Measuring National Income Copyright P Oldfield Measuring National Income THE ABSOLUTE BASICS

Measuring National Income Copyright P Oldfield What is National Income?  Making comparisons between countries National income measures the total value of goods and services produced within the economy over a period of time Measuring the level and rate of growth of national income (Y) is important to economists when they are considering:  Economic growth and where the economy is in the business cycle  Changes to average living standards of the population (GDP per capita)

Measuring National Income Copyright P Oldfield Gross Domestic Product (GDP) GDP includes the output of all firms in a country, including the foreign owned firms in that country There are three ways of calculating GDP - all of which should sum to the same amount since by identity: National Output = National Expenditure (Aggregate Demand) = National Income

Measuring National Income Copyright P Oldfield Expenditure/Aggregate Demand (AD) AD is the sum of the final expenditure on goods and services produced in a country measured at current market prices The full equation for GDP using this approach is GDP = C + I + G + (X-M) C: Household spending (consumption) I: Capital Investment spending G: General Government spending X: Exports of Goods and Services M: Imports of Goods and Services

Measuring National Income Copyright P Oldfield Measuring N.I. By Expenditure One thing to remember is that measuring by the expenditure method can be distorted by subsidies and indirect taxes Eg taxes on cigarettes would mean that expenditure on cigarettes would look artificially high if measured at the market price of cigarettes. In the UK the present price of a packet is about 9 pounds. But this is not the true value of the output produced because much of this price is due to taxation (wine in Indonesia is similar) Therefore to get to the true cost of the output (The factor cost) we have to take away the taxation. GDP at market prices-indirect taxes (+subsidies)=GDP at factor cost

Measuring National Income Copyright P Oldfield GDP measured by the Income method GDP is the sum of the final incomes earned through the production of goods and services Only factor incomes generated through the output of goods and services are included in the calculation of GDP by the income We exclude from the accounts:  Transfer payments (e.g.welfare payments and charity handouts)  Private Transfers of money from one individual to another  Income that is not declared to the tax authorities

Measuring National Income Copyright P Oldfield GDP by Output method This measures the value of output produced by each industry using the concept of final output. So output of steel is not included as it is included in the cost of the car. We use these approaches to avoid the problems of double- counting the value of intermediate inputs Does not include output that is self produced eg housewife or even charity work

Measuring National Income Copyright P Oldfield GDP and GNP GDP is only concerned with incomes generated within the geographical boundaries of the country. So output produced by Ford in China counts towards Chinese GDP but some of the profits made by Ford here are sent back to US – adding to their GNP GNP = GDP + Net property income from abroad (NPIA) NPIA is the net balance of interest, profits and dividends (IPD) coming into say Indonesia from Indonesian assets owned overseas matched against the flow of profits and other income out of Indonesia from foreign owned assets located within Indonesia.

Measuring National Income Copyright P Oldfield Money GDP and Real GDP (UK Data) The nominal value of GDP at current prices has grown each year – In monetary terms, national output at the end of 2000 was 31% higher than at the start of 1995 But some of this is simply the result of higher prices in the economy Making an adjustment for inflation (shown in the table below by the increase in the general price index) gives a figure for real GDP expressed at constant 1995 prices.

Measuring National Income Copyright P Oldfield Difference between GDP and GDP per capita China has the 2 nd largest GDP of any country, therefore it must be the 2 nd richest country? No! Because in order to measure the standard of living in a country you need to divide the GDP by the population to see on average, the income per person. This is known as GDP per capita. Remember if population is increasing by 5% per year, so must GDP, just to keep the standard of living constant.

Measuring National Income Copyright P Oldfield GDP and Green GDP GDP measures the total economic output in a country irrespective of whether it is beneficial or not. Eg cleaning up an oil spill is economic activity so is measured in GDP, but it would have been better if it never happened in the first place. Equally if we destroy a rainforest to plant palm trees for palm oil, there is only the measurement of the output of palm oil. Critics have pointed to the fact that we need to measure the negative effects of economic growth and therefore: Green GDP= GDP-the value of economic degradation/damage

Measuring National Income Copyright P Oldfield Gross and Net Figures (not in IB syllabus) Sometimes (but rarely ) you may see Net National Product figures. This figure is the same as GNP except that depreciation (or capital consumption ) has been deducted. This it is argued is a truer reflection of the net increase in income of a country as if there is a lot of depreciating assets these have to be replaced before any real increase in income is seen