NIA

National Income

Measures the total value of an economy’s final output of goods and services in a year

• Important as it provides insights to (a) how much goods and services has the economy produced to meet wants of her people; (b) how well the economy is doing compared over time/over space; (c) What policies are required to better fulfil macroeconomic goals

Gross Domestic Product (GDP)

(of a nation) the total market value of all final goods and services newly produced within the geographical boundaries of a country during a specified period of time, usually one year

• Only concerned with income generated, regardless of ownership of Factors of Production (FOP)

Gross National Product (GNP)

The market value of all final goods and services newly produced during a specified period, usually one year, by productive factors owned by residents of the country, irrespective of where these factors are located.

National Property Income from Abroad (NPIA)
The difference between the property income received from abroad and the factor income paid abroad.

• GNP = GDP + NPIA
• NPIA does not include wages
• National Factor Income  from Abroad = Wages, Rents, Interests, Profits

Market Price vs Factor Cost

Market Price: The value of the output at the shop level/ the prices purchases have to pay for the goods & services sold on the organised market

Factor Cost: What the factors of production received for the goods and services produced

May diverge due to indirect taxes and subsidies

• Indirect  taxes raise market Px
• Subsidies lower market Px
• GDP (Mkt Px) – Indirect tax + subsidies = GDP (FC)

Gross vs Net Product

• Capital consumption/ capital depreciation: where there is a loss in value of physical assets due to wear and tear and obsolescence
• GNP – Depreciation = Net NP

National Income

• NY = NNP(FC) = NNE(FC) = NNI(FC)
• NNP is a better indicator than GNP, but we use GNP because it is difficult to ascertain accurately the value of capital consumption
• Summary Equations
• GDP(MP) + NPIA = GNP(MP)
• GNP(MP) – Indirect tax + subsidy = GNP (FC)
• GNP (FC) – Depreciation = NY = NNP(FC) = NNE(FC) = NNI(FC)

Circular Flow of Income

• Households (Resource owner) >consumer expenditure on goods and service> Firms (Producers) >Factor Income (WRIP)> Households (Resource owner)
• Households (Resource owner) >Factor services> Firms (Producers) >Goods and services> Households (Resource owner)
• Output = Expenditure = Income
• NY thus calculated by: (a) Product/Output Method; (b) Expenditure Method; (c) Income Method

Real vs Nominal GNP

• GNP at current Px/ Nominal GNP: value of the output measured at prevailing or current Px (Both px & Qty components)
• GNP at constant Px/ Real GNP: level of output in terms of physical Qty (Effects of Px changes have been removed)

Difficulties in Measuring National Income

1. Arbitrary Definitions

• Definition of what is included in NY may vary from country to country
• Barter trade is un-priced, but imputed value has to be derived to be included in NY

2. Imputation of values

• Arises in the following cases (a) owner-occupied housing; (b) employees’ remuneration-in-kind such as food, lodging etc; (c) goods consumed by the producers’ themselves; (d) service of buildings owned and occupied by public authorities
• Difficult to find satisfactory basis for valuation

3. Omission in Measurement of NY

• Includes (a) non-marketed activities; (b) illegal activities; (c) unreported activities (black economy)
• Understates the nation’s output

4. Difficulty in obtaining reliable and complete information

• Sources not designed specifically for NY calculation

5. Difficulty in calculating depreciation

• Measurement of depreciation is difficult and arbitrary (usual to use GNP/GDP rather than NNP/NDP)

6. Danger of double counting

• Arises because of difficulty in distinguishing between (a) final and intermediate products; (b) earned and transferred incomes

Uses of National Income statistics

1. To indicate the overall Standard of Living (SOL) of people in a country

• SOL refers to the quantity of life
• Includes material and non-material well-being
• Material well-being: Refers to quantity and quality of goods and services
• Non-material well-being: Includes working hours, stress level, pollution level
• No universal acceptable definition on SOL
• Use Real per capita = (Real GNP / Population), where (Nominal Money GNP / GNP Deflator) *100 = Real GNP
• Compared over time

2. To measure the rate of economic growth

• Outward shift of PPC
• Achieved through increasing labour productivity, net investment or tech advancement
• Measured in terms of percentage increase in country’s real GNP/GDP

3. To calculate rate direction in which NY is growing

• Output method shows the contribution by various sectors
• Enable policy-makers to arrest undesirable trends

4. Indicate distribution of factor incomes among wage earners and property owners

• Show pattern of income distribution (Income method) among different categories

5. Assist government in formulating policies

• Achieve macroeconomic goals (internal)

6. Assist firms in their marketing and research

• Determine pattern of consumption

7. Assist international economic planning

• Useful in aid and assistance programmes planning.

Changes in NY over time and space

• Must be made with careful qualifications
• Essay Anti-thesis: Present examples where Increase Real GDP per capita, people not necessarily better off

Comparison over time

• Used to indicate rate of economic growth
• Enable comparison of SOL

Points to Note

1. Change in Price level

• Nominal GPD/GNP is misleading due to inflation
• Real GDP/GNP should be used

2. Change in Population

• Population growth affects SOL increase, Rate of change of population must be compared with rate of change of Y
• Use real GDP/GNP per capita

3. Composition of GNP

• NY measures output
• Poor indicator of consumption
• Current living standards only depend on consumption goods
• Investment goods only affect potential growth

4. Distribution of GNP

• GNP per captita may not be equitably distributed, therefore the average person may not be better off even if GNP per capita increases
• GINI coefficient (0-1), 0 = perfect equality, 1 = perfect inequality

5. Non-monetary transactions vs monetary ones

• NY only includes monetary transactions
• Non-monetary transactions converted to monetary will cause NY to increase
• Output not passing through market not counted, therefore NY understates output

6. Nature and Reliability of Data

• NY estimates are based on samples (e.g. Self-employed under-declare, income tax doesn’t cover lower income groups who do not pay income tax, etc.)
• Officials in developing countries may lack experience in collecting data

7. Other intangibles

• Environment, etc.
• Negative externalities (Pollution, congestion)
• Dis-amenities (longer working hours, stressful lifestyle)

Comparison over space

Points to note

1. Different accounting practices

• Different provision for depreciation
• Use “gross” concept of NY
• Excluded changes in inventory
• Value of inventory differs

2. Different size of monetised sector

• Most goods exchanged in organised market in developed countries, barter trade prevalent in developing countries, NY does not count non-monetised trade

3. Different currencies involved

• Usually converted to universally accepted currency (e.g. USD)
• Exchange rate may fluctuate (Manipulated by government, huge capital flows)
• Use Purchasing Power Parity (PPP: The amount of a certain basket of basic goods that can be bought in given country with the money it produces), which takes into account inflation rather than just nominal GDP comparison.

4. Difference in composition of NY

• Goods available for consumption differs
• Poor indicator of consumption
• Current living standards only depend on consumption goods
• Investment goods only affect potential growth

5. Difference in distribution of income

• Higher GDP per capita but lower living standard due to unequal distribution of income

6. Difference in external costs

• Higher output may be accompanied by higher negative externalities

7. Difference in work hours/leisure time

• Higher output may be accompanied by higher dis-amenities

8. Difference in availability/reliability of data

• Accurate vs inaccurate yields misleading results

Other Welfare Indicators

1. Net Economic Welfare (NEW)

• Adds certain non-monetised services
• Subtracts negative externalities/dis-amenities

2. Physical Quality of Life Index (PQLI)

• Includes Life expectancy, Literacy, Infant Mortality Rate (IMR)

3. Human Development Index (HDI)

• Includes Life expectancy, Literacy, gross enrolment ratio, GDP/capita

4. Happy Planet Index

5. Big Mac Index