National Income
Powerpoint produced by Rachel Farrell
Sources of information: SEC Marking Schemes & newspaper articles
Syllabus
• Determination of National Income
and its Fluctuations
• Concept of national income; its
measurement and statistical sources.
Factors influencing the size and
composition of national income. Its
limitations as a measure of economic
performance.
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COLLATED EXAM
QUESTIONS
ORDINARY LEVEL
HIGHER LEVEL
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SEE SCANNING EXERCISE
CSO
• The Central Statistics Office
calculates the National Income for
Ireland.
National Income
• Is the income earned by the permanent
residents of a country from current
economic activity during a specified
period, usually one year.
3 Methods of
Measuring National Income
1. Production/output method
2. Income method
3. Expenditure method
• All three methods should equal each
other as output (production) pays for
wages (incomes) which are spent
(expenditure) on output.
• However there can by stastistical
discrepancies (small differences)
due to the different methods used.
Three methods are used to
ensure that there is;
1. Accuracy
Using three methods gives a more
accurate result.
2. A cross-check
Estimates under one method can be crosschecked under the other two methods.
3. Each method brings valuable information
lacking in the other two.
• The output method is a supply-side
analysis which focuses on the
payments received from the supply of
goods and services.
• Understanding the outputs of
different sectors is vital for
infrastructural advancement,
research and development (R&D)
clusters, export competitiveness etc.
Output method
• Add the total value of output
producded by;
1. Agriculture, forestry, fishing
2. Industry
3. Building & construction
4. Distribution, transport &
communication
5. Public administration & defense
6. Other services (including rent)
Double counting
• When using the output method, care must
be taken to avoid “double counting”.
• If a dressmaker buys material for 100
and makes a dress worth 300, their
output is only 200.
• This is known as the value added of the
business.
The income method is a supplyside analysis which focuses on all
factor payments made to
households. This allows planners
to know the levels of taxes and
transfers that are appropriate
for given families.
Income method
Add the annual returns for income tax purposes of;
1. Income from agriculture, forestry & fishing
2. Non-agricultural income:
a) Company & trading profits & professional
earnings
b) Wages & salaries (including BIK)
c) Rent (actual & imputed)
Incomes-in-kind
Benefit-in-kind
• Incomes received in non money form.
• Payment made in the form of good or
service.
• Eg. Company car.
• Included in National Income.
Imputed Rent
• Employer may allow employee to live in
house rent free.
• No money changes hands.
• Will be lost from NI statistics unless
reported to the revenue commissioners.
Transfer Payment
• Is payment received for which no
FOP/good or service has been supplied.
• It occurs when tax on income earned by
one person is given as income to another
eg. social welfare, student grants
• It is this not included in National Income
as it would lead to double counting.
• The expenditure method (often
associated with the writings of
Keynes).
• Unlike the other two, the expenditure
method focuses on the levels of
demand in the economy and it allows
planners to assess the balance
between investment and consumption,
public and private activity, imports
and exports (the balance of trade)
etc.
Expenditure method
1. Personal consumption of goods & services
2. Net expenditure by central & local government on
current goods & services (wages, materials)
3. Gross domestic fixed capital formation (factories, roads)
4. Value of physical changes in stocks (livestock, raw
materials, work in progress)
5. Plus exports (spending by foreigners on Irish
goods/services must be included)
6. Less imports (spending by Irish people on foreign
goods/services must be deducted)
Relationship between
GDP @ CMP and NNP @ FC
Gross Domestic Product @ current market prices
± Net Factor Income from abroad (ROW)
= Gross National Product @ current market prices
Less indirect taxes
Plus subsidies
= Gross National Product @ factor cost
Less Depreciation
= Net National Product at factor cost (National Income)
Relationship between
NNP @ FC and GDP @ CMP
Net National Product @ factor cost (National Income)
Plus Depreciation
=Gross Domestic Prices @ factor cost
+/- Net Factor Income from abroad (ROW)
= Gross National Product @ factor cost
Plus indirect taxes
Less subsidies
= Gross National Product @ market prices
Gross Domestic Product
at current market prices
1. Is the output produced by the FOP
2. in the domestic economy
3. irrespective of whether the factors
are owned by Irish nationals or not
4. at current market prices.
Net Factor Income
From Abroad (ROW)
Is the difference between:
• Incomes earned by foreign FOP in
Ireland and sent back to home country
eg. USA (repatriated).
and
• Incomes earned by Irish FOP abroad and
returned to Ireland.
Is this + or - for Ireland
Minus in 2011 because:
1. Large no. of foreign owned co.’s in
Ireland repatriating profits.
2.Immigrants sending wages back
home.
3.Repayments of National Debt to
foreign institutions.
Therefore GNP < GDP or GDP > GNP
Note
• Gross Domestic Product is a better
guide to the level of economic
activity.
• Gross National Product is a better
guide to the Standard of Living.
Gross National Product
@ Current Market Prices
1.
2.
3.
4.
Is the output produced by
Irish owned FOP
in Ireland and elsewhere
at current market prices.
Gross Domestic Product
Gross National Product
Indirect tax
• Is tax on spending.
• Eg. VAT
Subsidy 2002 Q 8 OL
• Is a direct payment by the
government to a producer/exporter.
• In order to decrease the cost of
production and/or the price per unit.
Gross National Product
@ Factor Cost
1.
2.
3.
4.
Is the output produced by
Irish owned FOP
in Ireland & elsewhere
valued at payments to the factors of
production.
Factor Cost
• It is the payment to the factors of
production for producing goods &
services.
• It includes subsidies and excludes
taxes.
• Note: to get Market Prices – sub + tax
Depreciation
• Is the reduction in the value of
capital goods/fixed assets in the
production of goods & services in the
economy.
2010 Q 5 HL (a)
(i) GNP @ CMP + Sub – Tax = GNP @ FC
200m + 5m – 30 m = 175m
(ii) GNP @ FC – Dep = NNP @ FC
175m - 12m = 163 m
2005 HL SQ 9
(i) GNP @ CMP + Sub – Tax = GNP @ FC
180m + 4m – 25 m = 159m
(ii) GNP @ FC – Dep = NNP @ FC
159m - 15m = 144 m
2010 Q 5 (b) HL
• Explain the economic effect which each
of the following could have on the level of
GNP at Market Prices.
(i) A reduction in the general level of VAT
(ii) A reduction in the subsidies paid to
farmers.
A reduction in the general level of
VAT
Short Run
• GNP will decrease
• Because
• A reduction in VAT
reduces the price of
goods & services paid by
consumers
•
•
•
•
Long Run
GNP will increase
Because
Lower prices may
encouraged consumers
to buy more goods &
services.
When aggregate demand
increased so does GNP.
A reduction in subsidies
paid to farmers
Short Run
• GNP will increase
• Because
• A reduction in subsidies
paid to farmers will
increase prices for
agricultural products
which in turn will lead to
an increase in GNP
•
•
•
•
Long Run
GNP will decrease
Because
Higher prices may
discouraged consumers
from buying agricultural
produce.
When aggregate demand
falls so does GNP.
Current Market Prices
V
Constant Prices
• When measuring national income
statistics it is important to
distinguish between
nominal(monetary) and real (physical)
changes
• When comparing the national income
statistics from year to year at
current market prices no allowance is
made for inflation.
• So an increase in national income
could be due to price increases and
not due to the volume of activity
increasing.
• To overcome the problem of inflation
each year’s figures can be measured
at a constant price.
• Therefore a more realistic
comparison can be made between
years.
• From table 1 it appears that GNP
increased by 32% (264,000-200,000
= 64,000/200,00).
• However part of this increase is due
to the increase in price.
• To eliminate the inflationary effect
of price increases the GNP for year
2 is calculated using the price form
year 1.
• Table 2. shows the real change in
GNP is much less at 20%.
(244,000-200,000 = 40,000/200,000).
Uses of NI statistics
1. Measures changes in the level of economic
growth.
2. Indicates changes in standard of living.
3. Distribution of income.
4. Negotiation of Partnership agreements.
5. International comparisons.
Students: write a brief explanation of each of
thee headings.
Limits of NI statistics
• Care should be taken when using
National Income Statistics as a
measure of economic performance of
a country for the following reasons;
Limits of NI statistics
1. Inflation/deflation
2. Population changes
3. Employment / Unemployment
4. Levels of taxation
5. Measures flow of wealth not welfare
6. Distribution of national income
7. Nature of the goods produced
Students: write a brief explanation of each
of thee headings.
Limits of international
comparisons of NI stats
1.
2.
3.
4.
Rates of exchange
Nature of expenditure
Distribution of national income
Size of population
Students: write a brief explanation of each
of thee headings.
Human Development Index
• Is a comparative measure of life
expectancy, literacy, education and
standard of living for countries
worldwide.
• It is a standard measure of human
wellbeing, especially child welfare.
• The HDI is used by the United
Nations Development Programme.
GNP
HDI
V
Factors that affect the size
of National Income
2001 Q 4 OL
Effects of inflation & population
on SOL
2001 Q 4 OL
Black Economy
• Is any economic activity which takes
place which is not recorded and
therefore not included in national
income accounts.
Examples of work in the
black economy
• A teacher giving grinds, without
declaring the income for tax
purposes.
• A plumber fixing a washing machine
for cash payment and not declaring
the income for tax purposes
Reasons for the growth of the
Black Economy
• Unemployment: those who have lost
their jobs cannot afford VAT inclusive
prices and/or are prepared to take a
job for cash only to avoid paying income
tax.
• Disillusionment with government
policies: some think that the tax
system is unfair.
Reasons for the growth of the
Black Economy
• Reduced disposable incomes: people
can’t afford to pay the legitimate
prices for goods / services.
• Increased VAT rates: causing
prices to increase and consumers
want to avoid the higher taxes.
Economic effects of the black
economy in Ireland
1. Loss of tax revenue to the government.
2. Decline in legitimate business activity
3. Increased government expenditure on
enforcement.
4. Pressure on government services / finances.
5. Increase crime levels.
6. Standards of products/services.
Students: write a brief explanation of
each of thee headings.
Economic measures the Irish
Government could take to discourage
the black economy
1. Reduce direct taxation rates.
2. Reduce indirect taxation.
3. Better enforcement by revenue
commissioners.
4. Educate the public about the importance of
tax revenue to the state.
5. Simplification of the tax system / close all
tax loopholes.
Students: write a brief explanation of
each of thee headings.