1.4 Uses Of National Income Data Flashcards
What are the main uses of national income data?
- determine economic growth
- estimate tax revenues
- estimate welfare expenditure
- assess inflationary pressure
What are the limitations of national income data?
- distribution of income
- composition of GDP
- shadow economy
- non-marketed output
- negative externalities
- non-financial factors
Why is distribution of income a limitation of national income data?
- income inequality may be present and reduces the reliability in measuring the country’s living standards
- lots of people significantly lower than the GDP per capita
Why is composition of GDP a limitation of national income data?
- how it is generates matters and may not contribute significantly to living standards
- e.g in some countries military expenditure is a very important contributor to GDP, but it does not add much to the general living standards of the population = would be better on education or health
Why is the shadow economy a limitation of national income data?
- unrecorded transactions add to the living standards of the population but do not show up in GDP
- UKs shadow market is 10% of its actual GDP
Shadow economy definition
The value of transactions which are not recorded in the official national income data, often illegal transactions
Why is non-marked output a limitation of national income data?
- goods and services that are not payed for add to peoples wellbeing and their standard of living but do not show up in GDP
Examples of non-marketed output
- babysitting (for free by family members)
- DIY
Non-marketed output defenition
Transactions which occur without a monetary payment being made in exchange for a good or service
Why are negative externalities a limitation of national income data?
- additions to GDP often generate negative externalities which reduce the standard of living
- e.g pollution and traffic congestion
- therefore increases in GDP can lead to a reduction in standard of living
Why are non-financial factors a limitation of national income data?
- there are other factors which add to peoples general quality of life
- e.g
Quality of healthcare provision
Education provision
Individuals freedom - speech, gender
Amount of leisure time on average
Purchasing power parity definition
The exchange rate which would equalise the price of goods and services in different countries once converted into the same currency
How to calculate PPP
- basket of goods and services costs £1000 and $1500
- PPP exchange rate is £1 : $1.50
What is the problem with the PPP?
It assumes the goods are identical, which highly likely they are not
Why do we use PPP?
To make comparisons of living standards between countries by converting GDP into a common exchange rate
