Other Considerations for National Income Accounting
Problems of using National Income figures to compare welfare between countries
GDP per capita is the most commonly used single indicator of the standard of living
of a country, and for purposes of comparison, between countries. However, the
problems and shortcomings of using GDP per capita as though it were the same
thing as standard of living or welfare are enormous.
 Regional Variations in income and spending
National GDP figures hide significant regional variations in output, employment and
incomes per head of population. Within each region there are also areas of relative
prosperity contrasting with unemployment black-spots and deep-rooted social and
economic deprivation.
 Inequalities of income and wealth
GDP figures on their own do not show the distribution of income and the uneven spread
of financial wealth.
 Economic growth and externalities
Rising national output might have been accompanied by an increase in pollution and
other __________________ externalities which have a negative effect on economic
welfare. A new national income measurement for Green GDP aims to take this into
account. This is a measure of GDP that takes into account any environmental costs
incurred from the production of goods and services included in the GDP figures. In
2004, China produced its first set of green national income accounts. They showed that
annual pollution costs were approximately 3% of GDP. Green accounts were
discontinued after 2007.
Green GDP = GDP – environmental costs of production.
 Leisure and working hours
Rising national output might have been achieved at the expense of leisure time if workers
are working longer hours
 The balance between consumption and investment
If an economy devotes too many resources to satisfying the short run needs & wants of
consumers (consumption), there may be insufficient resources for investment needed for
long term economic development. Faster economic growth might improve living
standards today but lead to an over-exploitation of scarce finite economic resources
thereby limiting future growth prospects.
 The parallel economy and non-recorded sectors
GDP figures might understate the true living standards because of the existence and
growth of the parallel economy. The parallel economy includes economic activity that
goes unrecorded by government. According to their survey, Nigeria and Thailand have
the world’s largest black economies, both accounting for more than 70% of official GDP.
TASK 1
State whether the following sources of income would be added OR subtracted OR
not used when calculating HONG KONG’S Gross National Income.
Flow of income
Value of toys produced in China by Hong Kong owned business
Value of fish processed by an Australian company in HK
Profits earned and repatriated by Australian company above
Interest earned on account held abroad by HK company
Value of bootleg DVD’s sold by HK street trader
Dividends earned by UK company with holdings in HK company
Value of restaurant meals in HK owned restaurant chain
Value of furniture produced and sold by Domus (HK company) to
hotel chain in Pakistan
+ OR – OR N/A
Notes:
TASK 2
a) Calculate a country’s Gross National Income, Net National Income and GDP per
capita for both 2007 and 2008 given the following information:
(US$ billion)
Nominal GDP
Net property income from
abroad
Depreciation of capital stock
Population (millions)
ANSWERS:
Gross National Income
Net National Income
GDP per capita:
2007
567
-3.4
2008
578
2.2
1.7
45
4.3
48
b) Calculate the GDP growth rate from 2007 to 2008.
c) Calculate the Real GDP for 2007 and 2008 assuming that the price index (GDP
price deflator) for 2007 was 102.5 and for 2008 was 114.3. (2006 = 100) (HL
question)
d) What is the real GDP growth rate from 2007-2008?
TASK 3/Exercise 4: