National Income
• The value of the output of goods and services
produced in an economy over a period of time
• Increases in National Income mean that the
economy has grown – economic growth!
• It is assumed that a richer nation can have a more
comfortable life, more leisure time, more choices,
etc…
GDP – a measure of National Income
• In the UK, we use GDP to measure National
Income (some countries use another measure)
• GDP = Gross Domestic Product (includes
production of foreign countries on UK soil;
doesn’t include UK companies abroad)
Put the top 10 in order of Size
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Australia
Brazil
China
Canada
France
Germany
India
Indonesia
Italy
Japan
Netherlands
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Poland
Russia
Saudi Arabia
South Korea
Spain
Sweden
Switzerland
Thailand
Turkey
United Kingdom
United States
Country
Size ($billion, 2013)
United States
16,800
China
9,240
Japan
4,902
Germany
3,635
France
2,735
United Kingdom
2,522
Brazil
2,246
Russian Federation
2,097
Italy
2,071
India
1,877
Consider this…
2013 UK GDP – £1.7B
2014 UK GDP – £1.75B
What is the growth rate in the year?
Hmmm…. What if all the prices of all the goods in the
economy went up during the year… would that change
your answer?
Real vs. Nominal GDP Growth
(value versus volume)
• Nominal GDP growth:
Percentage increase in the total output of the economy
calculated using the raw figures (the prices used are
those that existed on the day of the measurement)
• Real GDP growth:
Percentage increase in the total output of the economy,
adjusted for inflation (removing the effect of price
changes during the period)
5% nominal GDP growth – 2% inflation = 3% real GDP growth
Total vs. Per Capita GDP
Per capita is ‘per
person’ – total GDP of
the country divided by
the population
Three ways to calculate
National Income
Remember the desert island?
Remember circular flow?
income = expenditure = output
We can measure any of these to calculate GDP
Can you calculate the
total contribution to
GDP here?
We have to
be careful
not to double
count – we
add ‘value
added’ at
each stage of
production.
The UK economy has become
increasingly based on producing
services…
But there are some problems with using
GDP as a measure of performance:
• Some activity goes uncounted
- things we do for ourselves or our friends without payment
- activities intentionally hidden from gov’t (black market)
• Doesn’t tell us the income of the average citizen
- most of GDP could be in the hands of a few very rich people
- Even GDP per capital doesn’t reveal this difference
• Difficult to compare countries
- the basket of goods that your money will buy in each country
may be very different, so different standards of living could
exist for the same GDP figure
Comparing
growth
rates:
China’s growth
rate at 7% is
considered poor
and worrying…
Comparing
growth
rates:
This annualised
rate of 1.6% growth
is considered really
positive for the UK!
Comparing growth rates:
• Different countries have different ‘potential’ to
grow
• Under developed countries have more possibilities
for progress and they can progress fast by adopting
technology already developed
• Highly developed countries have to work harder to
squeeze out more output with their already very
productive and sophisticated production and
workforce
Is GDP all that?
• Happiness?
• Well-being?
• Easterlin paradox?
• Relative versus absolute income?