What is National
Income?
National income measures the monetary
value of the flow of output of goods and services produced in an economy
over a period of time.
Measuring the level and rate of growth of national
income (Y) is important for seeing:
- The
rate of economic growth
- Changes
to average living standards
- Changes
to the distribution of income between groups within the population
- Gross
domestic product (GDP) is the total value of output in an economy
- GDP
includes the output of foreign owned businesses that are located in a
nation following foreign direct investment. For example, the output
produced at the Nissan car plant on Tyne and Wear contributes to the UK’s GDP
National Output = National Expenditure (Aggregate
Demand) = National Income
(i) The Expenditure Method - aggregate demand (AD)
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
C: Household spending
I: Capital Investment spending
G: Government spending
X: Exports of Goods and Services
M: Imports of Goods and Services
The Income Method – adding together factor incomes
GDP is the sum of the incomes earned through the
production of goods and services. This is:
Income from people in jobs and in self-employment
+
Profits of private sector businesses
+
Rent income from the ownership of land
=
Gross Domestic product (by factor incomes)
+
Profits of private sector businesses
+
Rent income from the ownership of land
=
Gross Domestic product (by factor incomes)
Only those incomes that are come from the
production of goods and services are included in the calculation of GDP by the
income approach. We exclude:
- Transfer
payments e.g. the state pension; income support for families on low
incomes; the Jobseekers’ Allowance for the unemployed and other welfare
assistance such housing benefit
- Private
transfers of money from one individual to another
- Income
not registered with the tax authorities Every
year, billions of pounds worth of activity is not declared to the tax
authorities. This is known as the shadow economy.
- Published
figures for GDP by factor incomes will be inaccurate because much activity
is not officially recorded – including subsistence farming and barter
transactions
Value Added and Contributions to a nation’s GDP
- There
are three main wealth-generating sectors of the economy – manufacturing
and construction, primary (including oil & gas, farming, forestry
& fishing) and a wide range of service-sector industries.
- This
measure of GDP adds together 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
goods or services as a result of the production process
Value added = value of production - value of
intermediate goods
Say you buy a pizza from Dominos at a price of £9.99. This is the retail price and will count as consumption. The pizza has many ingredients at different stages of the supply chain – for example tomato growers, dough, mushroom farmers and also the value created by Dominos as they put the pizza together and deliver to the consumer.
Some products have a low value-added, for example
cheap t-shirts that you might find in a supermarket for little more than £5.
These are low cost, high volume, low-priced products.
Other goods and services are such that lots of
value can be added as we move from sourcing the raw materials through to the
final product. Examples include designer jewellery, perfumes, meals in
expensive restaurants and sports cars. And also the increasingly lucrative
computer games industry.
GDP by output – the distribution of GDP from
different industries
The UK is an economy where the majority of GDP
comes from the service industries such as banking and finance, tourism,
retailing, education and health. In 2008 less than half of one per cent of our
GDP came from agriculture. Manufacturing accounted for less than 15 per cent of
GDP and construction a further 6 per cent. In contrast, the service industries
now contribute nearly three quarters of national income.
Manufacturing and service industries are not
separate! For example the health of a car exporting business will have a direct
bearing on demand, output, profits and jobs in many service businesses such as transportation,
design, marketing and vehicle retailing. Equally service businesses such as
online banking require plenty of physical inputs such as machinery and infrastructure to be successful.
The main service sector industries in the UK
are:
- Hotels
and restaurants, and a range of services provided by local government
- Transport,
logistics, storage and communication
- Business
services and finance, motor trade, wholesale trades and retail trade
- Land
transport and air transport, post and telecommunications
- Real
estate activities, computer and related activities, Education, Health and
social work
- Sewage
and refuse disposal
- Recreational,
cultural and sporting activities
The Share of National Output (GDP) for the UK
Economy
Notice in the chart above how there are long-term
shifts in the value added from the three main sectors – the pattern of GDP
depends on many factors including the stage of a country’s development and the
extent to which a nation has built up industries of competitive advantage in
the world economy.
Gross National Income (GNI)
- Gross
National Income (GNI) measures the final value of incomes flowing to UK owned
factors of production whether they are located in the UK or overseas.
- Gross
Domestic Income is concerned only with the incomes generated within the
geographical boundaries of the country. Fr example the value of the output
produced by Toyota 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.
GNI = GDP + Net property income from abroad (NPIA)
- NPIA is the
net balance of interest, profits and dividends (IPD) coming into
the UK from our assets owned overseas matched against the flow of profits
and other income from foreign owned assets located within the UK.
- There
has been an increasing flow of direct investment (FDI) into and out of the
UK. Many foreign firms have set up production plants here whilst UK firms
have become multinational organisations.
Nominal and Real - 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. An increase in real output
means that AD has risen faster than the rate of inflation and therefore
the economy is experiencing positive growth. Consider this example
The money value of a country’s GDP is calculated to
be $4,000m in 2007
In 2008, the money value of GDP expands to $4,500m
but during the year, inflation is 3% causing the general index of prices to
rise from a 2007 base year value of 100 to 103 in 2008.
The real value of GDP in 2008 is calculated thus:
Real GDP = money value of GDP in 2008 x 100 /
general price index in 2008
= £4,500 x 100/103 = $4,369 (measured at constant
2007 prices)
Note here that the real GDP data is expressed at
constant prices which mean that we have made an inflation
adjustment. Look for this in the data response questions in the exam.
Total and Per Capita – Measuring Income per capita
How much does each person earn on average? We use
per capita measures to give us a guide to this. Income per capita is a
way of measuring the standard of living for the
inhabitants of a country.
Gross National Income per capita = Gross National
Income / Total Population
Our next chart shows two pieces of economic data
- The
level of UK gross national income (GNI) which has been expressed in real
terms (i.e. it is inflation adjusted) and is measured in pounds sterling
- The
annual rate of change of real gross national income measured in percentage
terms
The chart shows that real incomes per head of the
population have risen over the years, i.e. average living standards have
improved but that the rate of improvement is not uniform each year. We see that
economic growth in the UK fluctuates from year to year, i.e. there is an
economic cycle with periodic recessions (where the value of real national
income declines.)
Real Gross National Income for the UK Economy –
During the recession (2008 to 2009) GDP per head decreased by 5.5 per cent
During the recession (2008 to 2009) GDP per head decreased by 5.5 per cent
Remittances and Gross National Income
Remittances are transfers of money across
national boundaries by migrant workers. Despite a dip because of the global
recession, remittance flows have grown in the world economy over the
longer-term as the scale of migration between countries has grown. For many
developing countries, money coming in from remittances is an importance source
of income.
Using data from the World Bank, for the world as a whole in 2010:
Using data from the World Bank, for the world as a whole in 2010:
- Stock
of immigrants: 215.8 million or 3.2 percent of population
- Females
as percentage of immigrants: 48.4 percent
- Refugees:
16.3 million or 7.6 percent of the total immigrants
Top 10 remittance recipients in 2010 (billions):
India ($55.0bn), China ($51.0bn), Mexico ($22.6bn), Philippines ($21.3bn),
France ($15.9bn), Germany ($11.6bn), Bangladesh ($11.1bn), Belgium ($10.4bn), Spain
($10.2bn), Nigeria ($10.0bn)
Top 10 remittance recipients in 2009 (percentage of
GDP): Tajikistan (35.1 percent), Tonga (27.7 percent), Lesotho (24.8 percent),
Moldova (23.1 percent), Nepal (22.9 percent), Lebanon (22.4 percent), Samoa
(22.3 percent), Honduras (19.3 percent), Guyana (17.3 percent), and El Salvador
(15.7 percent)
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