Economics – may revision
NATIONAL INCOME DEFINITIONS
National Income
Income which accrues to the permanent residents of a country from current economic activity in the
production of goods & services during a specific period, usually a year. NNP@FC
It includes income in kind but excludes transfer payments
Net National Product
The total of all payments for productive serves accruing to the permanent resident s of a country. It is
calculated using a value added approach
Gross Domestic Product
The output produced by the factors of production in the domestic economy irrespective of whether
those factors are Irish or foreign owned. It is the value, in money terms, of the final output in the
economy over a specified period, usually 1 year
Gross National Product
The value at current market prices of goods & services produced in the economy in a specified period ie
the total expenditure on the output of goods & services of the national economy valued at the prices
paid for them
Transfer Pricing
When multinational companies try to reduce their total tax bill by underpricing ( or price at zero profit)
components/services supplied from subsidiaries in higher corporate tax economies, to subsidiaries in
lower corporate tax economies.
This increases the apparent value, added in the low corporate tax economy, over inflating GDP figures
and reducing the company’s total tax bill.
GNP V’s GDP
The difference between GNP & GDP is Net Factor Income from Abroad ( NFIA ). NFIA is comprised of
profit, interest & wages earned by Irish people living abroad, less similar payments from foreigners living
in Ireland. As a result of large scale repatriation by multinationals operating in Ireland, NFIA is negative
& when added to GDP to calculate GNP, it makes it a smaller figure.
GNP is a more accurate measure in Ireland. Due to the presence of large multinational sector which
repatriates profits back to the courtiers which their primary base of operations are located.
GDP overstates income per capita in Ireland, This problem is exacerbated by the low corporate tax rate
in Ireland which leads to transfer pricing by multinationals, which over states the profits actually earned
by the economic activity which took place in Ireland.
Net Factor Income from Abroad
Profits, wages, Interest earned by Irish people living abroad and Irish owned subsidiaries abroad, less
similar payments from foreign people living abroad and foreign owned subsidiaries in Ireland
Income in Kind
Non money income. It can refer to government provided services such as food stamps, education,
medical aid, housing assistance or any good/service that can be consumed.
For example, the benefit received from the use of a company car
A farmer consuming some of his produce
Transfer Payments
A redistribution of income by the government. The payments are for providing non productive services
paid for out of the tax revenue. Social welfare payments are an example
Fiscal Deficit
The balance between the amount of money the government collects (taxes, source of income ) less the
expenditure ( goods/services, transfer payments )
In a recession, unemployment rises, taxes revenues fall. If the government spends more than it receives
then it must borrow to make up the difference.
Balance of Payments
A record of the countries transactions with the rest of the world. BOP deficits are Imports are greater
than Exports.
Ireland is a small open economy.
Small = Irish firms have a small share of the world economy
Open = refers to the importance of International trade in the economy
Domestic V National
Domestic includes all income from the multinationals
National is Irish, the income/money that stays in Ireland
The only difference between them is NFIA
Unemployment
Unemployment
A person is regarded as “unemployed” if they are out of work but are willing to accept a job at the going
rate for what they are qualified for.
Frictional
This occurs as workers spend time searching for jobs. Even at full employment such frictional
unemployment will occur.
As some firms close, others open.
Some people lose their jobs, people switch between jobs
Structural
This arises due to the mismatch between the types of jobs available & the skill of the workforce. This can
be as a result of a change in the structure of an industry brought by technical progress, competitive
forces, and changes in relative factor costs.
Whole regions & sectors may decline & many people may never work again
Deficient demand or Cyclical
This is the most frequent type of unemployment. Deficient demand in the economy can give rise to
unemployment. This can be brought about by the changes in activity associated with the business cycle
Classical
This occurs when wages are too high – above the level that equates to supply/demand.
It can be caused by either the exercise of Trade Union Power or by legislation which forces minimum
wage above the equilibrium wage
Seasonal
Simply some jobs are seasonal i.e. Agriculture, tourism, Xmas.
Double Counting
Double counting would occur if expenditure on intermediate goods was included in the calculation for
national incomes i.e. include the price paid for the car but not the price the manufactured paid for the
tyres.
Double counting should be avoided and shall not be included in the calculation for national income. We
use the value added approach to avoid this
Inflation
Inflation is a continuing or persistent tendency for the price level to rise. It is a continuous decrease in
the purchasing power of money. The most usual measure of consumer prices is called the consumer
price index CPI.
Non Marketed/Government services
Government provides certain services without a direct charge eg, police, ambulance, street lighting
These should be included in the national accounts but at cost price as there is no selling price
Figuring out National Income
Formula’s
C + I + G + (X - M) = GDP@mp
NNP@fc = National Income
GNDI = GDP@mp + NFIA + NTFA
Once you know GDP@mp you can figure everything else out.
From MP to FC
GDP@mp
- InTax
+ Sub
= GDP@fc
From Gross to Net
GDP@fc
- Dep
= NDP@fc
From Domestic to National
NDP@fc
+ NFIA
= NNP@fc
Income method
By adding together the income received by all of people in the economy for the factors of production
they supplied during the year.
Only income received for productive activity should be included, therefore, income in kind should be
included & transfer payments should excluded.
Expenditure Method
The calculation of the total amount spent on goods and services and on net additions to capital stock
and goods in the country in the course of a year.
Output method
The calculation of the total output of consumer ( or final ) goods and services that produced during the
year.
Uses





To indicate the standard of living
For standard of comparison
To calculate the rate at which income is growing
Relationship between different parts of the economy
To assist the government in managing the economy
The business Cycle
Nominal GNP = Real GNP x price level
When GNP changes it is important to distinguish between changes due to changes in the price level and
changes to the volume of output ( real GNP )
Year
1
2
Nominal GNP
1,000,000
2,000,000
=
Real GNP
500,000
500,000
X Price Level
100
200
Although nominal GNP has doubled, real GNP was unchanged, so the standard of living i the economy
remain unchanged. Improvements in the standard of living only come through changes in real GNP