AS Economics

Measuring National Income

AS Economics

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

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)

AS Economics

Your task

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

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

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 2,201,473

6 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

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

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

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

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)

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

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

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

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

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

AS Economics

AggregateDemand

Learning ObjectivesTo understand the term aggregate demandTo know the components of aggregate demand

ForeignCountries

Previously on Macroeconomics

Factors of Production

Output(O)

Households

Firms

Income (Y)

Expenditure (E)

Saving

Banks

Investment

Tax

GovernmentSpending

Government

Tax

Government Spending

ImportsExports

What determines the level of expenditure?

Aggregate demandTotal planned expenditure on goods & services in a given period of time (sound familiar?)

AD is the total amount of demand in an economy

AD has five components (five factors that determine the level of AD):

C Consumption (consumer spending)

I Investment (expenditure by firms on capital goods)

G Government spending

X Exports

M Imports

Calculating AD

AD = C + I + G + (X – M)Where:

C = Consumption

I = Investment

G = Government spending

X = Exports

M = Imports

Understanding the Components of AD

You will now work in small groups to prepare a 10 minute presentation on how one component contributes to the overall level of AD C Consumption Group 1

I Investment Group 2

G Government spending Group 3

X Exports Group 4

M Imports Group 5

Prepare a 10 minute presentation that explains how your factorYou will have next lesson as independent study to prepare

Home Learning

Use the next lesson to prepare your group presentations