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# AS Macro Revision National Income and Standard of Living

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• 1. AS Macro Revision National Income and the Standard of Living Spring 2014
• 2. We add new resources / links / articles every day to our Economics blogs Follow this link for the AS Macro Blog on Tutor2u www.tutor2u.net/blog/index.php/economics/categories/C59
• 3. What is meant by National Income? 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 (usually one year) Uses of National Income data • Measuring the level and rate of growth of national income (Y) is important for keeping track of: • The rate of economic growth (real GDP) • Changes to living standards (real GDP per capita) • Changes to the distribution of income between groups within the population
• 4. Gross Domestic Product (GDP) Gross domestic product (GDP) is the total value of national output produced in a given time period (normally one year) There are three ways of calculating GDP: National Output = National Expenditure (Aggregate Demand) = National Income
• 5. GDP – By Sum of Spending, Factor Incomes or Output GDP (Expenditure) • Consumption • Government spending • Investment spending • Change in value of stocks • Exports • - Imports • = GDP (or aggregate demand AD) GDP (Factor Incomes) GDP (Value of Output) • Income from people in jobs and in selfemployment (e.g. wages and salaries) • Profits of private sector businesses • Rent income from the ownership of land • Value added from each of the main economic sectors • These sectors are • Primary • Secondary • Manufacturing • Quarternary
• 6. Manufacturing Industries 1. The process or business of producing goods in factories. 2. The part of a company that is concerned with making goods, rather than designing or selling them The manufacturing sector accounted for 10% of UK economic output (Gross Value Added) in 2012 In 2013 there were 2.6 million jobs in the manufacturing sector, this was 8% of all jobs in the UK economy Food processing Earth moving equipment Additive manufacturing (3D)
• 7. Service Industries 1. Services are part of the tertiary sector of the economy 2. There are many different service industries – some focusing on business to business and others business to consumer products Hotels and restaurants & retail Education, health care, legal services Transport and logistics In 2012, the service sector accounted for 79% of UK economic output (Gross Value Added) and for 83% of jobs. In 2013 there were 27.1 million jobs in the service sector, 83% of all jobs in the UK
• 8. The Meaning and Importance of Value Added Value added is the increase in the market value of goods or services as a result of the production process. It excludes the costs incurred in supplying the output of a good or service. Value added = Value of production - Value of intermediate inputs Low Value Added Industries • Textiles • Processed foods • Farming • Manufacturing assembly • Social care High Value Added Industries • Information technology • Renewable energy • Life sciences • Aerospace • Bio-technology
• 9. Gross National Income (GNI) • GNP is GDP plus net income from overseas investments and remittances • Remittance money transfers are hugely important for some developing countries • Remittance flows to the developing world exceeded \$406bin in 2012 and \$450bn in 2013 Top countries for remittance income as % of GDP in 2012 Tajikistan (47% Liberia (31%) Lesotho (27%) Nepal (22%) Samoa (21%)
• 10. We add new resources / links / articles every day to our Economics blogs Follow this link for the AS Macro Blog on Tutor2u www.tutor2u.net/blog/index.php/economics/categories/C59
• 11. Measuring Real National Income (GDP) • Nominal GDP measures the value of national output at current prices with no adjustment for the effects of inflation • Real GDP measures the volume of output. It is adjusted for inflation and measured at constant prices • When economists are discussing economic growth they are referring to real GDP Turning nominal GDP into real GDP 1. Let the nominal (or money) value of UK GDP in 2013 be £1,400 bn 2. The price index for 2013 is 100 3. In 2014, the nominal value of GDP rises to £1450 bn 4. In 2014, price index rises to 103 Therefore .......Real GDP in 2014 = Nominal GDP x 100/price index in 2013 = £1,450 bn x 100/103 Real GDP = £1,408bn (expressed at constant 2013 prices)
• 12. Measuring National Income Per Capita Population estimates UK Population Forecast • In many countries, official population data is inaccurate • There has been a sharp rise in migrant flows • UK pop projected to increase by 9.6 million over the next 25 years • Projected population to reach 70 million in 2027 UK Population (Millions) 1980 56.3 1990 57.2 2000 58.9 2005 Per capita income • Per capita means income per head of population • = GDP / total population Year (Mid Year Figure) 60.2 2010 62.3 2013 63.6
• 13. Real GDP or GNI Per Capita – Purchasing Power Parity 1. Real GDP measures the value of national output at constant prices i.e. Adjusted for inflation 2. PPP stands for purchasing power parity 3. PPP measures how many units of one country’s currency are needed to buy exactly the same basket of goods and services as can be bought with a given amount of another country’s currency 4. In countries where the cost of living is relatively high, there will be a downward adjustment to a nation’s PPP-adjusted GDP or GNI per capita 5. PPP is an estimated figure and volatile exchange rates can have a big effect on real purchasing power of a given amount of currency e.g. \$100 in each country
• 14. Inaccuracies when Calculating GDP Published national income data is subject to errors in measurement • Official data on GDP understates real national income per capita due to the shadow economy and the value of unpaid work by volunteers and people caring for their family • The "shadow economy" includes illegal activities such as drug production and distribution, prostitution, theft, fraud and concealed legal activities such as tax evasion on otherwise-legitimate business activities such as un-reported self-employment income • Often official GDP data is inaccurate as many lower income countries do not update their reporting often enough, so their GDP numbers may miss large and fast-growing economic sectors, like cell phones
• 15. Measuring the Standard of Living (SoL) The base line indicator for standard of living is real GNI per capita (adjusted for purchasing power parity) – but this data hides........ • Regional variations in income and spending: • Inequalities in income and wealth • Changes in leisure and working hours and working conditions • Imbalances between consumption and investment • Changes in life expectancy • The value of non-marketed output, unpaid work • Innovation and the development of new products • The impact of growth on the stock of natural resources • Defensive expenditures - protecting against crime, or spending to clean up the effects of pollution and waste
• 16. Problems with using GDP to measure living standards Human Happiness Beyond Markets Externalities Quality of Life Non Market Activities Environmental Factors Black Market Sustainability Make up of GDP Informal Economy The Long Run View Balance of spending
• 17. Alternatives to Real GNI Per Capita as measure of SoL Many other published indicators and surveys are now available taking in economic, social, humanitarian and environmental aspects Happy Planet Index Genuine Progress Indicator OECD Better Life Index Human Development Index
• 18. We add new resources / links / articles every day to our Economics blogs Follow this link for the AS Macro Blog on Tutor2u www.tutor2u.net/blog/index.php/economics/categories/C59
• 19. Basics of Index Numbers 1. Index numbers are a useful way of expressing data time series and comparing / contrasting information 2. An index number is a figure reflecting price or quantity compared with a standard or base value 3. The base value always has an index number of 100 and the index number is expressed as 100 times the ratio to the base value 4. Note that index numbers have no units! Examples • FTSE-100 Share Prices Index • Consumer Prices Index (CPI) • Exchange rate index • Index of house prices • Index of GDP • Human Development Index
• 20. Calculating an Index Number Index number in Year Y = (Data Value in Year Y / Base Year Value)*100 Year Average House Price (£s) Index of House Prices (2007=100) 2007 192,651 100.0 2008 194,658 101.0 2009 159,961 82.2 2010 167,973 105.0 2011 162,915 97.0 2012 161,648 99.2 2013 163,593 101.2 The chosen base year Large fall – housing slump A recovery in house prices but little higher than 2007
• 21. The Difference between Income and Wealth Income Wealth Income is a flow of money going to factors of production Wealth is the current value of a stock of assets owned by someone or society as a whole Wages and salaries from jobs Savings in bank accounts Rental income from property Ownership of property Interest from savings Shares / stocks in businesses Profits flowing to shareholders Wealth held in pension schemes
• 22. Inequality of Income and Wealth Who Earns What In the Economy? 1. Median income = £21,400 2. Mean income = £30,100 3. Average income for top 1% of UK income distribution = £150,000 4. Average income for poorest 1% in the UK = £8,430 5. The richest 10% of taxpayers receive 1/3rd of income 6. The bottom 40% of households get almost half of their income from state welfare benefits 7. The UK is one of world’s most unequal rich countries: the poorest 10th get 1% of total income; richest 10th,31% The Gini Coefficient 1. The Gini coefficient is a measure of income inequality that condenses the entire income distribution for a country into a single number between 0 and 1: the higher the number, the greater the degree of income inequality 2. The latest value for the Gini Coefficient in the UK is a figure of 0.36