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measuring national income

Asked by Martinha | May 20, 2007 | AS Level > Economics > Revision
Martinha asks:

Could you help me to describe one method of measuring national income,including any problems that may be encountered in the calculation.
many thanks.

etutor answers:

There are of course three ways of measuring the national income. The value of the output of domestically produced goods and services (National Output or Product) is made up of the incomes paid to the factors of production involved in producing the output (National Income); when the goods and services are sold the resulting spending (National Expenditure) is by definition equal to the value of the output. The most reliable measure in practice is national expenditure. There are not so much 'problems' involved in the calculation, but rather there is a need to clearly outline how it is done. Hence national expenditure is calculated by adding up the value of all spending by consumers, firms (on investment, including addition to stocks) and government (excluding social security benefits, which are simply transfers of existing income). To this the value of exports is added and the value of imports is subtracted. And, to remove the distorting influence of taxes and subsidies, the value of indirect taxes is subtracted and the value of government subsidies is added. We also add in net property income (or 'investment income') from abroad. This gives a measure called GROSS DOMESTIC PRODUCT AT FACTOR COST, which is the most commonly used measure.

But this measure has its limitations as a guide to living standards:

  • It needs to be adjusted for inflation so that any increase in GDP from year to year reflects a genuine increase in output rather than simply an increase in the prices of existing output - hence the appropriate measure is REAL GDP.
  • It needs to be divided by the population to give a measure of living standards – hence real GDP per head.
    It takes no account of how equal or unequal the distribution of income is in an economy.
  • It does not include any transactions that do not occur in the market but which contribute to living standards – such as growing your own food or DIY activities.
  • It says nothing about the quantity or quality of services provided by the government – for example, a government could spend a large % of the total on defence (which does not contribute directly to living standards) rather than, say, health.
  • It takes no account of how many hours worked to produce the output, or of the extent of externalities such as pollution or congestion, or the availability and quality of leisure activities, or the extent to which people feel free and safe from crime.

I hope this is helpful.

2 student responses

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responded Jun 8, 2007 10:41:02 PM BST

Type your response here!

many thanks  ....

responded Jun 8, 2007 10:42:18 PM BST
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