P.7. National Income, p.84.
Circular flow of income.
national product- all wealth produced over a time, measured as GDP, GNP or NNP.
In UK gathered into "Blue Book".
We have three methods to measure- either national income = national expenditure
or value added.
Adding together all the differences in
intermediate products. All the value added are national output. It is important
to avoid double accounting (taking twice the expense). Thus the value added is
the payment made by industry to factors of production.
national income = national expenditure = national output
The components of national income:
goods (I) (capital formation)
Fixed capital (gross domestic fixed
Circulating capital (value of increase in
stocks and work in progress)
capital formation = gross capital formation - depreciation (NNP)
Includes also increase in stock
(inventories) at the end of the year.
Does not include old age pensions and
payment of national debt.
UK is one of the most dependant of foreign
trade. Visible and invisible trade (look at balance of payments).
National income accounts.
1. National expenditure method:
expenditure (everything except purchase of houses)
government final consumption (except harbours etc. loans, grants and transfer
payments, expenditure on fixed assets).
c) Gross fixed
d) The value of
physical increases in stocks and work in progress:
a+b+c+d=total domestic expenditure (TDE)
e) Exports (X) and
Exports+TDE=total final expenditure (TFE)
f) Gross domestic
money actually spent. This is misleading, because does not include taxes.
h) Gross domestic
product at factor costs = GDP - taxes + subsidies. Most common.
discrepancy. (GDP (average estimate)).
j) Gross national
product(GNP)=GDP + net property income from abroad.
k) Net national
product = GNP - depreciation (capital consumption)
Imputed charge for the
consumption of non-trading capital - capital gained in value (appreciation).
Everything together = total domestic
Personal disposable income (PDI)- PI - tax. It is distributed
between savings and consumption. Savings ration was in 1989 6.7%.
Manufacture biggest (oil)
Adjustment for financial
services - double counting on interest payments, must be subtracted.
and the GDP deflator.
RPI is not enough, because has only
consumers' expenditure, so GDP deflator is used.
2. Different national incomes per head. (Size
3. The distribution of income (Lorenz curve).
Wealth in UK is less evenly distributed
4. Government expenditure (progressive tax
makes more even).
5. Non-monetary transactions (growing own
food, in Kenya 25% allowance is made, in developed countries is negligible).
6. Tax evasion (black market).
7. Leisure. (UK has longest working week and
biggest working population although developing countries might have even more).
8. International comparisons - Exchange rates
(until dollar was fixed (1971)- no problem, now GDP figures apply to only 1
year, because exchange rate changes).
National income and wealth.
It is wrong to say wealth = welfare.
Welfare includes many factors other than
income e.g. distribution of income, crime rate, expectation of life, the
standard of health-care.
Nation wealth is all the goods produced
before, in UK 1.5 trillion. Art treasures and human skills are not included. Does not include money or bonds, because
they are just paper.