8- National Income

Question 1

What is the key measure of national income?

Answer 1

GDP

Question 2

GDP definition

Answer 2

The total market value of all goods and services produced over a period of time. Therefore includes value of indirect taxes like VAT.

Question 3

Real GDP

Answer 3

GDP adjusted for the effect of inflation.

Question 4

Nominal GDP

Answer 4

GDP unadjusted for the effect of inflation.

Question 5

Net national income

Answer 5

National income minus depreciation

Question 6

Why is GDP at market prices the main headline figure?

Answer 6

• Data to calculate is most quickly available
• Movements in GDP are similar measures in other national incomes.
• It’s a good guide to what’s happening in the economy e.g. with rate of growth

Question 7

Other description of real national income?

Answer 7

• Volume of national income
• It is the basket of goods and services that can be bought with a given amount of money.
• When comparing national income in 1900 with that of today in real terms, what is being measured is the relative size of the basket of goods and services.

Question 8

Other description of nominal national income?

Answer 8

• Value of national income
• Measures the monetary cost of the basket of goods and services at a given level of prices. The value is equal to the volume times the current price level

Question 9

GDP per capita

Answer 9

GDP/Population

Question 10

What does GDP measure?

Answer 10

• Measure of growth

- Measure of living standard

Question 11

Problems with measuring GDP?

Answer 11

• Double counting
• Informal activity
• Errors given vast data collection
• Negative externalities
• Income equality
• Output produced
• Other quality of life aspects

Question 12

Issues with GDP per capita?

Answer 12

• Same issues as GDP
• Factor income abroad and significance of remittances
• Influence of FDI and reparation of profit

Question 13

What is FDI?

Answer 13

Foreign directed investment

Question 14

What are remittances?

Answer 14

A transfer of money by a foreign worker to an individual in their home country

Question 15

What is GNI (per capita)?

Answer 15

Gross national income -

Income earned by domestic workers/ firms at home

Question 16

GNI equation

Answer 16

GDP + net factor income

Question 17

What does Green GDP account for?

Answer 17

Environment costs of production

Question 18

Green GDP equation

Answer 18

GDP - Environmental costs

Question 19

Issues with Green GDP?

Answer 19

• Monetary value on environment costs difficult

- GDP could fall dramatically

Question 20

What is Purchasing Power Parity (PPP)?

Answer 20

It’s the exchange rate needed to for say $100 to buy the same quantity of goods in each country

Question 21

What does PPP suggest?

Answer 21

That exchange rates are in equilibrium when they have the same purchasing power in different countries.

Question 22

How is PPP determined?

Answer 22

The PPP is determined by dividing a basket of goods in one country by the cost of basket of goods in another.

Question 23

What does PPP reflect?

Answer 23

Living costs

Question 24

Why can exchanges rates differ from PPP?

Answer 24

• Risk and stability of investing in a certain economy
• If countries are seen as a safe haven, then investors will seek to save money in those assets. E.g. investors are keen to save in the Swiss Franc causing the Franc to appreciate and make swiss goods and services seem expensive. Conversely, if a country is seen as risky due to high inflation or debt, the exchange rate will be undervalued as investors are reluctant to hold that currency.
• If interest rates are higher in the USA than the UK, then this will cause hot money to flow into the US as investors want to save in countries with higher interest rates.
• Tax rates- some visible prices may differ due to different tax rates. If VAT is higher in some countries, sales will be lower.
• Transport costs- if transport cots are lower so will prices
• Tariffs can rise prices beyond exchange rates
• Living costs - in the developing world where there is cheap rent reflect often lower prices/cheaper. If wages are lower so will prices as goods can be produced at lower prices

Question 25

Problems in using market exchange rates to measure GDP?

Answer 25

• Volatility- if there is a large depreciation of peso against US dollar it might imply Argentinian living standards have fell but the economy could be growing quickly.
• Exchanges are more relevant to products that are traded between countries rather than non-traded products. Traded products tend not to have big price difference because international competition tends to reduce difference in prices for similar products.

Question 26

What is the Balassa-Samuelson effect?

Answer 26

The Balassa-Samuelson effect states that productivity differences between the production of tradable goods in different countries 1) explain large observed differences in wages and in the price of services and between purchasing power parity and currency exchange rates, and 2) it means that the currencies of countries with higher productivity will appear to be undervalued in terms of exchange rates; this gap will increase with higher incomes.