4.2. National Income Statistics Flashcards
national income definition
The total income for an economy in a given period of time (usually 1 year)
3 measures of national income
1) Gross Domestic Product (GDP)
a. Income method
b. output method
c. expenditure method
2) Gross National Product
3) Gross National Income
Gross Domestic Product (GDP) definition
the market value of all finished output produced in an economy in a given time period
GDP includes
the earnings of foreign workers / businesses in the domestic economy
GDP does not include
the earnings of domestic workers / businesses in foreign economies
Methods of measuring GDP
a. income method
b. output method
c. expenditure method
The income method (methods of measuring GDP)
Total factor incomes (rent, wages, interest, profits) + depreciation + indirect tax - subsidiesGVA = value of final product - value of intermediate production
The income method detailed explanation
Net Domestic Product (factor cost) = Rent + Wages + Interest + Profits
- -> Net + capital depreciation = Gross
- -> (factor cost) + (indirect tax - subsidies) = (market prices)
Gross Domestic Product (market prices) = Rent + Wages + Interest + Profits
+ capital depreciation
+ (indirect taxes - subsidies)
The output method (methods of measuring GDP)
Total value of output (gross value added only)
GVA = value of final product - value of intermediate production
The expenditure method (methods of measuring GDP)
Total spending (AD = C + I + G + [X - M] )
Relationship between GDP, national income, national output, national expenditure
they are all equal to each other
Gross National Product (GNP)
Total value of output produced by a country’s citizens and businesses
GNP =
GDP + net foreign investments
Net foreign Investments =
(income earned by domestic residents and businesses from overseas investments)
minus
(income earned by foreign residents and businesses from domestic investments)
Gross National Income (GNI)
final value of incomes flowing to factors of production, regardless of whether they are located domestically or overseas.
* foreign incomes must be remitted to be included in GNI.
GNI =
GDP + Net Property Income from Abroad (NPIA)
NPIA =
(remitted income from citizens and businesses earned abroad)
minus
(remitted income earned by foreign citizens and businesses living in the country)
GDP - Income earned by
- residents in country - C + I + G + X
- foreigners in country - includes
- residents out of country - excludes
- foreigners out of country - excludes
GNI - Income earned by
- residents in country - C + I + G + X
- foreigners in country - includes if spent in country
- residents out of country - includes if remitted back
- foreigners out of country - excludes
GNP - Income earned by
- residents in country - C + I + G + X
- foreigners in country - excludes all
- residents out of country - includes all
- foreigners out of country - excludes
Nominal GDP
total output measured in current prices (unadjusted for inflation)
Real GDP
total output measured in constant prices (adjusted for inflation).
Real GDP =
(nominal GDP x price index in base year) / price index in current year
GDP deflator
accounts for inflation by converting output measured at current prices into output measured at constant prices
GDP deflator =
(nominal GDP / real GDP) x 100
Problems with national income statistics
GDP is often considered to be a “crude” measurement:
1) Does not include the shadow economy (black markets). Therefore, official figures understate the true level of output.
2) Difficult to value some things e.g. healthcare, education.
3) Includes morally dubious spending e.g. guns, bombs, missiles.
4) Ignores the distribution of income, productivity, quality of products, subsistence living, externalities, welfare.
5) Needs a common currency for comparison.
6) But there are different costs of living between countries (need to use Purchasing Power Parity - PPP)
Real GDP per Capita
total economic output of a country divided by the number of people and adjusted for inflation.
Real GDP per Capita facts
- A crude (not very good) way of showing income per person.
- Used as a measure of living standards (but does not measure other indicators of living standards e.g. health, education, freedom, corruption).
- For country comparisons: need to use PPP.
- Ignores: productivity, working hours, working conditions and job security.
Purchasing Power Parity (PPP)
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 / services.
National Debt
total amount of government debt.
National Debt Facts
- Usually expressed as % of GDP.
- Nat. debt increases during downturns / recessions because G > T.
- The higher the debt, the more interest needs to be paid.
- More interest means less spending elsewhere (opportunity cost).
- Nat. debt as a % of GDP decreases when: change in GDP > change in Debt
