Study Note - Measuring 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. Measuring the level and rate of growth of national income (Y) is important for seeing: The rate of economic growth Changes to average living standards Changes to the distribution of income between groups within the population

Gross National Income (GNI) measures the final value of income flowing to UK owned factors of production whether they are located in the UK or overseas.

Gross Domestic Income is concerned only with the incomes generated within the geographical boundaries of the country. Fr example the value of the output produced by Toyota in the UK counts towards our GDP but some of the profits made by overseas companies with production plants here in the UK are sent back to their country of origin – adding to their GNP.

GNI = GDP + Net property income from abroad (NPIA)

NPIA is the net balance of interest, profits and dividends (IPD) coming into the UK from our assets owned overseas matched against the flow of profits and other income from foreign owned assets located within the UK. There has been an increasing flow of direct investment (FDI) into and out of the UK. Many foreign firms have set up production plants here whilst UK firms have expanded their operations overseas and become multinational organisations.

Nominal and Real - Measuring Real National Income

When we want to measure growth in the economy we have to adjust for the effects of inflation.

Real GDP measures the volume of output. An increase in real output means that AD has risen faster than the rate of inflation and therefore the economy is experiencing positive growth. Consider this example

The money value of a country’s GDP is calculated to be $4,000m in 2007
In 2008, the money value of GDP expands to $4,500m but during the year, inflation is 3% causing the general index of prices to rise from a 2007 base year value of 100 to 103 in 2008.

The real value of GDP in 2008 is calculated thus:

Real GDP = money value of GDP in 2008 x 100 / general price index in 2008

= £4,500 x 100/103 = $4,369 (measured at constant 2007 prices)

Note here that the real GDP data is expressed at constant prices which mean that we have made an inflation adjustment. Look for this in the data response questions in the exam.

Total and Per Capita – Measuring Income per capita

How much does each person earn on average? We use per capita measures to give us a guide to this. Income per capita is a way of measuring the standard of living for the inhabitants of a country.

Gross National Income per capita = Gross National Income / Total Population

Our next chart shows two pieces of economic data

The chart shows that real incomes per head of the population have risen over the years, i.e. average living standards have improved but that the rate of improvement is not uniform each year. We see that economic growth in the UK fluctuates from year to year, i.e. there is an economic cycle with periodic recessions (where the value of real national income declines.)