3- Measures of National Income Flashcards
3 methods of measuring national income
- The income measure
- The output measure
- The expenditure measure
- EACH
3 methods of measuring national income
- The income measure
- The output measure
- The expenditure measure
- EACH MEASURE GDP
The Output Method
Adds up all of the output produced by all of the firms in the economy.
Problems with the output method
The problem of simply adding up output of firms is that of double
counting
i.e. the outputs of some firms are inputs of other firms.
How we can overcome double counting problem?
The use of the concept value added.
What is value added?
- Each firm’s value added is the market value of its output less the
market value of its inputs. - Value added measures each firms own contribution to total output:
- The total value of a firm’s output is the gross value of its output.
- The firm’s added value is the net value of its output.
- It is this latter figure that is the firm’s contribution to total output
Gross Value Added (GVA)
It is a measure of all final output produced by all productive activity in the economy.
GDP definition
Sum of the value added for each industry.
Sum of all incomes generated by producing all output.
The spending on a nation’s output
Difference between GDP and GVA
- GVA measured at basic prices (factory gate prices) which means it excludes all taxes and subsidies by gov.
- GDP measured at market prices.
How to covert GDP into GVA?
GDP(mp) = GVA(bp) + (taxes - subsidies)
Intermediate good definition
The output of some firms that are in turn used as inputs for other firms.
Final goods definition
Good that are not used as inputs by other firms.
Final demand definition
Refers to the purchase of final goods and services for consumption, investment (including inventory accumulation), use by government and for export.
What does ‘gross mean’
Gross means depreciation not taken into account.
The Income Method
From the circular flow diagram-
The value of total output must be equal to the value of incomes received by households.
Therefore the value of total output can also be measured by adding up the incomes received in the production of output.
3 types of Gross National Income (GNI)
- Operating Surplus
- Mixed Incomes
- Compensation of employees
Compensation of employees
This is wages and salaries and is the payments made to labour, including NI contributions, taxes withheld and pension contributions.
Operating Surplus (OS)
Net business incomes after payment has been made to labour and for material inputs, but before direct taxes.
These are essentially (pre-tax) profits.
Mixed Incomes (MI)
Incomes earned by people selling their services or output, but who are not employed by any organisation; e.g. the self-employed.
Problems with income method
- Some domestic production creates factor earnings for non-residents who either do some paid work for UK resident firms or who have previously invested in the UK.
- Some UK residents earn income from work for overseas resident firms
or on overseas investments. - So GDP and income can differ.
Personal Income definition
Income that is paid to individuals before tax.
Personal Disposable Income (PDI)
Personal income minus personal
income taxes and National insurance contributions.
Link between PDI and GNI
PDI is GNI less any part of it that is not actually paid to persons, such as retained profits of companies, less personal income taxes plus transfer payments received by individuals.
The Expenditure Method
Measure of output can be obtained by measuring the expenditures on the output of firms.
Consumption definition
- This is done by households (or non-profit organisations) and government and involves spending on final goods and services produced during the year.
- Given symbol C
What 3 classes of goods do households spend on?
- Durable goods
- Non-durable goods
- Services
2 main categories of government spending
- Individual Final Government Consumption- health spending,
education, e.g. money spent on services consumed by individuals - Collective Government Final Consumption- street lighting, national
defence etc, e.g. public goods where the spending cannot be attributed to individuals. - Given symbol - G
Investment definiton
Spending on the production of
goods not for present consumption, but for future use (capital goods).
3 categories of investment spending
- Fixed Capital Formation- this is the production of new capital goods-
machines computers etc. These goods augment the capital stock of
the country. This also includes the construction of houses, offices etc. - Change in Inventories- these are stocks of inputs and unsold outputs
held by firms. - Net Acquisition of Valuables- some productive activity creates goods
that are neither consumed nor used in the production process. e.g.
jewellery, art. - All together denoted the symbol I.
Net investment definition
- The addition to the capital stock - is measured as gross investment less replacement investment (sometimes called depreciation).
- I (net) = I - dep
Exports definition
- Goods and services produced by UK resident firms and sold abroad.
- Denoted symbol X
Imports definition
- Consumption and investment goods purchased by UK residents but produced overseas.
- Denoted symbol IM
GDP (mp) (expenditure method) equation
GDP(mp) = C + I + G + NX
GNP equation
GDP(mp) + NIA
where NIA = net income from abroad
Net national income equation
NNI=GNP - depreciation
Basic prices
Prices of products as recevied by producers.
Market prices
Price paid by consumers.
How to covert from marekt to basic prices
Basic prices = market prices - taxes + subsidies
Income approach equation
GDP= total national income + sales taxes + depreciation + net foreign factor income
