9 chapter: measuring national income

8/9/2019 9 Chapter: measuring national income

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Chapter 9

The Governmentand the national

economy


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Gross Domestic Product

Market value of all final goods andservices produced within a country.

Within geographical boundary GDP is measured in amount not innumbers.

P X Q Avoid double counting


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Gross National Product

Market value of all final goods andservices produced by countrys ownedfactors of production.

Income earned from abroad.(A) Income paid to abroad.(B)

Net property income from abroad(NPIA) = (A)-(B)


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Net National/DomesticProduct

Subtract depreciation of nationalcapital from GNP.

Wear and tear of capital depreciatethe value

Some part of GNP is required toreplace worn-out capital.


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Measuring the NationalIncome

Output: Total amount of goods andservices produced in a country.

Spending: Total amount ofexpenditure taking place in theeconomy.

Incomes: Total income generatedthrough production of goods andservices.


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Output Method

This measure of GDP adds togetherthe value of output produced by eachof the productive sectors in theeconomy using the concept of valueadded.


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Index of Gross Value Added by selected industry

Mining and

quarrying, inc

oil & gas

extraction

Manufacturi

ng

Constructio

n

Distribution,

hotels, and

catering;

repairs

Business

services

and

finance

2001 weights

in total GDP

(out of 1000)

28 172 57 159 249

2001 100 100 100 100 100

2002 100 97 104 105 102

2003 94 97 109 108 1062004 87 98 113 113 111


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Income Method:

Sum of income earned by factor ofproduction


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Exclude transfer payment

Transfer payments e.g. the statepension paid to retired people;income support paid to families onlow incomes.


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expenditure method

This is the sum of spending on produced goods and services measured atcurrent market prices

C: Household spending

I: Capital Investment spending

G: Government spending

X: Exports of Goods and Services

M: Imports of Goods and Services

Exclude taxes

Include subsidies


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If there are importsthose should be

excluded

Taxes on goods andServices should also

be excluded


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Measure of National Income


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Money National Income andreal National Income

Monetary National Income: When wecalculate the amount of goods andservices in monetary unit i.e. $ 100, this is

called monetary national income.


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Real National Income: When we calculatethe Physical amount of goods and servicesi.e. 10 tables & 20 chairs, this is called real

national income.

The value of this year's output at constant prices

Year Output Prices NationalIncome

($)

Changesin price

Changesin

quantity

2001 50,000 Rs. 20 1,000,000

2002 60,000 Rs. 40 1,800,000 50% 20%


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Measuring real national income fromnominal income

Find quantities of year 2001

Find national income of 2001 bymultiplying quantities of goods by priceof year 2000.

You will find real value of nationalincome

Year NationalIncome

Prices

2001 10,000 100

2002 15,000 140


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Reasons for measuringnational income

To provide government withessential information

To indicate changes in the standardof living

By measuring real income per head

Do not tell

how distribution of wealth is taken place

What types of products are sold

Social cost


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To compare the standards of living indifferent countries (based on commoncurrency)

Misleading because of: Difference of climate, taste and life style

Government expenditure pattern

Different working hours


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Circular flow of Income


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Circular flow of income(more realistic model)

Includes

Withdraw and injection of income in flow

Government and foreign trade sector


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Savings

Taxes

Imports

Households do notspend their whole

income so they save

part of it. It is leakage

in the income flow

Leakages


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Savings

Taxes

Imports

Government levies

taxes on income and

spending so these

withdraws areleakages in the flow

Leakages


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Savings

Taxes

Imports

Residents of country

buys some of the

foreign products so

money goes out of

income flow of

country,Leakages


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Savings

Taxes

Imports

Investments

Injections

Leakages

Government

spending

Exports

Investment on capital

goods. Firms borrow

money from banks

where consumers

have saved their

remaining income.


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Savings

Taxes

Imports

Investments

Injections

Leakages

Government

spending

Exports

Government buysgoods and services

from firms.


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Savings

Taxes

Imports

Investments

Injections

Leakages

Government

spending

Exports When firms sell their

products to foreign

countries then moneyfrom outside to inside.


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Government

spending onservices

Government

employees many

people from thecountry and gives

them income and

wages.


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Government

spending onservices

Government

employees many

people from thecountry and gives

them income and

wages.

Savings

Taxes

Imports

Leakages

Injection


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Economics policy

Economics objectivesof government and theways in which it tries

to achieve thoseobjectives


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Instruments of economicpolicy

Methods that government uses toachieve economic objectives

1.Fiscal policy

2.Monetary policy

3.Direct control

4.Public ownership


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1. Fiscal Policy

Use of government expenditure andrevenue collection to influence theeconomy.

Controlling rate of taxes

Budget


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2. Monetary Policy

Government influences interest rateand controlling banks ability to makeloans.

Controlling supply of money.


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3. Direct controls

Legal control over wages, prices andrents.

Granting types and number ofbuildings etc.


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4. Public ownership

Nationalizing industries

Heavy investments in differentsectors

Influence cost of production.


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End of chapter

9 chapter: measuring national income

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