To Glossary
see: OECD. The conceptual framework underlying the national accounts
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Session 8
The national income. Definitions and measurements. Problems
of measurements. Uses and reliability of national income statistics.
Outline some of the uses of national income
figures, and discuss the reliability of the statistics in relation
to these uses.
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(from Macmillan Dictionary of Modern Economics, Macmillan, 1986):
National Income: a measure of the money value of the goods
and services becoming available to the nation from economic
activity.
There are three approaches to measuring this:
1.-as the sum of the incomes derived from economic activity,
these broadly divide into incomes from PROFITS and
incomes from employment;
2.-as the sum of expenditures, with the main distinction being
between expenditure on CONSUMPTION and expenditures which
add to the CAPITAL STOCK (INVESTMENT);
3.-as the sum of the products of the various industries of the
nation.
These three measures, the income, expenditure and output (product)
approaches, give rise to several different ways of describing the
various aggregates employed in compiling the national accounts and
these are described and illustrated in the table below.
1.- The income approach to measuring national income does not simply
aggregate all incomes. It aggregates only those of residents of
the nation, corporate and individual, which derive directly from
the current production of goods and services. It aggregates the
incomes of FACTORS OF PRODUCTION (factor incomes) and excludes
all incomes which cannot be regarded as payment for current
services to production (TRANSFER INCOMES). The sum of all factor
incomes gives total domestic income which, once adjusted for
STOCK APPRECIATION, gives gross domestic product at factor cost.
If we then add on NET PROPERTY INCOME FROM ABROAD we have obtained
one measure of gross national income, or, as it is more commonly
known, gross national product.
2.- The expenditure approach aggregates consumption and investment
expenditures to obtain total domestic expenditure at market
prices. It aggregates only the value of final purchases and excludes
all expenditures on INTERMEDIATE GOODS. However, since final
expenditures at market price include both the effects of taxes
and subsidies and expenditures on IMPORTS, while excluding the value
of EXPORTS, all these have to be taken into account before we
obtain gross national product by this method.
3.- The output approach aggregates the sum of the VALUES ADDED at
each stage of produccion by the industries and productive enterprises
in the country. The sum of these values added gives gross domestic
product at factor cost which, after a similar adjustment to include
net property income from abroad, gives gross national product.
Thus the three approaches give rise to estimates of gross national
product which, once adjusted to take account of CAPITAL CONSUMPTION,
provide the measures of national income, or more accurately, net
national income or net national product.
A typical account is shown below. The figures are hypothetical.
THE INCOME APPROACH
Income from employment 40
plus Income from self-employment 5
plus Gross trading profits of companies 5
plus Gross trading surplus of public utilities 5
plus Rent 5
_____
equals Total domestic income before providing for 60
(less) Stock appreciation -15
_____
equals Gross domestic product at factor cost 45
plus Net property income from abroad 5
_____
equals Gross national product at factor cost 50
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THE EXPENDITURE APPROACH
Consumers' expenditure 35
plus Public authorities' current expenditures
on goods and services 10
plus Gross domestic fixed capital formation 10
plus Value of physical increase in stocks and
work in progress 5
____
equals Total domestic expenditure at market prices 60
plus Exports and property income from abroad 10
less Imports and property income paid abroad -15
less Taxes on expenditure -10
plus Subsidies 5
____
equals Gross national product at factor cost 50
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THE OUTPUT APPROACH
The agricultural and extractive industries 5
plus Manufacturing industries 20
plus Services and Construction 20
_____
equals Gross domestic product at factor cost 45
plus Net property income from abroad 5
_____
equals Gross national product 50
=====
Gross national product 50
less Capital consumption -10
_____
equals Net national income 40
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GDP SHORTCOMINGS
For various reasons, GDP omits certain measures of overall economic
well being. Because GDP is the basis of government economic
policies, the concern is that a false impression of the nation's
material well-being may result from a flawed GDP. GDP is a less-
than-perfect measure of the nation's economic pulse because it
excludes the following factors:
NONMARKET TRANSACTIONS
Because GDP counts market transactions, it excludes certain unpaid
activities such as homemaker production, child rearing, and do-it-
yourself home repairs and services. For example, if you take your
dirty clothes to the cleaners, GDP would increase by the amount of
the cleaning bill paid. But GDP ignores the value of cleaning these
same clothes if you cleaned them yourself at home.
There are two reasons for excluding nonmarket activities from GDP.
First, it would be extremely imprecise to attempt to collect data
and assign a money value to services people provide for themselves
or others without compensation. Second, it is difficult to decide
which nonmarket activities to exclude and which ones to include.
Perhaps repairing one's own roof, painting one's own house, or
repairing one's own car should be included. Now consider the value
of polishing one's shoes. GDP does include the price of the
shoeshine if purchased at a barber shop, so it could be argued that
GDP should include the value of people polishing their own shoes.
DISTRIBUTION, KIND, AND QUALITY PRODUCTS
GDP is blind to whether a small fraction of the population consumes
most of one country's GDP or consumption is evenly divided. GDP also
wears a blindfold with respect to the quality and kinds of goods and
services that compose a nation's GDP.
Consider the fictional economies of Z and E. Z has a GDP of $2,000
billion, and E has a GDP of $1,000 billion. At first glance, Z
appears to possess superior economic well-being. However, Z's GDP
consists of only military goods, and E's products include tractors,
wheat, milk, houses, and other consumer items. Moreover, assume that
the majority of the people of Z could care less about the output of
military goods and would be more pleased with the production of
consumer goods.
Conclusion: GDP IS A QUANTITATIVE, RATHER THAN QUALITATIVE, MEASURE
OF THE OUTPUT OF GOODS AND SERVICES.
LEISURE TIME
The wealthier a nation becomes, in general, the more leisure time
its citizens can afford. Rather than working longer hours, workers
often choose to increase their time for recreation and travel.
During this century, the length of the typical workweek in the
United States has declined steadily from about 50 hours in 1900 to
about 34 hours in 1993.
Conclusion: IT CAN BE ARGUED THAT GDP UNDERSTATES NATIONAL WELL-
BEING BECAUSE NO ALLOWANCE IS MADE FOR PEOPLE NOT WORKING AS MANY
HOURS AS THEY ONCE DID.
THE UNDERGROUND ECONOMY
Illegal gambling, prostitution, loan-sharking, and illegal drugs are
goods and services that meet all the requirements for GDP. They are
final products with a value determined in markets, but GDP does not
include unreported criminal activities. The "subterranean" economy
also includes tax evasion. One way to avoid paying taxes on a legal
activity is to trade or barter, rather than selling goods and
services. One person fixes a neighbour's car in return for baby-
sitting services, and the value of the exchange is unreported. Other
legal sales are made by some individuals and businesses for cash,
with no report of the income earned to the internal revenue service.
Estimates of the size of this subterranean economy vary. Some
studies by economists estimate the size of the underground sector is
between 5 and 20 percent of the GDP (in the U.S.A.). This range of
estimates is comparable to the size of the underground economy in
most European countries.
Conclusion: IF THE UNDERGROUND ECONOMY IS SIZEABLE, GDP WILL
UNDERSTATE AN ECONOMY'S PERFORMANCE.
ECONOMIC BADS
More production means a larger GDP, regardless of the level of
pollution created in the process. There exist 'negative
externalities' such as pollution caused by steel mills, chemical
plants, and cigarettes. Air, water, and noise pollution are
'economic bads' that impose costs on society not reflected in
private market prices and quantities bought and sold. When a
polluting steel mills sells many tons of steel, this transaction
increases the GDP. However, critics of the GDP argue that it fails
to account for the diminished quality of life from the "bads" not
reported in the GDP.
[drawn from I. B. Tucker,III, "Survey of Economics", West Publishing
Company, 1995]
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GLOSSARY
1.- CAPITAL CONSUMPTION
2.- CAPITAL STOCK
3.- CONSUMPTION
4.- EXPORTS
5.- FACTORS OF PRODUCTION
6.- GROSS DOMESTIC FIXED CAPITAL FORMATION
7.- IMPORTS
8.- INTERMEDIATE GOODS
9.- INVESTMENT
10.- NET PROPERTY INCOME FROM ABROAD
11.- PROFITS
12.- PROPERTY INCOME
13.- STOCKS
14.- STOCK APPRECIATION
15.- SUBSIDIES
16.- TAXES
17.- TRANSFER INCOMES
18.- VALUES ADDED
19.- WORK IN PROGRESS
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RRojas Databank/1997
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