Topic 1: National Income Flashcards
What are the four main macroeconomic policy objectives?
- Economic growth
- Low Unemployment
- Low Inflation
- Balance of payments
These four macroeconomic issues result in government policy objectives. However, they involve trade-offs as not all four can be achieved simultaneously as they conflict with each other,
What is GDP? and how do you calculate it?
GDP (Gross Domestic Product) - Gross domestic product is the total value of all final goods and services produced in the country over a given period of time (usually a year)
- If they are located within the country’s boundaries, their
production is included in GDP.
National Income = Consumption (C) + Investment (I) + Government
Expenditure (G) + Exports (X) – Imports (M)
What is the Economic Equilibrium and the circular flow of the economy?
In simple economy, equilibrium exists when: Consumption=Income
However, there are things that affect the circular flow: Injections and withdrawals
Injections : Investment, Government, Exports (boost national income)
Withdrawals : Savings, Taxation, Imports (lower national income)
What is GNP?
Gross National Product (GNP) - the market value of final goods
and services produced by a nation during a specific period, usually 1 year plus or minus (+ or -) net factor income (f) from abroad.
– Measures everything Irish.
NFI = Income received from Irish factors of production working abroad less income repatriated by foreign-owned factors employed in Ireland.
Formula: GNP = C + I + G + (X – M) +/- NFI
What is GNI?
- Gross National Income (GNI) is a similar measure to Gross National Product.
- The difference between them are the subsidies the European Union (EU) pay to us, and the taxes we pay to them.
- The EU pay subsidies to Irish producers in activities such as farming, and customs duties are paid to the EU by Irish resident firms and households
- Formula: GNI = GNP +/- net current transfers (NCT)
What is NNI?
- Net National Income (NNI) is an indicator of the total economic activity in a country.
- It excludes depreciation on all assets.
Formula:
NNI = Gross National Income (GNI) – Provision for Depreciation
What is Total Domestic Demand(TDD) and Modified Total Domestic Demand(MTDD)?
- Total Domestic Demand (TDD) is Final Domestic Demand plus the value of physical changes in stocks.
- TDD contains many of the elements used to calculate Gross Domestic Product (GDP) by the Expenditure Method, and so it is an indicator of how much the economy as a whole is growing. It
excludes imports and exports which are part of GDP. - Modified Total Domestic Demand goes further in trying to exclude those large transactions of foreign corporations that do not have a big impact on the domestic economy.
- Modified Total Domestic Demand is therefore a smaller number than GDP and it more truly reflects how Households, Government and domestic Corporations in Ireland are doing
What are the advantages of National Income (NI) Statistics?
- Economic Growth: National income indicates the level of economic
activity in a country during the year. - Employment: NI is a very important statistic from the point of view
of employment creation. A high level of economic activity usually
leads to a high level of employment. - International Comparisons: NI statistics enable a country to
compare its economic performance during the year with that of
other countries. Income per capita (per person) is usually used in
such comparisons - Role of Government in the Economy: NI statistics indicate the
importance of the role of government in the economy. They indicate
the proportion of total expenditure, total output and total income
accounted for by government economic activity. - Distribution of National Wealth: NI statistics give a broad general
indication of how the national wealth created during the year is
distributed between the various economic groupings e.g. farmers,
industrial firms, the self-employed, wage-earners etc. - Consumption Patterns: NI statistics indicate changes in consumer
spending habits over the years. This is important for government
planning in the area of indirect taxation i.e. taxes on expenditure.
How is GDP/GNP Measured ? (3 ways)
- by adding up the total value of all sales of final goods and services
(total expenditure). - by adding up all the incomes received by the individuals and firms
(total income). - by adding up the total value of all types of production (total output).
Describe the Expenditure Method?
Expenditure Method
* Adds up the total amount of money spent on final goods and services in a country during a particular year.
* Based mainly on the Census of Distribution, which is prepared
periodically from the returns made by wholesalers and retailers.
GDP = C + I + G + (X – M
Describe the Income Method?
- This adds up all the incomes received by individuals and firms in an economy during the year.
- Usually based on data collected by Revenue for income tax assessment.
- Total national income is made up of the total earnings of the four factors of production i.e. wages (labour), rent (land), interest (capital), and profits (enterprise)
Describe the Output Method?
This method involves adding up the total value of all goods and services produced in the country during the year.
The Output Method measures GDP as the value of
*Output (what is produced)
*minus the value of goods and services used up in producing these outputs (the inputs or Intermediate Consumption)
*plus all Taxes on Products like VAT, minus all Subsidies on Products
What are the Limitations of GDP?
- GDP does not take into account second-hand goods, intermediate
goods or financial securities (stock/shares/bonds). - Transactions within the ‘shadow or black’ economy, not included
- Externalities- These are side-effects generated in the production or consumption of commodities. e.g. Spillovers like waste, education
- Non-monetary transactions e.g. voluntary, stay at home
- Non-marketable goods and services, e.g. state education and health care,
- GDP measures only the value of goods and services produced, quality is not measured
- Welfare: GDP does not reflect disparities in the distribution of income
- GDP does not take account of all the costs of economic growth.
E.g. environmental degradation, climate change. - the income from GDP may not stay in the economy at all.
Why Use GDP?
- International comparisons.
– GDP is the best single indicator of how countries are doing economically. - A measure of economic activity for statistical purposes.
- For most developed countries GNP and GDP are not significantly
different.
