9.4 Uses Of National Income Data

Question 1

Economists use the terms

National income
National product
National output

Answer 1

Interchangeably

Question 2

What must the economy have to produce a flow of national income?

Answer 2

A stock of physical capital goods (national capital stock) and a stock of human capital, together with the stocks of other factors of production

Question 3

What is the national capital stock part of?

Answer 3

The stock of national wealth

Question 4

What does the stock of national wealth comprise of?

Answer 4

All physical assets owned by a nations residents that have value

Question 5

What does national capital stock exclude?

Answer 5

Consumer goods which are part of national wealth not national capital

Question 6

What is national income?

Answer 6

A flow of new output produced by the economy in a particular period measured by the flow of factor incomes

Question 7

What is national product or national output?

Answer 7

The flow of new output produced in different industries in a particular period e,g a year

Question 8

What is national capital stock?

Answer 8

A stock of capital goods e.g buildings and machinery, in the economy that had accumulated over time and is measured at a point in time

Question 9

What is human capital?

Answer 9

The skills, knowledge and experience possessed by a population

Question 10

What is national wealth?

Answer 10

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

Question 11

What is national capital?

Answer 11

Stock of capital that has accumulated over time in the economy

Question 12

What is national income?

Answer 12

Flow of new output produced by the stocks of physical and human capital and other factors of production

Question 13

What is consumption?

Answer 13

Total planned spending by households on consumer goods and services produced within the economy

Question 14

What does worn out capital reflect?

Answer 14

Capital consumption

Question 15

What is the difference between GDP and GNI

Answer 15

GNI includes income from assets that British people own overseas GDP does not

Therefore GNI better indicator of standard of living as it includes all possible income

Question 16

What are the main sources of data on what’s happening in the economy (3)

Answer 16

GNP
GNI
GDP

Question 17

What is the issue of gdp per capita ?

Answer 17

It shows living standard are growing but doesn’t show disparities in income distribution

Question 18

What are the issues of using national income statistics to measure living standards?(4)

Answer 18

The non-monetised economy
The hidden economy
Quality changes
Negative externalities

Question 19

Hidden economy def(sometimes called informal economy/underground economy/black economy)

Answer 19

All the economic transactions conducted in cash which are not recorded in national income figures because of tax evasion

Question 20

What are the issues of using national income statistics to measure living standards?

The non-monetised economy

Answer 20

Statistics underestimate true level of economic activity because household improvement takes place with generated without money being generated

(Decision has to be made to make an estimate or ignore this value)

Question 21

What are the issues of using national income statistics to measure living standards?

The hidden economy:

Answer 21

Because of its nature impossible to make a completely accurate estimate of the size of the hidden economy

(It probably equates to 10% of Britain’s measured gdp)

Question 22

What are the issues of using national income statistics to measure living standards?

Quality changes

Answer 22

Over time quality of goods change for the better this causes issues in construction interpretation of national income figures

(Also true for services as public transport and health deteriorate)

Question 23

What are the issues of using national income statistics to measure living standards?

Negative externalities

Answer 23

National income statistics over estimate living standards because of the effects of negative externalities (crime and pollution)

Question 24

What are the 3 limitations national income data has when comparing living standards in different countries

Answer 24

-relative importance of the non-monetised economy

-exchange rates

-traded and non traded goods

Question 25

limitations national income data has when comparing living standards in different countries

Relative importance of the non-monetised economy

Answer 25

Comparisons of national income per head are misleading if the non-monetised economy differs significantly

(Also differences in the degree of statistical sophistication in data collection)

(Further problems when making comparisons of different commodities are consumed. E.g expenditure of fuel and clothing is going to be greater in cold developed economies than hot developing economies-greater expenditure on these goods does not necessarily mean higher real incomes and higher living standards)

Question 26

limitations national income data has when comparing living standards in different countries

Exchange rates

Answer 26

It is possible to compare GNP per capita In different countries by converting GNP figures for each country into a common currency (US dollar)

However these calculations suffer from the assumption the exchange rates between the dollar and local currencies are correctly valued

Exchange rates can only reflect the values of internationally traded goods such as automobiles or internationally traded food stuffs and raw materials

Question 27

limitations national income data has when comparing living standards in different countries

Traded and non traded goods

Answer 27

The purchasing power of a currency over domestically produced goods and services may be different to their purchasing power of imported goods

Exchange rates only reflect the price change in internationally traded goods

(in so far as there is a much wider gap in economically developed countries between the price changes in internationally traded and non-traded goods, GNP figures measured in U.S. dollars tend to underestimate real levels of output and incomes in developing economies)

Question 28

What is the solution to the issues of using national income data to compare living standards in different countries?

Answer 28

Purchasing power parity (PPP) exchange rates

Question 29

What is the purchasing power parity of exchange rates (PPP)

Answer 29

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

Question 30

What is the idea behind PPP exchange rates

Answer 30

(Calculations of GDP based market exchange rates over time overestimate the cost of living in poorer countries)

PPP exchange rates idea that in the long run exchange rates should move towards rates that equalise the prices of an identical basket of goods in two different countries

Question 31

How is PPP exchange rates determined?

Answer 31

The relative cost of living and inflation rates in different countries (PPP means equaling purchasing power of two currencies by taking into account these cost of living and inflation differences)