Uses of National income Data

National income

• National income is the total value of the new output of an economy over a period of time

  • The output is produced by the physical (machinery) and human capital in the economy 

• National income gives an indication of the economic performance of a country

• Nominal and real GDP are often used to measure national income

  • A fall in national income may indicate the economy is going into a recession 

  • A rise in national income indicates the economy is experiencing economic growth

Gross national income

• Gross national income (GNI) is another measure of national income

  • It represents the total income earned by a country's residents, both domestically and abroad

• GNI includes the following components

  • GDP and Net income from abroad

  • Net income from abroad accounts for income earned by residents of a country from their investments or employment in foreign countries, minus income earned by foreign residents within the country 

• It can be calculated in one of two ways

  • Using GDP data plus net income from abroad

GNI = GDP + (net income from abroad) 

• Using income data from the factors of production plus net income from abroad

GNI = (Wages+interest+rent+profit) + (net income from abroad)

Using GDP to make Comparisons Between Countries

• While national income data can provide valuable information for policy makers, it is also limited in how useful it is when making international comparisons

Compares changes in living standards across time 

• National income statistics serve as a valuable tool for comparing standards of living over time, e.g between 1998 and 2016

• GNI per capita in the UK is a crucial indicator used to evaluate changes in living standards across different periods

• Typically, a rising GNI per capita indicates an improvement in average income, leading to an overall improvement in the standard of living for the population

Evaluates effectiveness of economic policy

• Monitoring GNI per capita is beneficial in assessing how effective a policy has been in enhancing economic well-being

• It also assists the government in formulating economic policy to improve standard of living in the future

Compares data across countries 

• National income statistics are useful for making comparisons between countries

• They allow judgments to be made about the relative wealth and standard of living within each country

• They allow comparisons to be made over the same or different time periods

  • E.g. The growth of the Asian Economies in the last 15 years can be compared to the growth of the European Economies in the 1990s

The Limitations of Using GDP for Comparisons

Lack of information provided on inequality

Quality of goods and services

Does not include unpaid or voluntary work

Differences in hours worked

Environmental factors

Lack of information provided on inequality

• The distribution of income in an economy is provided as an average (GDP/capita)

  • The differences in the standard of living within the same country can be significant

Quality of goods and services

• GDP provides no information on the increase or decrease in the quality of goods or services over time

  • If quality worsens but prices are lower, then the standard of living is judged to have increased 

  • The poor quality may actually have decreased the standard of living

Does not include unpaid or voluntary work

• If it included voluntary or unpaid work, then GDP/capita would be higher

  • E.g. Some economies have a high amount of family child care provision. This increases standards of living but is not recorded in any way

Differences in hours worked

• GDP data does not capture the amount of time taken to produce the GDP/capita

  • In one country, where it takes less time to generate income than in a similar country, the standard of living would actually be higher

Environmental factors

• GDP does not capture the environmental and health impacts of generating income within a country (externalities)

  • In one country, where there are fewer externalities in generating income, the standard of living would be higher

Purchasing Power Parity (PPP) for Making International Comparisons

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  Using GDP per capita to compare living standards may not be accurate because currency values are different

• PPP is an exchange rate that equalises the purchasing power of different currencies, so that a basket of goods costs the same in each country when prices are converted into a common currency

  • PPP is a conversion factor that can be applied to GDP, GNI and GNP

• It calculates the relative purchasing power of different currencies

  • It shows the number of units of a country's currency that are required to buy a product in the local economy, as $1 would buy of the same product in the USA 

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Example

• If a basket of goods cost $150 in Vietnam (once the currency has been converted) and the same basket of goods cost $450 in the USA, the purchasing power parity would be 1:3

  • It seems like the cost of living is much higher in the USA

  • However, if the USA GNP/capita is more than three times higher than the GNP/capita of Vietnam, it could be argued the USA has better standards of living

  • Conversely, if the GNP/capita in the USA was less than three times that of Vietnam, it could be argued that Vietnamese citizens enjoy a higher standard of living as they spend less income to acquire the same goods/services