4.2.1.4 - Uses of National Income Data Flashcards
What is national income?
The flow of new output produced by the economy in a particular period, measured by the flow of factor incomes.
What is national product?
The flow of new output produced by different industries in a particular period.
What is national capital stock?
The stock of capital goods in the economy that has accumulated over time and is measured at a point in time.
What is human capital?
The skills, knowledge, and experience possessed by the population.
What is national wealth?
The stock of all goods that exist at a point in time that have value in the economy.
Why does capital consumption occur?
During the process of generating national income, capital is used and (inevitably) breaks or wears down in that process.
What happens if investment doesn’t take place to replace worn-out capital?
The national capital stock shrinks in size, and therefore negative economic growth occurs.
How does positive economic growth generally take place?
Investment over and above the investment to replace worn-out capital stocks. This then leads to the productivity of the workforce increasing and leading to a shift outwards in the PPF.
How can long-term economic growth be hindered by short-term actions?
If you spend more of the national output on consumption, short-term economic living standards increase at the expense of long-term economic growth.
What is the difference between GDP and GNI?
GDP measures the productivity of industries located within the UK. GNI measures the standard of living of all those living within the UK, as it includes all income available to spend in the UK, including that from abroad.
What is the best measure to see how living standards are changing over time?
Real GNP per capita.
Why is real GNP per capita only useful in particular industries?
Particularly in developing countries, this metric may conceal growing disparities in income distribution.
Why are national income statistics problematic for measuring living standards in the UK over time?
Income distribution, non-monetised economy, hidden economy, quality changes, and negative externalities.
Why is income distribution an issue in measuring living standards over time?
Incomes may not be distributed equally, so using income statistics to measure living standards will not show that only a small fraction of the population is actually benefiting from economic growth.
Why is the non-monetised economy an issue in measuring living standards over time?
The true level of economic activity in the UK is underestimated by national income statistics because housework and ‘do-it-yourself’ home improvements do not generate any money incomes.
Why is the hidden economy an issue in measuring living standards over time?
The hidden economy is almost certainly omitted in national income statistics and leads to a gap between the true GNP total and the reported GNP total.
Why are quality changes an issue in measuring living standards over time?
The quality of goods and services deteriorates over time. When public services deteriorate, GNP may rise despite welfare and real living standards falling.
Why are negative externalities an issue in measuring living standards over time?
Negative externalities are not taken into account by GNP per capita calculations, so GNP is likely to be lower if these were included. What appears as an increase in national output may actually indicate a welfare loss, such as reduced leisure time or increased illness.
Why is national income data problematic for measuring differences in living standards between countries?
The relative importance of the non-monetised economy, exchange rates, and traded vs. non-traded goods.
Why is the relative importance of the non-monetised economy an issue in measuring living standards between countries?
If countries depend on the non-monetised economy more than others, then comparisons between national income per head will be misleading. Greater expenditure on goods may not always indicate higher real incomes and living standards.
Why are exchange rates an issue in measuring living standards between countries?
The assumption that exchange rates between local currencies and the dollar are correctly valued is incorrect. Exchange rates only accurately reflect the values of internationally traded goods and commodities.
Why are traded and non-traded goods an issue in measuring living standards between countries?
The purchasing power of a currency over domestically produced goods and services may differ from its purchasing power over imported goods. GNP figures measured in US dollars tend to underestimate real levels of income and output in developing economies.
What are Purchasing Power Parity exchange rates?
The rates of currency conversion that equalize the purchasing power of different currencies by eliminating differences in price levels between countries.
What is purchasing power determined by?
The relative cost of living and inflation rates in different countries.
What are the advantages of PPP?
PPP exchange rates are relatively stable over time. Market rates are more volatile and could produce large swings in aggregate growth measures even when growth rates are stable. Market-based rates are only relevant for internationally traded goods.
What are the drawbacks of PPP?
PPP is difficult to measure compared to market-based rates. New price comparisons are available only at infrequent intervals. The method does not cover all countries, so missing data must be estimated.
