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

• Australia

• Brazil • China• Canada • France • Germany • India • Indonesia• Italy • Japan • Netherlands

• 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?

• 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

Real vs. Nominal GDP Growth(value versus volume)

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?

£95

£550

£1600

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?