Unit 4 - Chapter 15 - National Income Statistics

Question 1

Definition: National income

Answer 1

National income measures the income of those individuals who are residents in the country.

Question 2

Why: the size of national income = total expenditure = total output

Answer 2

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.

Question 3

Why national income statistics is important?

Answer 3

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)

Question 4

Definition: (nominal) GDP

Answer 4

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.

Question 5

Are the following items counted in GDP?

raw materials

Answer 5

No

Question 6

Are the following items counted in GDP?
stock shares 股票

Answer 6

No

Question 7

Are the following items counted in GDP?
Transfer payment

Answer 7

No

Question 8

Are the following items counted in GDP?
Subsidies

Answer 8

No. because subsidies are transfer payments

Question 9

Are the following items counted in GDP?
Old buildings

Answer 9

No.

Question 10

Are the following items counted in GDP?
inputs

Answer 10

No.

Question 11

Are the following items counted in GDP?
Taxes

Answer 11

No. because taxes are transfer payments

Question 12

Are the following items counted in GDP?
Newly produced machines

Answer 12

Yes. It is capital

Question 13

Are the following items counted in GDP?
goods produced abroad

Answer 13

No

Question 14

Are the following items counted in GDP?
Government bonds

Answer 14

No. Gov. bonds are government borrowings

Question 15

Are the following items counted in GDP?
Government spending on healthcare

Answer 15

Yes. Services are produced. fop are used

Question 16

Are the following items counted in GDP?
Government interest payments on bonds

Answer 16

No

Question 17

Are the following items counted in GDP?
Firms’ interest payment on their borrowing to build new capital

Answer 17

Yes. Goods (namely capital) are created.

Question 18

Are the following items counted in GDP?
Goods that are produced but not sold

Answer 18

Yes. It is counted in △inventory, which belongs to Investment

Question 19

What is GDP per capita

Answer 19

GDP/人口

Question 20

GDP统计两大问题

Answer 20

1. 不准确inaccurate
2. 不能代表真正living standard (wellbeing)

Question 21

why is GDP inaccurate

Answer 21

(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

Question 22

Why GDP is not representative of living standards

Answer 22

1. GDP will overestimate living standard if this is spending on natural disaster, crime, war, disease etc.
2. 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
3. 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
4. GDP does not reflect equality.

Question 23

Definition of real GDP

Answer 23

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.

Question 24

How to measure real GDP?

Answer 24

Formula:
e.g. for real GDP in 2020,
real GDP 2020 = quantity of goods in 2020 * Base price

Question 25

What is GDP deflator?

Answer 25

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)

Question 26

What is the formua of GDP deflator?

Answer 26

Its formula is Nominal GDP / Real GDP * 100
(an index number, so it is measure in 100)

Question 27

How to get real economic growth rate

Answer 27

Quantity * Price = Monetary value

Therefore,

%△real GDP = %△nominal GDP - %△GDP deflator

Real GDP growth rate = Nominal GDP growth rate - inflation rate

Question 28

What is the difference between GDP and GNI?

Answer 28

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)

Question 29

Identify the three methods of measuing GDP

Answer 29

1. The output method (value add method)
2. The income method
3. The expenditure method

Question 30

Explain the output method

Answer 30

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

Question 30

Explain the output method

Answer 30

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

Question 31

Explain the income method

Answer 31

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

Question 32

Explain the expenditure method

Answer 32

The expenditure method adds up consumer consumption, net exports, investments, and government spending to arrive at GDP.

Question 33

Identify the components of aggregate demand

Answer 33

AD (多少expenditure) = C + I + G + NX

Question 34

Identify the difference between market price and basic price

Answer 34

Market price = 市场价
Basic price = 到手价

Market price + subsidies - indirect taxes = basic price

Question 35

What is depreciation

Answer 35

the amount of capital goods that have worn out

Question 36

How to get NDP?

Answer 36

Net domestic product = GDP – depreciation

Question 37

How to get NNI

Answer 37

Net national income = GNI - depreciation

Question 38

Why we would rather look at NDP than GDP?

Answer 38

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.

Question 39

How to get GDP at market price, if GDP at basic price is 1500, taxes are 40, subsidies are 150?

Answer 39

Market = basic + subsidies - taxes

1500 + 150 - 40 = 1610

Question 40

How to get NDP at basic price, if GDP at market price is 1500, taxes are 40, subsidies are 140, and depreciation is 100

Answer 40

Market = basic + subsidies - taxes

GDP at basic = 1500 - 140 + 40 = 1400

GDP - depreciation = NDP

Therefore NDP at basic = 1400 - 100 = 1300

Question 41

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

Answer 41

Market = basic + subsidies - taxes

GDP at basic = 1500 - 140 + 40 = 1400

GNI at basic = GDP at basic + net income from abroad = 1400 - 200 = 1200