4.9.4 - Uses of National Income Data

Question 1

What is national income?

Answer 1

The flow of new output produced by the economy in a particular period, measured by the flow of factor incomes.

Question 2

What is national product?

Answer 2

The flow of new output produced by different industries in a particular period.

Question 3

What is national capital stock?

Answer 3

The stock of capital goods in the economy that has accumulated over time and is measured at a point in time.

Question 4

What is human capital?

Answer 4

The skills, knowledge and experience possessed by the population.

Question 5

What is national wealth?

Answer 5

The stock of all goods that exist at a point in time that have value in the economy.

Question 7

Why does capital consumption occur?

Answer 7

During the process of generating national income, capital is used and (inevitably) breaks or wears down in that process.

Question 8

What happens if investment doesn’t take place to replace worn-out capital?

Answer 8

The national capital stock shrinks in size, and therefore negative economic growth occurs.

Question 9

How does positive economic growth generally take place?

Answer 9

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.

Question 10

How can long-term economic growth be hindered by short-term actions?

Answer 10

If you spend more of the national output on consumption, short-term economic living standards increase at the expense of long-term economic growth.

Question 11

What is the difference between GDP and GNI?

Answer 11

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 measures all of the income available to spend in the UK, including that from abroad.)

Question 12

What is the best measure to see how living standards are changing over time?

Answer 12

Real GNP per capita.

Question 13

Why is real GNP per capita only useful in particular industries?

Answer 13

Particularly in developing countries, the usage of this metric may conceal growing disparities in income distribution.

Question 14

Why are national income statistics problematic to measure living standards in the UK over time?

Answer 14

• Income distribution
• Non-monetised economy
• The hidden economy
• Quality changes
• Negative externalities

Question 15

Why is income distribution an issue in measuring living standards over time?

Answer 15

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 are actually benefiting from economic growth.

Question 16

Why is the non-monetised economy an issue in measuring living standards over time?

Answer 16

The true level of economic activity in the UK are underestimated by national income statistics because housework and ‘do-it-yourself’ home improvements do not generate any money incomes.

Question 17

Why is the hidden economy an issue in measuring living standards over time?

Answer 17

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.

Question 18

Why are quality changes an issue in measuring living standards over time?

Answer 18

The quality of goods and services deteriorate over time. When public services deteriorate, GNP may rise despite welfare and real living standards falling.

Question 18

Why are negative externalities an issue in measuring living standards over time?

Answer 18

Negative externalities are not taken into account by the GNP per capita calculations, so the GNP is likely to be lowered if these were taken into account.

What is a welfare loss may be shown as an increase in national output, falsely indicating a welfare gain. e.g. producing a higher national output leads to the loss of leisure time and people to fall ill more often. Loss of leisure time and illness cause welfare to fall, but in national accounts, these show up as extra production and as extra consumption of healthcare, suggesting a welfare gain.

Question 19

Why is national income data problematic to measure differences in living standards between countries?

Answer 19

• The relative importance of the non-monetised economy.
• Exchange rates.
• Traded and non-traded goods.

Question 19

Why is the relative importance of the non-monetised economy an issue in measuring living standards between countries?

Answer 19

If countries depend on the non-monetised economy more than others, then comparisons between national income per head will be incredibly misleading. Greater expenditure on goods may not always demonstrate higher real incomes and living standards.

Question 20

Why are exchange rates an issue in measuring living standards between countries?

Answer 20

The assumption that exchange rates between local currencies and the dollar are correctly valued is wrong. Exchange rates only correctly reflect the values of internationally traded goods and commodities.

Question 21

Why are traded and non-traded goods an issue in measuring living standards between countries?

Answer 21

The purchasing power of a currency over domestically produced goods and services may be completely differenct to those imported goods.

GNP figures measured in US dollars tend to underestimate real levels of income and output in developing economies as exchange rates only reflect price changes in internationally traded goods.

Question 22

What are Purchasing Power Parity exchange rates?

Answer 22

The rates of currency conversion that equalise the purchasing power of difference currencies by eliminating the differences in price levels between countries.

Question 23

What is purchasing power determined by?

Answer 23

The relative cost of living and inflation rates in different countries.

Question 24

What are the advantages of PPP?

Answer 24

• PPP exchange rates are relatively stable over time. Market rates are more volatile and using them could produce large swings in aggregate measures of growth even when growth rates are quite stable.
• Market-based rates are only relevant for internationally traded goods.

Question 25

What are the drawbacks of PPP?

Answer 25

PPP is incredibly difficult to measure relative to market-based rates. New price comparisons are only available at infrequent intervals.
The method of measurement does not cover all countries, so data for missing countries will have to be estimated.