Macroeconomics For MBA

1. Measuring National Income

2. What is National Income?
• National income measures the money 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

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

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

5. Case Study
• The Nissan plant at Washington, Tyne and Wear is
celebrating its 20th anniversary in July 2006, the first car
having rolled off the line on July 8th, 1986. In that first year
of production 470 staff had a production target of 24,000
Bluebirds. Twenty years on, more than 4,200 employees
produce around 310,000 Micras, C+Cs, NOTEs, Almeras and
Primeras each year. That car has been followed by 4.3
million others thanks to a total investment of £2.3 billion.
Production is set to rise from 310,000 per year last year to
400,000 in 2007 with the introduction of a new small 4x4,
and Sunderland has been rated as Europe's most
productive car factory for the last eight years.
• Sources: Reuters News, Sunderland Echo, July 2006

6. The Expenditure Method of
calculating GDP (aggregate • C: Household spending
demand)
I: Capital Investment
spending
This is the sum of spending
on UK produced goods and G: Government spending
services measured at X: Exports of Goods and
current market prices. The
full equation for GDP using Services
this approach is
M: Imports of Goods and
GDP = C + I + G + (X-M)
Services

7. The Income Method of Here GDP is the sum of the incomes
calculating GDP (the Sum of earned through the production of goods
Factor Incomes) and services. The main factor incomes are
as follows:
Income from people employment and in
self-employment
• We exclude from the
accounts the following +
items: Profits of private sector companies
– Transfer payments e.g. +
the state pension paid to
retired people; income Rent income from land
support paid to families =
on low incomes; the
Jobseekers’ Allowance Gross Domestic product (by factor
given to the unemployed income)
and other forms of
welfare assistance It is important to recognise that only those
including child benefit incomes that are actually generated
and housing benefit
– Income that is not through the production of output of goods
registered with the Inland and services are included in the
Revenue or Customs and
Excise calculation of GDP by the income
– Private transfers of approach.
money from one
individual to another.

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

9. The table below shows indices of value added from various sectors of the economy in recent
years. We can see from the data that manufacturing industry has seen barely any growth at all
over the period from 2001-2004 whereas distribution, hotels and catering together with business
services and finance have been sectors enjoying strong increases in the volume of output. These
figures illustrate a process of structural change, with a continued decline in manufacturing
output and jobs relative to the rest of the economy. By far the largest share of total national
output (GDP) comes from our service industries.
Index of Gross Value Added by selected industry for the UK
Mining and Manufacturi Construction Distribution, Business
quarrying, ng hotels, and services and
inc oil & gas catering; finance
extraction repairs
2001 28 172 57 159 249
weights in
total GDP
(out of
1000)
2001 100 100 100 100 100
2002 100 97 104 105 102
2003 94 97 109 108 106
2004 87 98 113 113 111

10. We can see from the following chart how there have been divergences in the growth achieved by
the manufacturing and the service sectors of the British economy. Indeed by the middle of 2006,
the index of manufacturing output was below the level achieved at the start of 2000.
In contrast the service industries have enjoyed strong growth, leading to a continued process of
structural change in the economy – away from traditional heavy industries towards service
businesses.

11. • In contrast, Gross Domestic Product
GDP and GNP (Gross (GDP) is concerned only with the factor
National Product) incomes generated within the
geographical boundaries of the country.
So, for example, the value of the output
produced by Toyota and Deutsche
Gross National Product Telecom in the UK counts towards our
(GNP) measures the final GDP but some of the profits made by
value of output or overseas companies with production
expenditure by UK owned plants here in the UK are sent back to
factors of production
their country of origin – adding to their
GNP.
whether they are located
in the UK or overseas.
• GNP = 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.

12. Measuring Real National Income Income per capita
• When we want to measure • Income per capita is a basic
growth in the economy we way of measuring the
have to adjust for the average standard of living
effects of inflation. for the inhabitants of a
Real GDP measures the country. The table below is
volume of output produced taken from the latest
within the economy. An edition of the OECD World
increase in real output Factbook and measures
means that AD has risen income per head in a
faster than the rate of common currency for the
inflation and therefore the year 2005, the data is
economy is experiencing adjusted for the effects of
positive growth variations in living costs
between countries.

13. GDP per capita $s
GDP per capita $s
Luxembourg 57 704 EU (established 15 countries) 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
Source: OECD World Economic Factbook, 2006 edition

14. Conclution
• By international standards, the UK is a high-
income country although we are not in the very
top of the league tables for per capita incomes.
We do have an income per head that is about ten
per cent higher than the average for the 15
established EU countries. But we are some
distance behind countries such as the United
States (where productivity is much higher). And
Ireland’s super-charged growth over the last
twenty years means that she has now overtaken
us in terms of income-based measures of
standards of living.

15. Bibliography
• www.google.com
• www.wickipidea.com
• www.tutor2u.com
• Special thanks to Mitra Mam