Unit 4 - Chapter 15 - National Income Statistics Flashcards
Definition: National income
National income measures the income of those individuals who are residents in the country.
Why: the size of national income = total expenditure = total output
Since income is then spent on the output therefore total income should equal and total expenditure. Also people earn an income from producing the output, therefore total output should equal total income.
Why national income statistics is important?
CLAP:
C: Can be used to compare with other countries
The UN uses national income statistics to compare performance and development of different countries
L: Can be used to tell living standard
Higher output has the potential to increase people’s living standards.
A: Can be used to assess the economy
An economy is usually considered to be doing well if its output is growing at a sustained and sustainable rate.
P: Thus the government can implement the correct policies. 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.
Final note: we care about the level as well as the growth rate (in reality, mostly focus on growth rate)
Definition: (nominal) GDP
The Market Value of All Final Goods and Services Produced in an economy (a Country or other Political Unit) during a Period of Time, typically one year or quarterly.
Are the following items counted in GDP?
raw materials
No
Are the following items counted in GDP?
stock shares 股票
No
Are the following items counted in GDP?
Transfer payment
No
Are the following items counted in GDP?
Subsidies
No. because subsidies are transfer payments
Are the following items counted in GDP?
Old buildings
No.
Are the following items counted in GDP?
inputs
No.
Are the following items counted in GDP?
Taxes
No. because taxes are transfer payments
Are the following items counted in GDP?
Newly produced machines
Yes. It is capital
Are the following items counted in GDP?
goods produced abroad
No
Are the following items counted in GDP?
Government bonds
No. Gov. bonds are government borrowings
Are the following items counted in GDP?
Government spending on healthcare
Yes. Services are produced. fop are used
Are the following items counted in GDP?
Government interest payments on bonds
No
Are the following items counted in GDP?
Firms’ interest payment on their borrowing to build new capital
Yes. Goods (namely capital) are created.
Are the following items counted in GDP?
Goods that are produced but not sold
Yes. It is counted in △inventory, which belongs to Investment
What is GDP per capita
GDP/人口
GDP统计两大问题
- 不准确inaccurate
- 不能代表真正living standard (wellbeing)
why is GDP inaccurate
(1) Value add by household services.
For example, domestic services provided by homeowners, painting and repairs undertaken by home owners and voluntary work are not included in the official figures. The more underdeveloped a country is, the more likely GDP will be underestimated.
(2) Underground economy (informal / hidden economy)
Average size of “informal” economy (% of GDP 2002-2003):
Developing Countries: >36%
Developed Countries: 13%
➪ Those seeking to evade paying tax. For example, a plumber may receive payment for undertaking jobs in his spare time and not declare the income he receives to the tax authorities
➪ Illegal activities, for example smuggling goods
➪ Therefore it is influenced by the marginal rates of taxation, the penalties imposed for illegal activities and tax evasion, the risk of being caught and social attitudes towards, for example, different illegal activities.
(3) Price data
(4) low levels of literacy: In countries with low levels of literacy, it will be difficult for the government to gather information about all economic activity. Some people will be unable to fill out tax forms and others will fill them out inaccurately, so estimates will have to be made for some output
Why GDP is not representative of living standards
- GDP will overestimate living standard if this is spending on natural disaster, crime, war, disease etc.
- The recruitment of more police to cope with more crime will increase real GDP but will be unlikely to cause people to feel better off
e.g. stressful work
e.g. GDP growth might come with the depletion of natural resources, pollution, and even at the cost of the health of the labour force - GDP Only includes those that can be counted in monetary values
GDP will underestimate living standard as it does not include happiness, leisure and volunteerism - GDP does not reflect equality.
Definition of real GDP
Real GDP is nominal GDP adjusted for inflation.
Therefore it measures The Real Value of All Final Goods and Services Produced in an economy (a Country or other Political Unit) during a Period of Time, typically one year or quarterly.
How to measure real GDP?
Formula:
e.g. for real GDP in 2020,
real GDP 2020 = quantity of goods in 2020 * Base price
What is GDP deflator?
A price index measuring the price of products being produced
Its formula is Nominal GDP / Real GDP * 100
(an index number, so it is measure in 100)
What is the formua of GDP deflator?
Its formula is Nominal GDP / Real GDP * 100
(an index number, so it is measure in 100)
How to get real economic growth rate
Quantity * Price = Monetary value
Therefore,
%△real GDP = %△nominal GDP - %△GDP deflator
Real GDP growth rate = Nominal GDP growth rate - inflation rate
What is the difference between GDP and GNI?
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.
GNI = GDP + net property income from the rest of the world （投资收入) + other sources of income (e.g. taxes, subsidies, wages)
Identify the three methods of measuing GDP
- The output method (value add method)
- The income method
- The expenditure method
Explain the output method
The output method measures the value of output produced by industries such as manufacturing, construction, distributive, hotel and catering and agricultural industries or sectors. It is measured by calculating the value added along the production chain.
Value added is the difference between the sales revenue received and the cost of raw materials used. It is equal to the payments made to the factors of production in return for producing the good or service.
For example, REMEMBER TO GIVE YOUR EXAMPLES
Explain the output method
The output method measures the value of output produced by industries such as manufacturing, construction, distributive, hotel and catering and agricultural industries or sectors. It is measured by calculating the value added along the production chain.
Value added is the difference between the sales revenue received and the cost of raw materials used. It is equal to the payments made to the factors of production in return for producing the good or service.
For example, REMEMBER TO GIVE YOUR EXAMPLES
Explain the income method
The income method measures the total Income paid to factors of production, including wages, rent, interest and profits.
Transfer payments, which are transfers of income from taxpayers to groups of individuals for welfare payments, are not included
Explain the expenditure method
The expenditure method adds up consumer consumption, net exports, investments, and government spending to arrive at GDP.
Identify the components of aggregate demand
AD (多少expenditure) = C + I + G + NX
Identify the difference between market price and basic price
Market price = 市场价
Basic price = 到手价
Market price + subsidies - indirect taxes = basic price
What is depreciation
the amount of capital goods that have worn out
How to get NDP?
Net domestic product = GDP – depreciation
How to get NNI
Net national income = GNI - depreciation
Why we would rather look at NDP than GDP?
GDP only measures the total value of goods and services produced within a country. But some parts of the goods produced are to replace depreciation, rather than value creation.
How to get GDP at market price, if GDP at basic price is 1500, taxes are 40, subsidies are 150?
Market = basic + subsidies - taxes
1500 + 150 - 40 = 1610
How to get NDP at basic price, if GDP at market price is 1500, taxes are 40, subsidies are 140, and depreciation is 100
Market = basic + subsidies - taxes
GDP at basic = 1500 - 140 + 40 = 1400
GDP - depreciation = NDP
Therefore NDP at basic = 1400 - 100 = 1300
How to get GNI at basic price, if GDP at market price is 1500, taxes are 40, subsidies are 140, and depreciation is 100, and net income from abroad is -200
Market = basic + subsidies - taxes
GDP at basic = 1500 - 140 + 40 = 1400
GNI at basic = GDP at basic + net income from abroad = 1400 - 200 = 1200
