4.2. National Income Statistics

Question 1

national income definition

Answer 1

The total income for an economy in a given period of time (usually 1 year)

Question 2

3 measures of national income

Answer 2

1) Gross Domestic Product (GDP)
a. Income method
b. output method
c. expenditure method
2) Gross National Product
3) Gross National Income

Question 3

Gross Domestic Product (GDP) definition

Answer 3

the market value of all finished output produced in an economy in a given time period

Question 4

GDP includes

Answer 4

the earnings of foreign workers / businesses in the domestic economy

Question 5

GDP does not include

Answer 5

the earnings of domestic workers / businesses in foreign economies

Question 6

Methods of measuring GDP

Answer 6

a. income method
b. output method
c. expenditure method

Question 7

The income method (methods of measuring GDP)

Answer 7

Total factor incomes (rent, wages, interest, profits) + depreciation + indirect tax - subsidiesGVA = value of final product - value of intermediate production

Question 8

The income method detailed explanation

Answer 8

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)

Question 9

The output method (methods of measuring GDP)

Answer 9

Total value of output (gross value added only)

GVA = value of final product - value of intermediate production

Question 10

The expenditure method (methods of measuring GDP)

Answer 10

Total spending (AD = C + I + G + [X - M] )

Question 11

Relationship between GDP, national income, national output, national expenditure

Answer 11

they are all equal to each other

Question 12

Gross National Product (GNP)

Answer 12

Total value of output produced by a country’s citizens and businesses

Question 13

GNP =

Answer 13

GDP + net foreign investments

Question 14

Net foreign Investments =

Answer 14

(income earned by domestic residents and businesses from overseas investments)

minus

(income earned by foreign residents and businesses from domestic investments)

Question 15

Gross National Income (GNI)

Answer 15

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.

Question 16

GNI =

Answer 16

GDP + Net Property Income from Abroad (NPIA)

Question 17

NPIA =

Answer 17

(remitted income from citizens and businesses earned abroad)

minus

(remitted income earned by foreign citizens and businesses living in the country)

Question 18

GDP - Income earned by

Answer 18

• residents in country - C + I + G + X
• foreigners in country - includes
• residents out of country - excludes
• foreigners out of country - excludes

Question 19

GNI - Income earned by

Answer 19

• 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

Question 20

GNP - Income earned by

Answer 20

• residents in country - C + I + G + X
• foreigners in country - excludes all
• residents out of country - includes all
• foreigners out of country - excludes

Question 21

Nominal GDP

Answer 21

total output measured in current prices (unadjusted for inflation)

Question 22

Real GDP

Answer 22

total output measured in constant prices (adjusted for inflation).

Question 23

Real GDP =

Answer 23

(nominal GDP x price index in base year) / price index in current year

Question 24

GDP deflator

Answer 24

accounts for inflation by converting output measured at current prices into output measured at constant prices

Question 25

GDP deflator =

Answer 25

(nominal GDP / real GDP) x 100

Question 26

Problems with national income statistics

Answer 26

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)

Question 27

Real GDP per Capita

Answer 27

total economic output of a country divided by the number of people and adjusted for inflation.

Question 28

Real GDP per Capita facts

Answer 28

• 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.

Question 29

Purchasing Power Parity (PPP)

Answer 29

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.

Question 30

National Debt

Answer 30

total amount of government debt.

Question 31

National Debt Facts

Answer 31

• 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