Economic Growth
How to Calculate National Income
Income Approach
Expenditure Approach
Product or Output Approach
Summing up the final value of output produced for all goods and services
Adding up the factor incomes generated in the current production of goods and services
National Income = W + R + I + P
Factor Incomes
Wages (W)
Rent (R)
Interest (I)
Profits (P)
Adding up the final expenditure on final output of goods and services produces in the current period
Expenditure Types
Consumption Expenditure (C)
Investment Expenditure (I)
Government Expenditure (G)
Net Exports (X-M)
All expenditure on goods and services on final goods by households
Investments in capital (buildings and machinery) and changes in inventories of raw materials, semi-finished goods and unsold finished products
Government expenditure on final goods and services, but excludes transfer payments (pensions, social security payments)
Import expenditure by foreign sector subtracted from export revenue earned from sales of goods and services abroad
National Income = C + I + G + (X-M)
National Income Statistics
Calculated by one of the 3 methods
Gross Domestic Product (GDP)
Gross National Income (GNI)
Total market value of all final goods and services that are produced within the geographical boundary of a given country in a given period of time, usually 1 year
Nominal GDP at current prices
The market prices prevailing that time period
E.g. Nominal GDP in 2010 shows the total value of final goods and services produced in the country in 2010 valued at 2010 prices
Real GDP at constant prices
Market prices that are adjusted to inflation
Real GDP(Yr1) = Nominal GDP(Yr1) x
Consumer Price Index(Yr0)/Consumer Price Index(Yr1)
Yr 0 is the base year (the year we take of the prices)
Total market value of income received by the nationals of a country over a given period of time regardless of where the production takes place
GNI= GDP + (Property Income from Abroad - Property Income to Abroad)
Property Income from Abroad: Income accruing to locally owned FOP located abroad
Property Income to Abroad: Income earned by foreign owned FOP located in country
Uses of NIS
Benefits
Measures Economic Growth
Measures SOL (Material)
Limitations
Space
Time
Valuation
Non-Inclusion of Non-Market Activities
Non-Inclusion of Underground Economy
Changes in GPL, thus using real GDP btr
Population Growth, thus using GDP per capita btr
Unequal Income Distribution (Seen from Gini Coeff)
Production =/= Consumption (Increase in I of Capital does not affect on SOL)
Environmental Degradation, Resource Depletion
Non-Material SOL not taken into account
Literacy Rates
Life Expectancy
Infant Mortality Rates
Leisure Time
Comparing to other countries' GDP (Difference in exchange rates). Btr to use PPP
Distribution of income not taken into account
Size of underground economy
Diff sources of statistical data
Spending of money on (Defence will not affect SOL)
Difference in accounting procedures, habits
Other forms of Stats
Human Development Index (Health, Education, Income)
Measure of Economic Welfare (However, difficult to valuate non economic indicator)
Index of Sustainable Economic Welfare (Income, Environment, Income inequality etc)
National Income: Is the total monetary value of all the final goods and services that are produced by a given country in a given period of time