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.
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