national income statistics chapter 15 Flashcards
national income
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.
national income statistics
measures of the total output (income and expenditure) of an economy
why does a government measure a country’s total output
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.
effect of higher output
the potential to increase people’s living standards.
what happens if an economy is growing at a slower rate
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.
gross domestic product(GDP)
the total output produced in a country.
how is GDP used
used by economists, governments and international organisations to assess what is produced, earned and spent in an economy.
meaning of GDP
‘Gross’ means total, ‘domestic’ refers to the home economy and product means ‘output.
gross national income (GNI)
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.
why is GNI a better measure than GDP
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
net property income
receipts of profit, rent and interest earned on the ownership of foreign assets minus the payments of profit, rent and interest to non-residents.
compensation of employees
income of workers who work in another country for a short period of time.
gross national disposable income
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)
taxes and subsidiaries by other countries and organization
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.
multinational companies (MNCs)
firms that operate in more than one country. cause of foreign investments
difference in countries’ GDP and GNI
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
problem with foreign investment
foreign investment can result in in a net outflow of profits and other income
methods of measuring GDP
output method
income method
expenditure method
circular flow of income
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
why should all methods of Measuring GDP have the same answer
each method should yield the same answer because they all measure the circular flow of income produced in an economy.
measuring GDP: output method
a way of measuring GDP by calculating the total production of goods and services of the country
output method: double counting
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.
how to avoid double counting
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.
value added
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.
way of measuring GDP: the income method
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.
payments to include in income method
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.
measuring GDP: expenditure method
a way of calculating GDP by totalling all the spending on the country’s output.
expenses included in expenditure method
consumer expenditure (spending by households). government spending on goods and services, total investment, changes in stocks and the difference between exports and imports.
expenses not included in expenditure method
In this case, government spending on welfare payments does not represent spending on goods and services.
exports and imports in expenditure method
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.
stock of goods and expenditure
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
market prices
prices paid by consumers; they take into account indirect taxes and subsidies
basic prices (factor cost)
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
how to find basic price
to get from market price to basic prices, taxes on products are deducted and subsidies on products are added
gross investment
total spending on capital goods. GDP and GNI include gross investment
net domestic product (NDP)
GDP minus depriciation
net national income (NNI)
gross national income minus depreciation
net investment
additions to the capital stock
depreciation (of capital goods)
the value of capital goods that have worn out or become out of date
what does gross investment include
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.
what does net investment indicate
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.
