Download Measuring National Income

Measuring National Income
GDP: Gross domestic product is the total goods and services produced within the borders
of one nation for a year. There are three ways of measuring GDP: Income, expenditure,
and output.
Expenditure: It is calculated by C+I+G+NX or, consumption, capital investment,
government spending, and net exports.
Income: Adds up all income, salaries, wages, interest earned and totals it up to a
grand national income.
Output: Accounts for all the literal goods and services produced and output in an
economy.
GNP: Gross national product is the total amount of goods and services produced or
owned by members of one nation, regardless of location, for one year.
Circular Flow—a model designed how capital cycles through an economy, between
producers and consumers.
Factor
Market
Businesses
Households
Product
Market
Differences Between:
I.
Gross and Net
a. Gross is the amount of revenue that is earned from a transaction.
b. Net is that revenue minus the costs of production, such as materials,
manpower, etc.
II.
Nominal and Real
a. Nominal amounts (nominal GDP, nominal wage, etc.) refer to the
amounts paid or earned in terms of currency.
b. Real amounts are changed to take inflation into account. This
adjustment indicates the actual value of amount in the transaction, in
terms of other indicators, such as purchasing power.
III.
Total and Per Capita
a. Total income refers to all of the revenue earned in a given time. (Total
wages paid by a company, GDP)
b. Per capita income refers to the total income divided by all of the
members of that group. It is the average income per person in a nation
or company. For example, if Nation A’s GDP is $1,000 and it has 10
members, the GDP per capita would be $100.
3.2
Introduction to Development
Economic Growth and Economic Development
Economic Growth is when the output of an economy increases. This is measured through
increases in Real GDP. Human Capital and Physical Capital typically play a major role in
causing economic growth.
Economic Development is when the quality of a nation’s standard of living grows better.
Improved health care and education systems contribute to this.
Economic Growth is measured as a quantitative piece of data while Development is
qualitative.
Gross Domestic Product vs. Gross National Product
Gross Domestic Product is the amount of output produced within a country’s boundaries.
Gross National Product is the amount of output produced by the citizens of a country.
Gross Domestic Product can be deceptive in measuring a nation’s economic growth
because the GDP data would include the output of foreign companies working in the
countries. These companies don’t serve to improve standard of living so they don’t
contribute to Economic Development.
Gross National Product increases do not certainly signify improvements in
Economic Development. If a U.S. worker is producing more, their company could
still be outsourcing jobs for cheap labor in a foreign nation.
Limitations of GDP
-
Differences in the wealth of each nation are not accounted for.
-
The effects of negative externalities are not accounted for.
Only encompasses improvements in quantity and does not include qualitative
improvements in goods.
Allowance for Differences in Purchasing Power
-
Exchange Rates cause different prices for the same good being sold in different
nations. For example, a basket in Mexico costs five pesos but those five pesos
could buy 90 baskets in Cuba.
Alternative Methods of Measuring
The Human Poverty Index- The percentage of a nation’s population that is living in
poverty.
The Human Development Index- Developed by the United Nations and encompasses a
nation’s standard of living, life expectancy, and education standards.
Genuine Progress Index- Aims to measure the happiness and safety of a nation’s citizens
rather than production rates.
Problems in measuring Development
-
Illegal systems of trade and production such as Black Markets or Secret
Sweatshops.
Once again a nation’s wealth and perspective on it is not accounted for. The GDP
or GNP for the U.S. may be far greater than that of Chile. Yet, Chile is at a greater
disadvantage in wealth and thus, the comparison in development between the two
is unfair.