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Measuring National Income

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

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Measuring National Income

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

  2. 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

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

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

  5. 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 Income Method

  6. 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 The Expenditure Method

  7. 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? Discuss:

  8. 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

  9. 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

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

  11. 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. Critique of Per Capita Income as a Measure of Standard of Living

  12. Understanding Growth Rates

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

  14. 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 Real National Income vs. Nominal National Income

  15. 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. Class work

  16. 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. Recap

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