AS Economics

PowerPoint Briefings 2006

Measuring National Income

AS Economics

Tutor2u &
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

Tutor2u &
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)
Tutor2u &
Mrs G
 AS Economics
PowerPoint Briefings 2006

Your task

Put the following economies into a rank of size from largest to

smallest for the top 10….latest statistics is for 2006.
Tutor2u &
Mrs G
 Not all of these are obviously in the top 10!

• Australia • Netherlands
• Belgium • People's Republic of China
• Brazil • Russia
• Canada • Saudi Arabia
• France • South Korea
• Germany • Spain
• India • Sweden
• Italy • Switzerland
• Japan • Turkey
• Mexico • United Kingdom
• United States

Tutor2u &
Mrs G
 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
Tutor2u & 14 Russia 766,180
Mrs G
Tutor2u &
Mrs G
 Has the world economy grown or shrunk over
this period?

2005 2006
• Gross world product
World economy 44,433,002
European Union 13,446,050 48,245,198
• European Union 14,609,836

Tutor2u &
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
Tutor2u &
Mrs G
 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
Tutor2u &
Mrs G
 Aggregate Demand Data for the UK
£ billion at constant 2002 prices

So which C G I Stocks X M AD
‘stock’ 1996 552.9 183.2 128.6 1.9 209.9 198.3 880.9
makes up
the largest 1997 572.8 182.3 137.1 4.0 227.2 217.7 908.7
% of AD? 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

Tutor2u &
Mrs G
 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)

Tutor2u &
Mrs G
 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
Tutor2u &
Mrs G
 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
Tutor2u &
Mrs G
 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

Tutor2u &
Mrs G
 Sectors of the economy

Tutor2u &
Mrs G
 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

Tutor2u &
Mrs G
 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

Tutor2u &
Mrs G
 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

Tutor2u &
Mrs G
 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
Tutor2u &
Mrs G
 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
Tutor2u &
Mrs G
 Caution… just because an economy has a high
GDP… it can still have high elements of poverty.

Tutor2u &
Mrs G
 Uk statistics ….June 2007

Tutor2u &
Mrs G
 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
Tutor2u &
Mrs G
 GDP per capita of the world

Tutor2u &
Mrs G
 Percent poverty world map

Tutor2u &
Mrs G
 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?
Tutor2u &
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….

Tutor2u &
Mrs G