National Income 2 Flashcards
main measures of national income
GDP and GNP
Gross domestic product
the total output produced by the factors of production in the domestic economy, irrespective of whether the factors are owned by Irish nationals or foreigners, as measured by payments to factors of production/current market prices
Gross national product
the total output produced by Irish owned factors of production in ireland and elsewhere. It is a measure of the income accruing to a country’s residents
methods used to measure NI
expenditure method
income method
production method
All three should be equal to one another as all money spent is spent on goods/services that are produced and all incomes earned from the production
National income statistics are compiled by
CSO
why are these statistics important
used to measure economic performance indicate the standard of living compare irelands NI with other countries formulating economic policy effective research EU budget contributions and benefits
market prices
the prices consumers pay for goods/services including VAT, customs duty and excise
factor costs
the cost of the 4 factors of production i.e. labour, rent, interest on bank loans, returns to entrepreneur
net factor income from the rest of the world
income earned by Irish factors of production and sent home minus income earned by foreign factors of production in Ireland repatriated to their country
expenditure method
- calculate total expenditure (C+I+G)
minus imports plus exports - GDP - plus or minus net factor income with rest of..
- GNP - plus Eu subsidies minus EU taxes
- GNI- minus NET current transfers to/from
- GNDI
second hand goods
not included in GNP as they were counted when they were new
Production/output method
not used by CSO but used across Europe
difficulty- double counting
applies where any good/service is provided in the production of another good/service
Gross national income
comprises of domestic and foreign income earned by the resident population of a country
Gross national disposable income
may be derived by adding NI to net current transfers
GDP is a better indicator of
level of economic activity
GNP IS A BETTER INDICATOR OF
standard of living
Why is GDP bigger than GNP
net factor income from abroad:
- repatriation of profits by multinational companies exceed profits made by Irish MNCs abroad returned home
- interest payments on irish debt held by non irish residents exceed the interest payments residents recieve on non-irish debt
- remittances of immigrants in ireland sent abroad
GDP vs GNI
the profits of US MNC’s count toward irish GDP, but also toward US GNI as they are repatriated.
These repatriations are reflected in a decreased GNI for Ireland, as they are an amount paid OUT.
GDP will be unchanged, as the produce remains the same
GNI vs GNDI
GNI does not record unilateral transfers, including foreign aid and remittances. These are called net secondary incomes for developing countries (net current transfers)
Thus, GNDI provides a better account of the income that is available to the people and is a much better indicator of standard of living of residents of a country
What does GNI indicate
a populations income, as it captures the income related to the mobility of factors of production (net primary incomes)
GNI * or modified
GNI less the affects of asset transfers, to exclude globalisation effects disproportionately impacting GNI
convert Market Prices to Factor Costs
minus taxes
plus subsidies
limitations of national income measures/statistics
- population growth/decline
- inflation/deflation
- measures growth not welfare, so may not reflect standard of living
- levels of taxation not included
- changes to quality of goods not taken into account
- non market economic activities not included
the hidden/black/shadow economy
any economic activity which takes place, that is not recorded and therefore not included in national income accounts
main causes of the hidden economy
unemployment: those who have lost jobs cant afford VAT inclusive prices and/or are prepared to take a cash only job to avoid income tax
disillusionment with gov policy: think tax system is unfair
reduced disposable income: cant afford legitimate prices of goods or services
Increased VAT rates: causing prices to increase, consumers want to avoid higher taxes
economic consequences of the hidden economy
Loss of tax revenue to gov.- no VAT or income tax
Decline in legitimate business activity- more expensive/harder to compete with illegal activity
Increased Gov expenditure on enforcement
Pressure on gov services/finances- less tax revenue spent on essential public services or borrow or increase taxes
Standard of goods/services- risk of harmful/unsafe products to consumers if there is no regulation
social effects of a rise in the hidden economy
Increased crime levels - fear in citizens and further reduce legitimate economic activity
Vicious cycle scenario- legitimate businesses cant compete and close, illegal activity thrives
Public outrage- unhappy with lack of supervision and action by the gov
Decrease in the provision of public goods/services- less capacity to provide high quality services eg health thus decreasing the standard of living
government measures to tackle the hidden economy
reduce taxation rate
reduce indirect taxation - VAT, excise duties
better enforcement by revenue commissioners eg heavier fines, longer sentences
educate the public about the importance of taxation to the state
simplification of tax system/close all loopholes
encourage a culture of ethical business eg positive role models
