MEASURING NATIONAL INCOME. Unit 5 Theory and measurement in the macroeconomy

Transcription

1 MEASURING NATIONAL INCOME Unit 5 Theory and measurement in the macroeconomy

2 We need information on how much spending, income and output is being created in an economy over a period of time. National income data gives us this information

3 To measure how much output, spending and income has been generated in a given time period we use national income accounts. These accounts measure three things: 1. Output: i.e. the total value of the output of goods and services produced in an economy. 2. Spending: i.e. the total amount of expenditure taking place in the economy. 3. Incomes: i.e. the total income generated through production of goods and services.

4 What is National Income? National income measures the monetary value of the flow of output of goods and services produced within an economy over a period of time. Measuring the level and rate of growth of national income (Y) is important to economists when they are considering: The rate of economic growth Changes over time to the average living standards of the population Changes over time to the distribution of income between different groups within the population (i.e. measuring the scale of income and wealth inequalities within society)

5 Gross Domestic Product (GDP) Measures the value of output produced within the domestic boundaries of an economy over a given time period. Includes the output of foreign owned businesses that are located in an economy following foreign direct investment. For example the output of motor vehicles produced at the giant Nissan car plant on Tyne and Wear and by the many foreign owned restaurants and banks all contribute to the UK s GDP.

6 Calculating GDP There are three ways of calculating GDP - all of which should sum to the same amount since the following identity must hold true: National Output = National Expenditure (Aggregate Demand) = National Income

7 The Expenditure Method of calculating GDP (aggregate demand) This is the sum of spending 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) where C: Household spending I: Capital Investment spending G: Government spending X: Exports of Goods and Services M: Imports of Goods and Services

8 The Income Method of calculating GDP Sum of the incomes earned through the production of goods and services. Income from people in employment and in selfemployment + Profits of private sector companies + Rent income from land = Gross Domestic product (by factor income) Only incomes generated through the production of output of goods and services are included.

9 Output Method of calculating GDP using the concept of value added Sum of the value of output produced by each of the productive sectors in the economy using the concept of value added. Value added is the increase in the value of a product at each successive stage of the production process. We use this approach to avoid the problems of double-counting the value of intermediate inputs.

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11 GDP and GNP (Gross National Product) 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. In contrast, Gross Domestic Product (GDP) is concerned only with the factor incomes generated within the geographical boundaries of the country. So, for example, the value of the output produced by Toyota and Deutsche Telecom in the UK counts towards our GDP but some of the profits made by overseas companies with production plants here in the UK are sent back to their country of origin adding to their GNP. GNP = GDP + Net property income from abroad (NPIA)

12 Measuring Real National Income When we want to measure growth in the economy we have to adjust for the effects of inflation. Real GDP measures the volume of output produced within the economy. An increase in real output means that AD has risen faster than the rate of inflation and therefore the economy is experiencing positive growth.

13 Income per capita GDP per capita $s GDP per capita $s Luxembourg EU (established 15 countries) United States Germany Norway Italy Ireland Spain Switzerland Korea United Kingdom Czech Republic Canada Hungary Australia Slovak Republic Sweden Poland Japan Mexico France Turkey 7 687

14 Any price index.. Measures the price of a specially selected basket of goods and services. A basket of goods in a given year is compared to the price of the same collection of goods and services in a base year.

15 The GDP deflator Measures the combined price of a particular collection of goods and services that make up the GDP. The Inflator helps to adjust the nominal GDP to a real GDP figure

16 Nominal GDP vs real GDP Nominal GDP Reflects the current price level of goods and services. Nominal GDP ignores the effect of inflation on he growth of GDP.

17 Nominal GDP vs real GDP Real GDP Measures the value of goods and services adjusted for changes in the price level. Reflects the real changes in output.

18 Adjusting GDP GDP PRICE INDEX Price index in a given year = Price of basket of goods in a specific year X 100 Price of same basket of goods in base year Real GDP = Nominal GDP Price index (in hundredths)

19 Nominal Vs Real GDP Year Units of output Price per unit ($) Price index Nominal GDP ($) 1 (base) ??? ??? ??? ??? Real GDP ($)

20 Nominal Vs Real GDP Year Units of output Price per unit ($) Price index Nominal GDP ($) 1 (base) Real GDP ($)

21 The Consumer Price Index (CPI) A measure of average change over time in the price paid by consumers for a basket of consumer goods and services. GDP deflator converts nominal GDP to real GDP Changes in the CPI are designed to measure the rate of inflation