Flashcards in L3 - Measures of National Income, Output and Expenditure Deck (30):
What are the 3 ways to measure GDP?
- Income measure
- Output measure
- Expenditure measure
What is the Output Method?
- Adds up all of the output produced by all of the firms in the economy - but the problem of simply adding up output of firms is that of “double counting” – i.e. the outputs of some firms are inputs of other firms
So we have to distinguish between:
- intermediate transactions in goods and services – the output of some firms which are used as inputs by the other firms; and
- transactions in final goods and services – outputs which are not used as inputs
What is Final Demand?
- Purchase of final goods or services for consumption, for investment (including inventory accumulation), for use by government and for exports
- does not include goods/services bought to be used as inputs for other goods/services
Why can't we separate sales of firms into transactions of final intermediate goods?
- The problem is solved by the use of the concept of value added. Each firm’s value added is the market
- value of its output minus the market value of its inputs.
- The total value of a firm’s output is the gross value of its output. The firm’s added value is the net value of its output. It is this latter figure that is the firm’s contribution to total output.
What is the total value of a firms output called?
- the gross value of its output
- The firm's value added is the net value of its output
What is Value Added and Gross Value Added (GVA)?
- Value added measures each firm’s own contribution to total output: i.e. the amount of market value that is produced by that firm
- The sum of all values added in an economy is a measure of the economy’s total output. This measure of output is called gross value added (GVA). It is a measure of all final output produced by all productive activity in the economy.
What does Gross mean in Economic terms?
refers to the fact that, we are measuring currently produced outputs or incomes without taking into account wearing out or depreciation
How do you move from GVA to GDP?
- GVA is measured at basic prices (bp); i.e. factory gate prices (raw cost of producing a product --> no taxes etc.) which exclude all taxes and subsidies levied by government, but Gross Domestic Product (GDP) is measured at market prices (mp)
To go from GVA to GDP we need to add indirect taxes (such as VAT) and deduct subsidies levied on products by the authorities
GDP(mp) = GVA(bp) + (taxes – subsidies)
What is the Income method?
- GDP income-based: all the incomes generated by the act of production combined
- The value of total output must be equal to the value of incomes received by households. Therefore the value of total output can also be measured by adding up the incomes received in the production of output
- total amount spend = income earn (and the value of output produced)
What are the 3 kinds of income to add to get Gross National Income?
- Compensation of employees – this is wages and salaries and is the payments made to labour, including NI contributions, taxes withheld and pension contributions. In 2017: £1,002,861mn
- Operating Surplus (OS) – net business incomes after payment has been made to labour and for material inputs (dividends and retained profit), but before direct taxes. These are essentially (pre-tax) profits.
- Mixed Incomes (MI) – incomes earned by people selling their services or output, but who are not employed by any organisation; e.g. the self-employed. Thus some income is imputed as wages, the other part as profit. (includes charities)
- In 2017 (OS+MI) = £782,865 mn
Whats a Problem with the Income Method?
Not all income accruing to domestic residents comes from domestic production – why?
Some domestic production creates factor earnings for non-residents who either do some paid work for UK resident firms or who have previously invested in the UK
Some UK residents earn income from work for overseas resident firms or on overseas investments
- GNI = GDP(mp) + NIA
NIA = Net Income from Abroad
How can the Income method be further refined?
- Personal income is income that is paid to individuals before tax
- Personal disposable income (PDI) is personal income minus personal income taxes and National insurance contributions.
- PDI is GNI less any part of it that is not actually paid to persons, such as retained profits of companies, less personal income taxes plus transfer payments received by individuals.
What is the Expenditure Method?
- One of the most important measure of national income
- A third measure of output can be obtained by measuring the expenditures on the output of firms - because all value produced must be accounted for by a claim that someone has to that value.
All output produced is either used up within a year - consumption goods (current good/asset); or if the output is not used up, it is put aside to add to the nation’s wealth - investment goods (non-current good/assets).
What is Consumption as part of the National Income Formula?
- Private Consumption is denoted as Cª (a = actual value --> the a is dropped if taking about consumption behaviour of future consumption)
- This is done by households (or non-profit organisations) and government and involves spending on final goods and services produced during the year.
-Households spend on 3 classes of goods:
- services; e.g. haircuts, concerts
- non-durable goods; e.g. flowers
- durable goods; e.g. cars, computers
- Also included here is the fuel consumption, spending of non-profit-making institutes serving household (NPISH) e.g. Charities
What is Government Consumption as Part on the National Income formula?
-Government Consumption spending includes 2 main categories of government spending:
- Individual Final Government Consumption (Things an individual can use) – health spending, education, e.g. money spent on services consumed by individuals
- Collective Government Final Consumption (Things an individual can't use) – street lighting, national defence etc, e.g. public goods where the spending cannot be attributed to individuals
What isnt included in Government Consumption?
- Government consumption only includes spending on currently produced goods/services
- pensions, benefits, interest on national debt are transfer payments
- these are government spending not made in return for goods/services therefore not included
How is Government Consumption valued?
- at cost the market value
- how would you figure out the market value of the court of law
- public services arent sold on a market place generally
What is Investment as part of the National Income Equation?
-Gross Investment is denoted as Iª
-Investment spending is defined as spending on the production of goods not for present consumption, but for future use. These goods are called capital or investment goods.
There are 3 categories of investment spending:
-Fixed Capital Formation
- Change in inventories
-Net Acquisition of Valuable
What is Fixed Capital Formation as part of Investment?
- this is the production of new capital goods – machines computers etc. These goods augment the capital stock of the country. This also includes the construction of houses, offices etc.
- existing house are not part of current production --> transfer of existing asset
What is Change in Inventories as part of Investment?
- these are stocks of inputs and unsold outputs held by firms.
- valued at what they would be worth on the market
- if this rises could mean a recession could be coming
- destocking counts as negative investment as it represents a reduction in stocks of finished goods available for future use
What is Net Acquisition of Valuables as part of Investment?
some productive activity creates goods that are neither consumed nor used in the production process. e.g. jewellery, art
What is Net Investment?
- Because over time some machines wear out and need to be replaced some of this gross investment is used for replacement.
- Net investment – the addition to the capital stock - is measured as gross investment less replacement investment (sometimes called depreciation). This can be written in symbols as:
I^net = I^a – dep
What is Exports as part of the National Income Formula?
-Exports are goods and services produced by UK resident firms and sold abroad. Because the buyers are foreign, these expenditures are not included in Cª, Iª or Gª. Thus a new category is required called exports - actual exports are denoted by, Xª.
What is Imports as part of the National Income Formula?
Imports are consumption and investment goods purchased by UK residents but produced overseas. Imports are not part of domestic production and so must NOT be included as part of domestic production (GDP). They are denoted as IMª
What is Net Exports as part of the National Income Formula?
Net Exports are: NXª = Xª – IMª
What is the Complete National Income formul;a?
- Adding together all the elements of expenditure gives GDP at current market prices:
- GDP(mp) = Cª + Iª + Gª + NXª
- This says GDP spending is identically equal to the sum of private consumption, investment, government consumption and net export spending on currently produced goods and services.
- It is GDP measured at current market prices or money GDP. This is the most common measure of GDP.
What is NNI?
- Net National Income
- NNI= GNI - depreciation
What is GNP?
- Gross National Product (GNP) is the total market value of all goods and services produced by domestic residents. GNP includes domestic residents earnings from goods and services produced and sold abroad, and investments abroad. GNP does not include earnings by foreign residents while inside the country.
- GDP and GNI thus refer to economic income within the borders of the country, while GNP refers to economic output by the country's residents.
GNP = GDP + [(income earned on all foreign assets – income earned by foreigners in the country)].
How do you get GNI from GNP?
GNI = GNP + [(income spent by foreigners within the country) – (foreign income not remitted by citizens)].