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
Measuring national • 1. Output: i.e. the totalincome value of the output ofTo measure how much goods and servicesoutput, spending and produced in the UK.income has beengenerated in a given time • 2. Spending: i.e. the totalperiod we use national amount of expenditureincome accounts. Theseaccounts measure three taking place in thethings: economy. • 3. Incomes: i.e. the total income generated through production of goods and services.
• National Output = NationalGross Domestic Product Expenditure (Aggregate Demand) = NationalThere are three ways ofcalculating GDP - all of Incomewhich should sum to thesame amount since thefollowing identity musthold true:
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 Europes most productive car factory for the last eight years.• Sources: Reuters News, Sunderland Echo, July 2006
The Expenditure Method ofcalculating GDP (aggregate • C: Household spendingdemand) I: Capital Investment spendingThis is the sum of spendingon UK produced goods and G: Government spendingservices measured at X: Exports of Goods andcurrent market prices. Thefull equation for GDP using Servicesthis approach is M: Imports of Goods andGDP = C + I + G + (X-M) Services
The Income Method of Here GDP is the sum of the incomescalculating GDP (the Sum of earned through the production of goodsFactor 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.
Output Method of calculatingGDP – using the concept of • Value added is the increasevalue added in the value of a product at each successive stage ofThis measure of GDP addstogether the value of output the production process. Weproduced by each of theproductive sectors in the use this approach to avoideconomy using the concept of the problems of double-value added. counting the value of intermediate inputs.
The table below shows indices of value added from various sectors of the economy in recentyears. We can see from the data that manufacturing industry has seen barely any growth at allover the period from 2001-2004 whereas distribution, hotels and catering together with businessservices and finance have been sectors enjoying strong increases in the volume of output. Thesefigures illustrate a process of structural change, with a continued decline in manufacturingoutput and jobs relative to the rest of the economy. By far the largest share of total nationaloutput (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 repairs2001 28 172 57 159 249weights intotal GDP(out of1000)2001 100 100 100 100 1002002 100 97 104 105 1022003 94 97 109 108 1062004 87 98 113 113 111
We can see from the following chart how there have been divergences in the growth achieved bythe 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 ofstructural change in the economy – away from traditional heavy industries towards servicebusinesses.
• In contrast, Gross Domestic ProductGDP and GNP (Gross (GDP) is concerned only with the factorNational Product) incomes generated within the geographical boundaries of the country. So, for example, the value of the output produced by Toyota and DeutscheGross National Product Telecom in the UK counts towards our(GNP) measures the final GDP but some of the profits made byvalue of output or overseas companies with productionexpenditure by UK owned plants here in the UK are sent back tofactors of production their country of origin – adding to their GNP.whether they are locatedin 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.
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.
GDP per capita $s GDP per capita $sLuxembourg 57 704 EU (established 15 countries) 28 741United States 39 732 Germany 28 605Norway 38 765 Italy 27 699Ireland 35 767 Spain 25 582Switzerland 33 678 Korea 20 907United Kingdom 31 436 Czech Republic 18 467Canada 31 395 Hungary 15 946Australia 31 231 Slovak Republic 14 309Sweden 30 361 Poland 12 647Japan 29 664 Mexico 10 059France 29 554 Turkey 7 687 Source: OECD World Economic Factbook, 2006 edition
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.
Bibliography• www.google.com• www.wickipidea.com• www.tutor2u.com• Special thanks to Mitra Mam