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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
•
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
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?
2006
2005
World economy
European Union
44,433,002
13,446,050
•
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
Aggregate
Demand
Learning Objectives
To understand the term aggregate demand
To know the components of aggregate demand
Previously on Macroeconomics
Households
Government
Spending
Saving
Tax
Output
(O)
Government
Income
(Y)
Factors of
Production
Banks
Expenditure
(E)
Tax
Investment
Government
Spending
Firms
Exports
Foreign
Countries
Imports
What determines the level of expenditure?
Aggregate demand
Total 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
I
G
X
M
Consumption (consumer spending)
Investment (expenditure by firms on capital goods)
Government spending
Exports
Imports
Calculating AD
AD = C + I + G + (X – M)
Where:
C
I
G
X
M
= Consumption
= Investment
= Government spending
= Exports
= 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 factor
You will have next lesson as independent study to prepare
Home Learning
Use the next lesson to
prepare your group
presentations