03.1 measuring national income

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AS Economics PowerPoint Briefings 2006 PowerPoint Briefings 2006 Tutor2u Tutor2u & Mrs G & Mrs G Measuring National Income AS Economics

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Page 1: 03.1 Measuring National Income

AS EconomicsPowerPoint Briefings 2006PowerPoint Briefings 2006

Tutor2u Tutor2u & Mrs G& Mrs G

Measuring National Income

AS Economics

Page 2: 03.1 Measuring National Income

Tutor2u Tutor2u & Mrs G& Mrs G

What is National Income?

• National income measures the total value of goods and services produced within the economy over a period of time

• National Income can be calculated in three main ways

• 1. The sum of factor incomes earned in production

• 2. Aggregate demand for goods and services

• 3. The sum of value added from each productive sector of the economy

Page 3: 03.1 Measuring National Income

Tutor2u Tutor2u & Mrs G& Mrs G

Why is national income important?

• Measuring the level and rate of growth of national income (Y) is important to economists when they are considering:

– Economic growth and where a country is in the business cycle

– Changes to average living standards of the population

– Looking at the distribution of national income (i.e. measuring income and wealth inequalities)

Page 4: 03.1 Measuring National Income

AS EconomicsPowerPoint Briefings 2006PowerPoint Briefings 2006

Tutor2u Tutor2u & Mrs G& Mrs G

Your task

Put the following economies into a rank of size from largest to smallest for the top 10….latest statistics is for 2006.

Page 5: 03.1 Measuring National Income

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Not all of these are obviously in the top 10!

• Australia

• Belgium

• Brazil

• Canada

• France

• Germany

• India

• Italy

• Japan

• Mexico

• Netherlands

• People's Republic of China

• Russia

• Saudi Arabia

• South Korea

• Spain

• Sweden

• Switzerland

• Turkey

• United Kingdom

• United States

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Countries with largest GDP in 2005

Country GDP (millions of USD)

World economy 44,433,002

European Union 13,446,050

1 United States 12,485,725

2 Japan 4,571,314

3 Germany 2,797,343

4 People's Republic of China 2,224,811

5 United Kingdom 2,201,4736 France 2,105,864

7 Italy 1,766,160

8 Canada 1,130,208

9 Spain 1,126,565

10 South Korea 793,070

11 Brazil 792,683

12 India 775,410

13 Mexico 768,437

14 Russia 766,180

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Has the world economy grown or shrunk over this period?

2005World economy 44,433,002European Union 13,446,050

2006• Gross world product

48,245,198

• European Union 14,609,836

Page 9: 03.1 Measuring National Income

Tutor2u Tutor2u & Mrs G& Mrs G

Gross Domestic Product (GDP)

• GDP measures the value of output produced within the domestic boundaries of the UK

• GDP includes the output of the foreign owned firms with production plants located in the UK

• There are three ways of calculating GDP - all of which should sum to the same amount since by identity:

• National Output = National Expenditure = National Income

• Under the new definitions introduced in 1998, GDP is now known as Gross Valued Added

Page 10: 03.1 Measuring National Income

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Aggregate Demand (AD)

• AD is the sum of the final expenditure on UK produced goods and services 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

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Aggregate Demand Data for the UK£ billion at constant 2002 prices

C G I Stocks X M AD

1996 552.9 183.2 128.6 1.9 209.9 198.3 880.9

1997 572.8 182.3 137.1 4.0 227.2 217.7 908.7

1998 595.7 184.3 154.9 4.9 234.2 237.9 938.1

1999 622.1 191.6 158.1 6.4 244.2 256.7 966.6

2000 650.4 198.6 163.7 5.3 266.5 279.8 1005.5

2001 670.1 202.0 167.6 6.2 274.3 293.2 1027.9

2002 693.4 211.0 172.6 2.9 274.9 306.5 1048.5

2003 711.1 220.4 172.6 4.6 278.2 312.0 1074.9

2004 736.5 227.4 181.5 5.9 291.0 333.0 1109.1

2005 749.9 232.1 187.5 2.7 306.0 348.9 1129.2

So which ‘stock’

makes up the

largest % of AD?

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GDP by Factor Income

• GDP is the sum of the final incomes earned through the production of goods and services

• The main factor incomes are as follows:– Income from employment and self-employment

– Profits of commercial companies

– Rental income from the ownership of property

• = Gross Domestic product (by factor income)

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GDP by Factor Income (2)

• 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. the state pension, income

support and the Jobseekers’ Allowance)

– Private transfers of money from one individual to another

– Income that is not registered with the Inland Revenue

– There is a sizeable shadow economy in which income and spending is generated but no tax is declared

– The shadow economy may be as high as 10% of the UK’s annual GDP

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Welfare benefits

• Welfare benefits are excluded from the income approach to calculating national income

• This is because welfare benefits are simply transfers rather than a reward for factors of production

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GDP by Value Added from each Sector

• This measures the value of output produced by each industry using the concept of value added

• Value added is the difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage

• We use this approach to avoid the problems of double-counting the value of intermediate inputs

• We try to calculate the value added at each stage of the supply chain

• This is difficult when production is complex

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Sectors of the economy

Page 17: 03.1 Measuring National Income

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GDP and GNP

• Gross National Product (GNP) measures the final value of output or expenditure by UK owned factors of production whether they are located in the UK or overseas

• Output produced by Nissan in the UK counts towards our GDP but some of the profits made by Nissan here are sent back to Japan – 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 the UK from UK assets owned overseas matched against the flow of profits and other income from foreign owned assets located within the UK

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GDP and GNP

• GDP is the value of output produced by factors of production located within a country

• Output produced by a country’s citizens, regardless of where the output is produced, is measured by gross national product (GNP)

• For the UK, GNP is higher than GDP

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Limitations of national income data

• Each method of estimating GDP is imprecise leading to inaccuracies in the published figures

• Non-marketed output e.g. DIY, the value of housework and voluntary activities are not yet part of official NY figures

• Undeclared economic activity eg shadow or informal economy is excluded from official NY figures

• Transfer payments are excluded ie benefit payments received with no corresponding output eg unemployment and child benefits

• Double counting. In the output method of calculating GDP we ignore intermediate output and count only value added – but this is done by using a sample of firms from each industry and calculating value added can be difficult

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Shadow economy….

• According to the Institute for Fiscal Studies (2001) more than £124 billion of goods and services (13% of GDP) is undeclared to the government resulting in lost tax revenue.

• GDP underestimates value added in the construction industry, second hand cars and personal services eg home help.

• The shadow economy has grown very rapidly over the last thirty years and it is a phenomenon that is common to many countries

Page 21: 03.1 Measuring National Income

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GDP and the standard of living

• Once GNP has been calculated it is– Converted into US dollars at the official exchange

rate – Divided by the country population

• This gives an average figure for GNP per head

• The standard of living refers to the amount of goods and services consumed by households in one year and is found by applying the equation: – Standard of living = Real national income/Population

• A high standard of living means households consume a large number of goods and services

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Caution… just because an economy has a high GDP… it can still have high elements of poverty.

Page 23: 03.1 Measuring National Income

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Uk statistics ….June 2007

Page 24: 03.1 Measuring National Income

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GDP per capita in 2004

GDP per capita

Luxembourg 57 704 EU15 28 741

United States 39 732 Germany 28 605

Norway 38 765 Italy 27 699

Ireland 35 767 Spain 25 582

Switzerland 33 678 Korea 20 907

United Kingdom 31 436 Czech Republic 18 467

Canada 31 395 Hungary 15 946

Australia 31 231 Slovak Republic 14 309

Sweden 30 361 Poland 12 647

Japan 29 664 Mexico 10 059

France 29 554 Turkey 7 687

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Percent poverty world map

Page 27: 03.1 Measuring National Income

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HDI – Human Development Index

• Read through article

• Use ICT – investigate the website

• http://hdr.undp.org/statistics/data/

• Try to work out why a GDP’s ranking is not always its HDI order

• Which country has the highest HDI? WHY?

• Which country has the lowest HDI? WHY?

• Where is the UK ranked for its HDI? WHY?

Page 28: 03.1 Measuring National Income

Tutor2u Tutor2u & Mrs G& Mrs G

Homework….

• Textbook…. Yes that orange thing!

• Read unit 25

• P158 – do Q 3 & Q4

• Make notes on comparing NI over time & with other countries….