result of pollution – this will lower living
standards but not real GDP. If more
resources have to be used to clean up
environment, real GDP rises while living
standards fall.
Comparison of GDP per head
between countries
To compare living standards between
countries, it is necessary to convert the real
GDP per capita into a common currency.
Economies usually adjust exchange rate to
take into account their purchasing power
parity.
Purchasing power parity
a way of comparing international living
standards by using an exchange rate
based on the amount of each currency
needed to purchase the same basket of
goods and services.
A country with a higher real GDP per head
than another country using PPP doesn’t
mean its people will enjoy higher living
standards. Income may be very unevenly
distributed (Kuwait).
Working hours, working conditions, fear of
crime and freedom of thought may be
taken into account.
National debt
Is the total amount of government debt.
Is often expressed as a percentage of
GDP.
If a gov’t has a budget deficit, it will add to
the country’s national debt. The extra
revenue from a budget surplus can be
used to pay off the national debt.
Disadvantages of national debt
 There is the opportunity cost of interest
payments on the national debt. The
government revenue used to service the debt
might be used to finance the building of new
schools/hospitals.
 Financial institutions, firms, governments
reluctant to lend and may push up the rate of
interest.
National debt is not the same as external
debt.
Some of the debt is owed to the citizens
of the country.
Payments to foreign lenders will involve
an outflow of money from the country.
Other indicators of living standards
and economic development
Measurable Economic Welfare (MEW)
– adjusting GDP figures to other factors.
Human Development Index (HDI) –
GNP per head, education (years of
schooling and expected years of
schooling) and health (life expectancy).
 Best option to calculate the
living standards

Multidimensional Poverty Index (MPI) –

it measures living standards (cooking fuel,
sanitation, safe drinking water, floor space
and assets) 33%, education (years of
schooling and school attendance) 33%
and health (child mortality and
nourishment) 33%.
The Kuznets Curve
 A curve that shows the relationship
between economic growth and income
inequality.
 It suggests that as an economy develops,
income becomes more unevenly
distributed and after a certain income
levels, income becomes more evenly
distributed
GDP per head