Measuring National Income Principles of Business Form 5 Ms J. Gregory

National Income National income is a measure of the total flow of goods and services over a period of one year. There are three methods of measuring national income: output method, income method, expenditure method

National Income Output = Income = Expenditure Value of all goods and services produced Income received from the factors of production Spending on national output Note: each method is a different way of calculating the same thing

The Output Method Double counting must be avoided Only the value added is counted Advantages and disadvantages: Abiraj, pg. 367

The Income Method Sum of the rewards of the factors of production Transfer payments such as pensions and social security are not included. (They are not rewards for the factors of production.) Advantages and disadvantages: Abiraj, pg. 366

The Expenditure Method Includes stock produced that has not yet been purchased Does not include expenditure on imports Y = C + I + G + X – M Advantages and disadvantages: Abiraj, pg. 365

Discuss: In measuring national income, why would it be misleading to add the total value of the outputs of the National Flour Mill in Trinidad and Tobago to the total value of the outputs of bakeries?

Measures of National Income Gross Domestic Product (GDP): total output produced by the factors of production located within and economy Gross National Product (GNP): total output produced by domestically owned factors of production wherever they happen to be located, whether at home or abroad

Measures of National Income Net property income from abroad: income received from abroad less income paid abroad; the output of a country’s citizens made abroad less the output made by foreign companies in the country GNP = GDP + NPI from abroad

Measures of National Income GDP per capita = GDP population

Critique of Per Capita Income as a Measure of Standard of Living It does not account for the distribution of income It does not take into account productive work which does not reach the market place but contributes to standard of living It includes spending on things which do not necessarily contribute to standard of living It does not consider such things as freedom, justice, security, and leisure.

Understanding Growth Rates Year 1 (GDP $mill) Year 2 (GDP $mill) Growth rate (%) Description 54.5 57.77 6% GDP increased by 6% from year 1 to year 2 Positive growth 55.59 2% GDP increased by 2% from year 1 to year 2 52.32 -4% GDP decreased by 4% from year 1 to year 2 Negative growth

Is it possible to have economic growth without development? Discuss Is it possible to have economic growth without development?

Real National Income vs. Nominal National Income Inflation: general rise in prices over time Can also be thought of as a situation where the value of money is falling Any measure classified as “real” takes inflation into account Question: If money national income increases by 10% in a year when prices rise by 12%, is real national income rising or falling? Answer: falling

Class work Production for country X The fictional Country X produces only one good. Production of this good for the years 1999-2001 is shown in the table above.  A) Calculate nominal (money) national income for each year (that is at current prices). B) Calculate real national income using 1999 as the base year (that is at 1999 prices). C) Using the results above, explain why it is best to use real national income to compare national income over a period of time.

Recap National Income Methods to measure NI Measures of NI Critique of Per Cap Income Nominal Income Real income Additional Reading: Read Waterman and Ramsingh, Ch 21.