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LEARNING OUTCOME

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					 LEARNING OUTCOME 5



NATIONAL INCOME
  NATIONAL INCOME
National Income is a measure of the value of economic activity in an economy.
Nominal National Income is the money value, whereas Real National Income
eliminates the effect of inflation.
The basis of National Income is Aggregate Monetary Demand which comprises:
Consumption Spending (C)   +     Investment Spending (I)      +   Government Spending (G) + Exports (X)

 In an open (trading) economy, National Income comprises:

Consumption(C) + Investment(I) + Government(G) + Exports(X) – Saving(S) – Taxation(T) - Imports(M)

 INJECTIONS                                (I)                                       WITHDRAWALS
                                                   Firms
 Government                                                                                     Saving
                                                                             (X)
 Investment                    (G)                                                            Taxation
                                                 CIRCULAR
                                     (C)         FLOW OF      (Y)
                                                                                               Imports
 Exports                                         INCOME
                       (M)


                                                                            (T)
                                                 Households
                           (S)
NATIONAL INCOME
As long as -
      total injections      equal         total withdrawals
         Investment                           Saving
              +                                  +
         Government
              +
                               =             Taxation
                                                +
          Exports                             Imports
               national income is in equilibrium.
 If injections are greater than withdrawals national income, output and
 employment will rise.
 If injections are lower than withdrawals national income, output and
 employment will fall.
                           Similar to water in a bath, when the taps inject
                           water into the bath faster than the plug withdraws
                           it, then the water level rises.

                         If the plug withdraws water faster than the taps
                         inject it, the water level falls.
  THE MULTIPLIER
 The proportion of any rise in income which consumers save is known as the
 Marginal Propensity to Save.
 Any additional injection will be multiplied by the inverse of the Marginal
 Propensity to Save or     1             ie 1
                      MPS (T) (M)      Marginal Leakages
 This is known as the multiplier effect and can be used as follows:
 If consumers choose to spend two thirds of any rise in income then they save
 the other one third. This means the multiplier is 1       ie 3.
                                                    1/3
When the multiplier has a value of 3 this means a Government, seeking to generate
additional national income of £4.5 bn, only requires to spend an additional £1.5 bn,
since a multiplier of 3 will generate the desired £4.5 bn (£1.5 X 3 = £4.5).
The reason for the multiplier effect is because when 2/3 of any extra income is
spent, creating increased demand. Manufacturers will employ extra resources
to increase output to meet the demand. When these extra resources are paid for,
extra income is earned, 2/3 of which will be spent and so the process goes on.
  An additional injection therefore has a ‘multiple’ rather than a ‘one-off’ effect.
NATIONAL INCOME
National income in an economy is important since it is the level of economic
activity which creates employment for labour and all the other resources.
                                       If we plot all spending on the graph
                               E=Y
                                       starting with Consumption spending (C),
Expenditure
                                   C+I+G     then add on Investment spending (I),
                                 C+I      then Government spending (G) - C+I+G
                             C            represents Aggregate Monetary Demand.

                                          When AMD is insufficient to employ all
                                          resources, there is a deflationary gap.
                                 Income
                           FE
Keynesian theory would suggest that a Government could increase G and put
policies into effect to stimulate C and I in order to make up the gap and create
a level of national income sufficient to achieve full employment.
Similarly where the level of AMD is higher than necessary for full employment
there is an inflationary gap – too much demand for the capacity available.
Keynesian theory would suggest a Government could decrease G and use policies
to reduce C and I to eliminate the inflationary gap.
3 METHODS OF CALCULATING
NATIONAL INCOME
 INCOME METHOD               OUTPUT METHOD                 EXPENDITURE METHOD

Gross Domestic Income Gross Domestic Product             Gross Domestic Expenditure

        +                          +                 + Net Income from Overseas
                                                                and Exports
   Net Income
  from Overseas
                               Net Income
                              from Overseas                        -
                                                                 Imports
        =                          =
Gross National Income       Gross National Product
                                                                   =
                                                         Gross National Expenditure
        -                          -                       + subsidies -    tax
  Depreciation                 Depreciation          = Gross National Expenditure
                                                               -
       =                           =                         Depreciation
                                                                  =
Net National Income     =   Net National Product     =   Net National Expenditure
  PROBLEMS WITH NATIONAL INCOME
  CALCULATIONS
 INCOME METHOD:
Only incomes which are earned from productive activity should be counted.
Transfer incomes must not be included since these are paid out of the axes
paid by income earners and have already been counted.
Transfer incomes include pensions, benefits and disability allowances.
OUTPUT METHOD:
Care must be taken to avoid double counting by costing production at final value.
Increase in value of stock must be due to real additions to stock and not inflation
Much production is in the ’ black economy’ and therefore goes unrecorded.
EXPENDITURE METHOD:
Should be expressed at ‘factor cost’ by adding back subsidies given and deducting
taxes taken.
ALL METHODS:
Depreciation must be deducted since this is value attributed to income earned
from, or output produced for, or expenditure on, replacement goods (which do not
increase the total stock of goods available) and not additional new goods.
USING NATIONAL INCOME
STATISTICS
Allows comparisons of standard of living between countries provided consideration
is given to:
  • differing populations – national income per head should be used
 • average personal disposable income would take differing tax rates into account
 • consideration is given to how national income is distributed within countries
 • differences in hours worked and conditions of work should be considered
 • social costs and benefits

 • exchange rate differences between countries
• different countries spend different proportions of national income on capital
  goods and defence which do not immediately impact on standard of living


Allows comparisons over time provided consideration is given to:
 • the rate of inflation therefore
 • use ‘real’ values rather than’ nominal’ values
 QUIZ
What does AMD stand for?                AGGREGATE MONETARY DEMAND
                                        CONSUMPTION, INVESTMENT, GOVERNMENT
What makes up AMD?                      SPENDING AND EXPORT

Name 3 injections.                      INVESTMENT, GOVERNMENT SPENDING AND
                                        EXPORTS
Name 3 withdrawals.                     SAVING, TAXATION AND IMPORTS

What is national income equilibrium?     LEVEL AT WHICH INJECTIONS = WITHDRAWALS

Describe the multiplier effect.          EXTRA SPENDING MULTIPLIED UP GENERATING
                                         NATIONAL INCOME LARGER THAN INJECTION
How is the value of the multiplier
                                         INVERSE OF MARGINAL PROPENSITY TO LEAK
determined?
What is an inflationary gap?             SPENDING TOO HIGH FOR AVAILABLE CAPACITY

What is a deflationary gap?              SPENDING TOO LOW FOR AVAILABLE CAPACITY

What are 3 methods of calculating
                                          INCOME, OUTPUT AND EXPENDITURE
national income?
When using national income statistics   DIFFERENCES IN POPULATION, INFLATION, WORK
what must be borne in mind?             CONDITIONS, DISTRIBUTION OF WEALTH ………….

				
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posted:9/15/2011
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