National Income The value of the output of goods and services produced in an economy over a period of time Increases in National Income mean that the economy has grown – economic growth! It is assumed that a wealthier nation can have a more comfortable life, more leisure time, more choices, etc…

GDP – a measure of National Income In the UK, we use GDP to measure National Income (some countries use another measure) GDP = Gross Domestic Product (includes production of foreign countries on UK soil; doesn’t include UK companies abroad)

Put the top 10 in order of Size Country Size ($billion, 2013) United States 16,800 China 9,240 Japan 4,902 Germany 3,635 France 2,735 United Kingdom 2,522 Brazil 2,246 Russian Federation 2,097 Italy 2,071 India 1,877 Australia Brazil China Canada France Germany India Indonesia Italy Japan Netherlands Poland Russia Saudi Arabia South Korea Spain Sweden Switzerland Thailand Turkey United Kingdom United States

Consider this… 2013 UK GDP – £1. 7B 2014 UK GDP – £1 Consider this… 2013 UK GDP – £1.7B 2014 UK GDP – £1.75B What is the growth rate in the year? Hmmm…. What if all the prices of all the goods in the economy went up during the year… would that change your answer?

Real vs. Nominal GDP Growth (value versus volume) Nominal GDP growth: Percentage increase in the total output of the economy calculated using the raw figures (the prices used are those that existed on the day of the measurement) Real GDP growth: Percentage increase in the total output of the economy, adjusted for inflation (removing the effect of price changes during the period) 5% nominal GDP growth – 2% inflation = 3% real GDP growth

Total vs. Per Capita GDP Per capita is ‘per person’ – total GDP of the country divided by the population

Three ways to calculate National Income Remember the desert island? Remember circular flow? income = expenditure = output We can measure any of these to calculate GDP

Can you calculate the total contribution to GDP here? £1600 We have to be careful not to double count – we add ‘value added’ at each stage of production. £95 £550

The UK economy has become increasingly based on producing services…

But there are some problems with using GDP as a measure of performance: Some activity goes uncounted - things we do for ourselves or our friends without payment - activities intentionally hidden from gov’t (black market) Doesn’t tell us the wealth of the average citizen - most of GDP could be in the hands of a few very rich people - Even GDP per capital doesn’t reveal this difference Difficult to compare countries - the basket of goods that your money will buy in each country may be very different, so different standards of living could exist for the same GDP figure

Comparing growth rates: China’s growth rate at 7% is considered poor and worrying…

Comparing growth rates: This annualised rate of 1 Comparing growth rates: This annualised rate of 1.6% growth is considered really positive for the UK!

Comparing growth rates: Different countries have different ‘potential’ to grow Under developed countries have more possibilities for progress and they can progress fast by adopting technology already developed Highly developed countries have to work harder to squeeze out more output with their already very productive and sophisticated production and workforce

Is GDP all that? Happiness? Well-being? Easterlin paradox? Relative versus absolute income?