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Measuring National Income

Measuring National Income. THE ABSOLUTE BASICS. What is National Income?. Making comparisons between countries. National income measures the total value of goods and services produced within the economy over a period of time.

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Measuring National Income

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  1. Measuring National Income THE ABSOLUTE BASICS

  2. What is National Income? • Making comparisons between countries • National income measures the total value of goods and services produced within the 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: • Economic growth and where the economy is in the business cycle • Changes to average living standards of the population

  3. Gross Domestic Product (GDP) • GDP includes the output of all firms in Thailand, including the foreign owned firms inThailand • There are three ways of calculating GDP - all of which should sum to the same amount since by identity: • National Output = National Expenditure (Aggregate Demand) = National Income

  4. Expenditure/Aggregate Demand (AD) • AD is the sum of the final expenditure on goods and services produced in Thailand measured at current market prices • The full equation for GDP using this approach is GDP = C + I + G + (X-M) C: Household spending (consumption) I: Capital Investment spending G: General Government spending X: Exports of Goods and Services M: Imports of Goods and Services

  5. Measuring N.I. By Expenditure • One thing to remember is that measuring by the expenditure method can be distorted by subsidies and indirect taxes • Eg taxes on cigarettes would mean that expenditure on cigarettes would look artificially high if measured at the market price of cigarettes . In the UK the present price of a packet is about 5.5 pounds. But this is not the true value of the output produced because as much of this price is due to taxation (wine in Thailand is similar) • Therefore to get to the true cost of the output (The factor cost) we have to take away the taxation. • GDP at market prices-indirect taxes (+subsidies)=GDP at factor cost

  6. GDP measured by the Income method • GDP is the sum of the final incomes earned through the production of goods and services • Only factor incomes generated through the output of goods and services are included in the calculation of GDP by the income • We exclude from the accounts: • Transfer payments (e.g.welfare payments and charity handouts) • Private Transfers of money from one individual to another • Income that is not declared to the tax authorities

  7. GDP by Output method • This measures the value of output produced by each industry using the concept of value added or final output • We use these approaches to avoid the problems of double-counting the value of intermediate inputs • Does not include output that is self produced eg housewife or even charity work

  8. GDP and GNP • Gross National Product (GNP) measures the final value of output or expenditure by Chinese owned factors of production whether they are located in China or overseas • GDP is only concerned with incomes generated within the geographical boundaries of the country • So output produced by Ford in China counts towards our GDP but some of the profits made by Ford here are sent back to US – adding to their GNP • GNP = GDP + Net property income from abroad (NPIA) • NPIA is the net balance of interest, profits and dividends (IPD) coming into China from Chinese assets owned overseas matched against the flow of profits and other income from foreign owned assets located within China.

  9. Money GDP and Real GDP (UK Data) The nominal value of GDP at current prices has grown each year – In monetary terms, national output at the end of 2000 was 31% higher than at the start of 1995 But some of this is simply the result of higher prices in the economy Making an adjustment for inflation (shown in the table below by the increase in the general price index) gives a figure for real GDP expressed at constant 1995 prices.

  10. Gross and Net Figures • Sometimes (but rarely ) you may see Net National Product figures. • This figure is the same as GNP except that depreciation (or capital consumption ) has been deducted. • This it is argued is a truer reflection of the net increase in income of a country as if there is a lot of depreciating assets these have to be replaced before any real increase in income is seen

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