national income statistics chapter 15

Question 1

national income

Answer 1

a country’s total output. People earn an income from producing the output. This income is then spent on the output. This means that total output should equal total income and total expenditure.

Question 2

national income statistics

Answer 2

measures of the total output (income and expenditure) of an economy

Question 3

why does a government measure a country’s total output

Answer 3

to assess the performance of the economy. An economy is usually considered to be doing well if its output is growing at a sustained and sustainable rate. A government is also likely to compare its country’s output and the growth of that output with those of other countries.

Question 4

effect of higher output

Answer 4

the potential to increase people’s living standards.

Question 5

what happens if an economy is growing at a slower rate

Answer 5

If an economy is growing at a slower rate than it is considered capable of, a government is likely to introduce policy measures to stimulate the economy.

Question 6

gross domestic product(GDP)

Answer 6

the total output produced in a country.

Question 7

how is GDP used

Answer 7

used by economists, governments and international organisations to assess what is produced, earned and spent in an economy.

Question 8

meaning of GDP

Answer 8

‘Gross’ means total, ‘domestic’ refers to the home economy and product means ‘output.

Question 9

gross national income (GNI)

Answer 9

GDP plus net income from abroad. an increasingly important measure. As well as adding net property income from abroad, GNI also includes other sources of income that residents receive from abroad and deducts other sources of income that foreigners receive from the country. These payments are net receipts of compensation of employees and net taxes less subsidies on products.

Question 10

why is GNI a better measure than GDP

Answer 10

GNI goes further than GDP in changing the focus from output produced in a country to income earned by the country’s residents and firms regardless of where it is earned. most countries GDP and GNI are similar

Question 11

net property income

Answer 11

receipts of profit, rent and interest earned on the ownership of foreign assets minus the payments of profit, rent and interest to non-residents.

Question 12

compensation of employees

Answer 12

income of workers who work in another country for a short period of time.

Question 13

gross national disposable income

Answer 13

GNI plus net transfers of workers’ income to their relatives to and from other countries (+income sent home by people working abroad-income sent by foreigners working in the country to relatives abroad)

Question 14

taxes and subsidiaries by other countries and organization

Answer 14

Some tax revenue on products may be paid to other countries and international organisations and some production subsidies may be received by other governments and international organisations.

Question 15

multinational companies (MNCs)

Answer 15

firms that operate in more than one country. cause of foreign investments

Question 16

difference in countries’ GDP and GNI

Answer 16

GNI can be higher than GDP because they receive a net inflow of property income from abroad
GDP can be higher than GNI because of foreign investment and contribution of MNCs to the output

Question 17

problem with foreign investment

Answer 17

foreign investment can result in in a net outflow of profits and other income

Question 18

methods of measuring GDP

Answer 18

output method
income method
expenditure method

Question 19

circular flow of income

Answer 19

the value of output is equal to the incomes that are earned producing it, meaning wages, rent, profit and interest. If it is assumed that all incomes are spent, expenditure will, by definition, equal income

Question 20

why should all methods of Measuring GDP have the same answer

Answer 20

each method should yield the same answer because they all measure the circular flow of income produced in an economy.

Question 21

measuring GDP: output method

Answer 21

a way of measuring GDP by calculating the total production of goods and services of the country

Question 22

output method: double counting

Answer 22

When using the output measure it is important to avoid counting the same output twice. For example, if the value of cars sold by manufacturers is added to the value of output of the firms which make the tires, double counting will occur.

Question 23

how to avoid double counting

Answer 23

To avoid double counting, output is measured either by totaling the value of the final goods and services produced or by adding the value added at each stage of production.

Question 24

value added

Answer 24

the difference between the price at which products are sold and the price of goods and services used in their production. Adding the value at each stage of production should give the figure as the market value of the finished product produced.

Question 25

way of measuring GDP: the income method

Answer 25

a way of measuring GDP by totaling all the incomes earned in producing the country’s output. the costs include wages, rent, interest and profits. All these payments represent income paid to factors of production.

Question 26

payments to include in income method

Answer 26

In using the income method it is important to include only payments received in return for providing a good or service. So transfer payments, which are transfers of income from taxpayers to groups of individuals for welfare payments and to firms in the form of subsidies, are not included.

Question 27

measuring GDP: expenditure method

Answer 27

a way of calculating GDP by totalling all the spending on the country’s output.

Question 28

expenses included in expenditure method

Answer 28

consumer expenditure (spending by households). government spending on goods and services, total investment, changes in stocks and the difference between exports and imports.

Question 29

expenses not included in expenditure method

Answer 29

In this case, government spending on welfare payments does not represent spending on goods and services.

Question 30

exports and imports in expenditure method

Answer 30

necessary to add expenditure on exports and deduct expenditure on imports. This is because the sale of exports represents the country’s output and creates income in the country, whereas expenditure on imports is spending on goods and services made in foreign countries and creates income for people in those countries.

Question 31

stock of goods and expenditure

Answer 31

what is produced in a year will either be sold or added to stocks. so, if additions to stocks are added to expenditure on goods and services, a measure is obtained that will equal output and income

Question 32

market prices

Answer 32

prices paid by consumers; they take into account indirect taxes and subsidies

Question 33

basic prices (factor cost)

Answer 33

prices charged by producers before the addition of indirect taxes and the deduction of subsidies. equal the income paid to the factors of production for making the output

Question 34

how to find basic price

Answer 34

to get from market price to basic prices, taxes on products are deducted and subsidies on products are added

Question 35

gross investment

Answer 35

total spending on capital goods. GDP and GNI include gross investment

Question 36

net domestic product (NDP)

Answer 36

GDP minus depriciation

Question 37

net national income (NNI)

Answer 37

gross national income minus depreciation

Question 38

net investment

Answer 38

additions to the capital stock

Question 39

depreciation (of capital goods)

Answer 39

the value of capital goods that have worn out or become out of date

Question 40

what does gross investment include

Answer 40

includes the output of capital goods both used to replace existing capital goods that have worn out or become out of date due to advances in technology and capital goods required to expand capacity.

Question 41

what does net investment indicate

Answer 41

Net investment gives an indication whether the country’s ability to produce goods and services in the future will increase, stay the same or even decrease.