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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 - PowerPoint PPT Presentation
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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