national income

Measuring National Income

EdExcel AS Economics 2.1.1

What is meant by National Income?

National Income• National income measures the monetary value of the

flow of output of goods and services produced in an economy over a period of time (usually one year)

Key uses of National Income data• Measuring the level and rate of growth of national

income (Y) is important for keeping track of:• The rate of economic growth (real GDP)• Changes to living standards (real GDP per capita)• Changes to the distribution of income between

groups within the population

Gross Domestic Product (GDP)

Gross domestic product (GDP) measures the total value of national output produced in a given time period (i.e. one year)

There are three ways of calculating GDP: National Output = National Expenditure (Aggregate Demand) = National Income

GDP – By Sum of Spending, Factor Incomes or Output

GDP (Expenditure)

• Consumption• Government

spending• Investment

spending• Change in value of

stocks• Exports• (minus) Imports• = GDP (also known

as aggregate demand or AD)

GDP (Factor Incomes)

• Income for people in jobs and in self-employment (e.g. from their wages and salaries)

• Profits of private and public sector businesses

• Rental income from the ownership of land

GDP (Value of Output)

• Value added from each of the main economic sectors

• These sectors are• Primary (e.g.

farming)• Construction• Manufacturing• Tertiary (e.g.

tourism)• Quaternary (e.g.

business consultancy)

The Meaning and Importance of Value Added

Value added is the increase in the market value of goods or services as a result of the production process. It excludes the costs incurred in supplying the output of a good or service.

Value added = Value of production - Value of intermediate inputs

Low Value Added Industries

• Textiles• Mass processed foods• Farming• Manufacturing assembly• Social care• Contract cleaning services

High Value Added Industries

• Information technology• Renewable energy• Precision engineering• Life sciences• Aerospace• Bio-technology

Manufacturing Industries

1. The process or business of producing goods in factories2. The part of a company that is concerned with making goods,

rather than designing or selling them

Food processing

Earth moving equipment

Additive manufacturing (3D)

The manufacturing sector accounted for 10% of UK output (Gross Value Added) in 2012

In 2013 there were 2.6 million jobs in the manufacturing sector, this was 8% of all jobs in the UK economy

Service Industries

1. Services are part of the tertiary sector of the economy2. There are many service industries – some focusing on business-

to -business and others business-to-consumer products

Hotels and restaurants & retail

Education, health care, legal services

Transport and logistics services

In 2012, the service sector accounted for 79% of UK output (Gross Value Added) and for 83% of jobs.

In 2013 there were 27.1 million jobs in the service sector, 83% of all jobs in the UK

The Difference between Nominal and Real

Monetary values for data e.g. money GDP

Not inflation adjusted

Data expressed at current prices (i.e. today’s prices)

NominalAdjusted for inflation

Prices held at level of the chosen base year

Data expressed at constant prices

Real

Nominal (Money) Value of UK GDP

00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/140

200000

400000

600000

800000

1000000

1200000

1400000

1600000

1800000

2000000

UK

GDP

in £

mill

ion

This chart shows the nominal or money value of national output for the UK economy since 2000. It is expressed at current prices i.e. it has not been adjusted for the effects of rising prices (inflation).

Source: Office for National Statistics

Measuring Real National Income (GDP)• Nominal (money) GDP

measures the value of national output at current prices i.e. there is no adjustment made for the effects of inflation

• Real GDP measures the volume of output.

• It is adjusted for inflation and is measured at constant prices

• When economists are discussing economic growth they are referring to a nation’s real GDP

Turning nominal GDP into real GDP1. Let the nominal (or money) value

of UK GDP in 2013 be £1,400 bn2. The price index for 2013 is 1003. In 2014, the nominal value of GDP

rises to £1450 bn4. In 2014, price index rises to 103

Therefore .......Real GDP in 2014

= Nominal GDP x 100/price index in 2013 = £1,450 bn x 100/103

Real GDP = £1,408bn

(expressed at constant 2013 prices)

Example of Nominal and Real: UK House Prices

Year Nominal house prices

Adjusted for inflation

2007 223,000 144,000

2008 228,000 142,000

2009 226,000 141,000

2010 251,000 150,000

2011 245,000 139,000

2012 246,000 135,000

2013 251,000 134,000

2014 267,000 139,000 1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

0

50000

100000

150000

200000

250000

300000

£

Source: Land Registry

Nominal house prices

Adjusted for inflation

• The table and chart show average house prices for properties in the UK between the years 2007 and 2014. The real price of a house is the money value of a property adjusted for the effects of inflation.

• In this case, real prices have been “deflated” to a constant price level using the UK retail price index (RPI).

UK Average House Prices 1991-2014

Value and Growth of UK GDP and for Key Industries

Real GDP Real GDP Manufacturing Construction All Services

Year £m at constant 2011 prices

Per cent change year on

year


year

Per cent change year

on year


year

2007 1,637,432 2.6 0.7 2.2 3.1

2008 1,631,995 -0.3 -2.9 -2.6 0.6

2009 1,561,646 -4.3 -9.4 -13.2 -2.9

2010 1,591,494 1.9 4.7 8.5 1.4

2011 1,617,677 1.6 1.8 2.2 2.1

2012 1,628,338 0.7 -1.3 -7.5 2

2013 1,655,447 1.7 -0.7 1.4 1.9

2014 1,704,998 3 3.1 9.5 3


Gross National Income (GNI)

• GNI is not as well-known as GDP but is still an important economic indicators

• GNI is GDP plus net property income from overseas

• Remittance money transfers are hugely important for some developing countries

• Countries with strong net inflows of remittances and other incomes will see their GNI rise

Tajikistan (47%

Liberia (31%)

Lesotho (27%)

Nepal (22%)

Samoa (21%)

Top countries for remittance income as % of GDP in 2012

UK Real GDP Per Capita and Real Disposable Income

Real GDP Per Capita Real Household Disposable Income

Year Q1 2008 = 100 Q1 2008 = 1002007 Q1 98.6 101.02008 Q1 100.0 100.02009 Q1 93.5 99.12010 Q1 93.6 102.42011 Q1 94.8 99.12012 Q1 95.1 98.42013 Q1 95.4 98.62014 Q1 97.3 97.72015 Q1 99.4 101.4

Real GDP Per Capita = real income per head of populationReal Disposable Income = income after deduction of taxes + addition of benefits


GDP and GNI Per Capita – for the United Kingdom

In recent years UK GNI has fallen below GDP per capita because the net annual flow of investment income has become negative for the UK

5,000

5,200

5,400

5,600

5,800

6,000

6,200

6,400

6,600

6,800

7,000

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

Real GNI per Capita Real GDP per capita

£ per capita, at constant 2011

prices

Recession

Real GDP or GNI Per Capita – Purchasing Power Parity

1. Real GDP measures the value of national output at constant prices i.e. adjusted for inflation

2. PPP stands for purchasing power parity3. PPP measures how many units of one country’s

currency are needed to buy exactly the same basket of goods and services as can be bought with a given amount of another country’s currency

4. In countries where the cost of living is relatively high, there will be a downward adjustment to a nation’s PPP-adjusted GDP or GNI per capita

5. PPP is an estimated figure and volatile exchange rates can have a big effect on real purchasing power of a given amount of currency e.g. $100 in each country

GDP per capita (Euros) GDP per capita (Euros)

Austria 34,900 Italy 26,500

Belgium 32,500 Latvia 17,600

Bulgaria 12,300 Lithuania 20,100

Croatia 16,100 Luxembourg 74,300

Cyprus 23,400 Malta 23,100

Czech Republic 22,900 Netherlands 36,000

Denmark 33,900 Poland 18,600

Estonia 19,900 Portugal 21,400

Finland 30,200 Romania 14,600

France 29,400 Slovakia 20,800

Germany 33,800 Slovenia 22,600

Greece 19,600 Spain 25,500

Hungary 18,500 Sweden 34,100

Ireland 36,100 United Kingdom 29,600

Real Per Capita GDP for EU Nations (2014)

Understanding Real Incomes and Economic Activity

Year

Earnings (Wages, Bonuses

and Overtime)% annual change

Consumer Price Index% annual change

Real incomes

2008 4.7 3.0 Rising2009 1.9 2.3 Falling Year of recession2010 2.1 3.7 Falling2011 0.4 4.5 Falling2012 1.6 3.0 Falling2013 2.2 2.4 Falling Signs of recovery

Real income measures the purchasing power of a given amount of nominal income – i.e. money income adjusted for inflation

In recent years in Britain, the annual growth of earnings for people in work has been less than inflation – causing real incomes to fall

• Real wages have been falling because the growth of wages / earnings has been slower than the rise in consumer prices

• Some reasons for slow wage growth include:1. Tough pay restraint in the public sector e.g. NHS workers

have seen as 10% decline in real wages since the start of the recession

2. Many private sector businesses have introduced pay freezes (and in some cases, pay cuts) as an alternative to bigger job cuts during the recession

3. Trade union bargaining power has been hit by economic problems at home and forces of globalisation

4. For much of the last five years, consumer price inflation has been above the 2% target measure, in part because of big jumps in fuel and energy prices.

5. Labour productivity has been disappointing – businesses find it harder to fund wage rises if output per person employed is flat

Reasons for the Fall in Real Wages in the UK

Measuring National Income

EdExcel AS Economics 2.1.1