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

2. 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

3. 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

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

5. 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

6. 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

7. 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?

8. 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

9. 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

10. Measures of National Income
GDP per capita = GDP
population

11. 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.

12. 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

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

14. 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

15. Class work Production for country X
The fictional Country X produces only one good. Production of this good for the years 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.

16. 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.