3- Measures of National Income

Question 1

3 methods of measuring national income

Answer 1

1. The income measure
2. The output measure
3. The expenditure measure
   - EACH

Question 2

3 methods of measuring national income

Answer 2

1. The income measure
2. The output measure
3. The expenditure measure
   - EACH MEASURE GDP

Question 3

The Output Method

Answer 3

Adds up all of the output produced by all of the firms in the economy.

Question 4

Problems with the output method

Answer 4

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.

Question 5

How we can overcome double counting problem?

Answer 5

The use of the concept value added.

Question 6

What is value added?

Answer 6

• 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

Question 7

Gross Value Added (GVA)

Answer 7

It is a measure of all final output produced by all productive activity in the economy.

Question 8

GDP definition

Answer 8

Sum of the value added for each industry.
Sum of all incomes generated by producing all output.
The spending on a nation’s output

Question 9

Difference between GDP and GVA

Answer 9

• GVA measured at basic prices (factory gate prices) which means it excludes all taxes and subsidies by gov.
• GDP measured at market prices.

Question 10

How to covert GDP into GVA?

Answer 10

GDP(mp) = GVA(bp) + (taxes - subsidies)

Question 11

Intermediate good definition

Answer 11

The output of some firms that are in turn used as inputs for other firms.

Question 12

Final goods definition

Answer 12

Good that are not used as inputs by other firms.

Question 13

Final demand definition

Answer 13

Refers to the purchase of final goods and services for consumption, investment (including inventory accumulation), use by government and for export.

Question 14

What does ‘gross mean’

Answer 14

Gross means depreciation not taken into account.

Question 15

The Income Method

Answer 15

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.

Question 16

3 types of Gross National Income (GNI)

Answer 16

• Operating Surplus
• Mixed Incomes
• Compensation of employees

Question 17

Compensation of employees

Answer 17

This is wages and salaries and is the payments made to labour, including NI contributions, taxes withheld and pension contributions.

Question 18

Operating Surplus (OS)

Answer 18

Net business incomes after payment has been made to labour and for material inputs, but before direct taxes.
These are essentially (pre-tax) profits.

Question 19

Mixed Incomes (MI)

Answer 19

Incomes earned by people selling their services or output, but who are not employed by any organisation; e.g. the self-employed.

Question 20

Problems with income method

Answer 20

• 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.

Question 21

Personal Income definition

Answer 21

Income that is paid to individuals before tax.

Question 22

Personal Disposable Income (PDI)

Answer 22

Personal income minus personal
income taxes and National insurance contributions.

Question 23

Link between PDI and GNI

Answer 23

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.

Question 24

The Expenditure Method

Answer 24

Measure of output can be obtained by measuring the expenditures on the output of firms.

Question 25

Consumption definition

Answer 25

• 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

Question 26

What 3 classes of goods do households spend on?

Answer 26

• Durable goods
• Non-durable goods
• Services

Question 27

2 main categories of government spending

Answer 27

• 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

Question 28

Investment definiton

Answer 28

Spending on the production of
goods not for present consumption, but for future use (capital goods).

Question 29

3 categories of investment spending

Answer 29

• 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.

Question 30

Net investment definition

Answer 30

• The addition to the capital stock - is measured as gross investment less replacement investment (sometimes called depreciation).
• I (net) = I - dep

Question 31

Exports definition

Answer 31

• Goods and services produced by UK resident firms and sold abroad.
• Denoted symbol X

Question 32

Imports definition

Answer 32

• Consumption and investment goods purchased by UK residents but produced overseas.
• Denoted symbol IM

Question 33

GDP (mp) (expenditure method) equation

Answer 33

GDP(mp) = C + I + G + NX

Question 34

GNP equation

Answer 34

GDP(mp) + NIA
where NIA = net income from abroad

Question 35

Net national income equation

Answer 35

NNI=GNP - depreciation

Question 36

Basic prices

Answer 36

Prices of products as recevied by producers.

Question 37

Market prices

Answer 37

Price paid by consumers.

Question 38

How to covert from marekt to basic prices

Answer 38

Basic prices = market prices - taxes + subsidies

Question 39

Income approach equation

Answer 39

GDP= total national income + sales taxes + depreciation + net foreign factor income