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P.7. National Income, p.84.

Circular flow of income.

The 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.

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:

1.         Capital goods (I) (capital formation)

      Fixed capital (gross domestic fixed capital formation)

      Circulating capital (value of increase in stocks and work in progress)

Net capital formation = gross capital formation - depreciation (NNP)

2.         Consumer goods(C)

3.         Final goods

Includes also increase in stock (inventories) at the end of the year.

4.         Government expenditure (G)

Does not include old age pensions and payment of national debt.

5.         Foreign trade (X-M)

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:

a)    Consumers expenditure (everything except purchase of houses)

b)    General government final consumption (except harbours etc. loans, grants and transfer payments, expenditure on fixed assets).

c)    Gross fixed capital formation.

d)    The value of physical increases in stocks and work in progress:

a+b+c+d=total domestic expenditure (TDE)

e)    Exports (X) and imports (M).

Exports+TDE=total final expenditure (TFE)

f)     Gross domestic product(GDP)=TFE-Imports

g)    The money actually spent. This is misleading, because does not include taxes.

h)    Gross domestic product at factor costs = GDP - taxes + subsidies. Most common.

i)     Statistical discrepancy. (GDP (average estimate)).

j)     Gross national product(GNP)=GDP + net property income from abroad.

k)    Net national product = GNP - depreciation (capital consumption)

2.         National income method.

     Imputed charge for the consumption of non-trading capital - capital gained in value (appreciation).

Everything together = total domestic income.

     Personal disposable income (PDI)- PI - tax. It is distributed between savings and consumption. Savings ration was in 1989 6.7%.

3.         National output method.

Manufacture biggest (oil)

     Adjustment for financial services - double counting on interest payments, must be subtracted.


1.     Inflation 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 of population).
3.     The distribution of income (Lorenz curve).

Wealth in UK is less evenly distributed than income.

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.

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