Updated: Oct 24, 2019
National Income is the sum total of all final goods and services produced in a year and measured in money terms. National Income is a flow of money and wealth is a stock concept. Wealth is measured at one point of time. National Income = National Expenditure = National Output National Income is the value of the good and services produced in a year. National Output is the payments for producing the goods and services in a year. National Expenditure is the consumer's’ payments for buying the goods and services. One person’s expenditure is one person's income.
A report card for a country – has the government been successful in achieving its goals? To be able to develop strategies To make forecasts about the future Analyze the performance over time To compare countries
the income figures have to be converted into a common currency accounting techniques can vary between countries important to take the price level into account but also the nominal income figure – a country may have less average income but also lower prices the composition of output may vary considerably – one country may be spending on defence, another may be producing consumer goods the distribution of income is likely to vary some economies have much more barter and a greater black economy than others
The output method
Total value of goods and services
The income method
All incomes earned in the country
The expenditure method
Spending by households=consumption(C)
Spending in capital(by firms)=investment(I) GDP=C+I+G+(X-M)
Spending by Government(G)
Does not take into account depreciation of capital(wear, tear, broken)
Net national income: GNI-depreciation
GDP is larger every year due to inflation but that does not equal a higher economic activity. Fot that there is the Real GDP which is adjusted to the inflation rate
Real GDP vs. Nominal GDP
Historically we can follow the different periods of economic growth and recessions. This can be shown in a country´s Business cycle/tradecycle. The economic activity are measured by changes in the real GDP:
It is the actual wealth that the company gets to keep
E.g. since China produces a lot the GDP is very large but since this money is sent abroad the GNI is a small number compared
Why is it important to measure them?
Report card-to see how successful when it comes to economic growth
Measure of the wealth and standards of living
Comparisons with other countries
Analyzing over time
It’s the total output(real GDP) for all goods and services at a certain average price level.
It’s downward sloping because of the following.
Wealth effect: if prices go down people will be able to consume more.
Savings/Interest effect: People will be able to save more money so the quantity in banks available for borrowing is higher and the interest rates go down. More investment and consumption can be done with this borrowings.
Foreign exchange effect: if prices are lower in our country, companies will buy more in our market increasing the output.
Shift in the aggregate demand
The interest rate(mortgages for example)
Changes in technology
Level of national income
The ideology of the party(subsidies, taxes, trading policy)
Net of export
Inflation in comparison to other nations
Difference in price level among nations
Exchange rate among currencies
Change in income of other countries
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