SOME IMPORTANT ECONOMICS TERMS EXPLAINED
Here, I have tried to explain, what is Natinal Income, Real National Income, Gross Natinal Product (GNP), Net National Product (NNP) and Per Capita Income.
National income is the final value of all goods and services produced within an economy over a period of time (usally a year). Measuring the level and rate of growth of national income (Y) is important to economists when they are considering:
The rate of economic growth
Changes over time to the average living standards of the population
Changes over time to the distribution of income between different groups within the population (i.e. measuring the scale of income and wealth inequalities within society).
There are two types of National Incomes.
1. Real National Income
2. Monetary/Nominal National Income
1. Real National Income: When we calculate the Physical amount of goods and services for e.g. 10 tables & 20 chairs, this is called real national income.
2. Monetary/Nominal National Income: When we calculate the amount of goods and services in monetary unit is called monetary national income.
GDP and GNP (Gross National Product or National Income):
Gross National Product (GNP)measures the final value of output or expenditure or income factors of production whether they are located in a particular country or overseas.
In contrast, Gross Domestic Product (GDP) is concerned only with the factor incomes generated within the geographical boundaries of the country.
GNP = GDP + Net property income from abroad (NPIA)
NPIA is the net balance of interest, profits and dividends (IPD) coming into a country from our assets owned overseas matched against the flow of profits and other income from foreign owned assets located within the country. In recent years there has been an increasing flow of direct investment into and out ofa country. Many foreign firms have set up production plants here whilst a country's firms have expanded their operations overseas and become multinational organisations.
Measuring Real National Income:
When we want to measure growth in the economy we have to adjust for the effects of inflation.
Real GDP measures the volume of output produced within the economy.
Measuring national income
To measure how much output, spending and income has been generated in a given time period we use national income accounts. These accounts measure three things:
1. Output: i.e. the total value of the output of goods and services produced in a country.
2. Spending: i.e. the total amount of expenditure taking place in the economy.
3. Incomes: i.e. the total income generated through production of goods and services.
National Output = National Spending or Expenditure (Aggregate Demand) = National Income
(1) Output Method of calculating GDP – using the concept of value added:
This measure of GDP adds together the value of output produced by each of the productive sectors in the economy using the concept of value added. Value added is the increase in the value of a product at each successive stage of the production process. We use this approach to avoid the problems of double-counting the value of intermediate inputs.
(2) The Expenditure Method of calculating GDP (aggregate demand):
This is the sum of spending on produced goods and services measured at current market prices. The full equation for GDP using this approach is
GDP = C + I + G + (X-M) where,
C: Household spending
I: Capital Investment spending
G: Government spending
X: Exports of Goods and Services
M: Imports of Goods and Services
(3)The Income Method (the Sum of Factor Incomes):
Here, national income is the sum of the incomes earned through the production of goods and services. The main factor incomes are as follows:
Income from people employment and in self-employment Profits of private sector companies + Rent income from land = Gross Domestic product (by factor income).
It is important to recognise that only those incomes that are actually generated through the production of output of goods and services are included in the calculation of GDP by the income approach.
We exclude from the accounts the following items:
Transfer payments e.g. the state pension paid to retired people; income support paid to families on low incomes; the Jobseekers’ Allowance given to the unemployed and other forms of welfare assistance including child benefit and housing benefit. Private transfers of money from one individual to another.
Income that is not registered with the Inland Revenue or Customs and Excise. Every year, billions of rupees worth of economic activity is not declared to the tax authorities. This is known as the shadow economy where goods and services are exchanged but the value of these transactions is hidden from the authorities and therefore does not show up in the official statistics. It is impossible to be precise about the size of the shadow economy but some economists believe that between 8 – 15 per cent of national output and spending goes unrecorded by the official figures.
Nominal and Real Values:
One of the uses of national income accounts, such as GDP, is for the comparison of an economy's performance over time. It is a measurement of economic growth. However, just looking at the value of GDP from one period of time compared to the value of GDP from another period of time will not give an indication of economic growth. This is because a change in the value of GDP has two components: a change in total output, and a change in prices (or the overall price level). To measure growth, you would need to isolate these two components, take out the price level component, and only look at the total output component.
In order to do this, economists adjust the GDP numbers by a price index to reflect the change in the overall price levels over the relevant time frame. This means that they adjust out the price level changes, leaving only the changes in output to account for a change in GDP.
The actual raw numbers for GDP are called nominal values. The numbers for GDP after the adjustment for the change in the price level are called real values. The price index used for adjusting for the price level change relating to GDP is called a GDP deflator, or GDP price index (GDPPI). The calculation is as follows:
Real GDP = Nominal GDP divided by GDPPI:
In order to have a reference point for any price index, a base year is established. For the purpose of calculations, this base year can be considered to be arbitrary (although if you have to do calculations on a given set of numbers, and at the same time you have to decide what to use as the base year, you might want to pick the year that makes your calculations the easiest - using the beginning year under consideration is often easiest). For the base year, a number of 100 is assigned for a price index. This means that the resulting calculations must be adjusted by a factor of 100. This amounts to simply moving the decimal point over two spaces. Knowing the nominal values for different years, as well as the price index used for each year, will allow you to calculate not only real GDP but also GDP growth and the rate of inflation.
Economic activity that does not result in monetary income, such as service provided within the family, or for barter, are usually not counted. The importance of these services varies widely among different economies.
Comparisons of per capita income over time need to take into account changes in prices. Without using measures of income adjusted for inflation, they will tend to overstate the effects of economic growth.
International comparisons can be distorted by differences in the costs of living between countries that aren't reflected in exchange rates. Where the objective of the comparison is to look at differences in living standards between countries, using a measure of per capita income adjusted for differences in purchasing power parity more accurately reflects the differences in what people are actually able to buy with their money.
Per Capita Income:
We can get per capita income by dividing the national income, with the population of that particular country. For example, if we want to know the per capita income of India, we have to divide the national income of India by its population.
Real Per Capita Income: To obtain this, we have to divide real national income with the population of that particular country.