NIS, circular flow of income

what does national income statistics measure?

National income statistics measure a countries economic activity.

People produce goods and services (output), earn money from producing them (income), and then spend that money on goods and services (expenditure).

Therefore:

Total Output = Total Income = Total Expenditure

Why are total output, total income, and total expenditure equal?

1. Producing goods and services creates output.

2. Production generates income for workers and businesses.

3. That income is used to buy goods and services (expenditure).

Therefore: Output = Income = Expenditure.

Why does the government use national income statistics?

To measure how successful and healthy the economy is over time.

How is the performance of an economy measured?

By measuring the country's total output (the goods and services it produces).

When is an economy considered to be doing well?

When output is growing at a sustainable rate over time.

What are national income statistics?

A set of measures used to assess a country's output, income, and expenditure.

What do national income statistics help governments understand?

Whether the economy is growing, shrinking, or staying the same.

what are some tools used under national income statistics?

Gross Domestic Product (GDP)

Gross National Income (GNI)

Net Property income

compensation of employees

What is Gross Domestic Product (GDP)

gross = total

domestic = home economy

Products = goods

NZ’s GDP is a measure of the total value of all goods and sevices produced by its citezens for a period of one year

what is Gross National income (GNI)

Gross National Income (GNI) is the total income earned by a country's residents and businesses, whether that income is earned within the country or abroad.

Formula:
GNI = GDP + net income from abroad

(Net income from abroad = income earned overseas by residents − income earned domestically by foreigners)

What is Net Property Income?

The income which the country’s residence earn on their physical assets overseas. From this we minus the returns on physical assests overseas

what is compensation of employees

workers who live in the country but work for short periods of time overseas

what are GDP and GNI both measured in?

market and basic prices

what are market prices?

the price consumers pay, they include taxes charged but minus any subsidy

what are basic prices?

Basic price is the amount a producer receives for a good or service, excluding taxes on the product but including subsidies.

what is the depreciation of capital items?

The value of capital items that have worn out or have become out of date.

e.g) Purchased a truck for $70k if it depreciates at 10% p.a what is the depreciated value of the truck in year 1? - depreciates by 7k = 63k

what is Gross Investment

total spending on capital goods

what is Net Domestic Product

GDP (Gross Domestic Product) minus depreciation

What is Net National Income?

GNI (Gross National Income) minus depreciation

what is Net Investment?

addition to capital stock

what is nominal GDP?

the actual value of GDP at current prices.

Nominal means money

This price isn’t adjusted for inflation

The money value of GDP rises rapidly then this could be misleading because prices could have risen and actual output could not be rising.

what is the circular flow of income

a simple model of the process by which incomes flows around the economy

what does the circular flow of income look like

how does the circular flow of income work

when workers produce output, it leads to income.

They spend their income (expenditure) and this produces more output

what is a closed economy

an economy that doesn’t trade with other economies

what is an open economy

an economy that trades with the rest of the world

what are injections and leakages

Leakages and injections are the flows of money that leave or enter the Circular Flow Model of an economy.

• Leakages (Withdrawals): Money that is removed from the income-spending stream.

• Injections: Money that is added into the income-spending stream from outside.

what happens in an open economy in terms of leakages

in an open economy there are leakages out of the circular flow of income in the form of savings, taxation, and saving on imports

what happens in an open economy in terms of injections

there are also injections into the circular flow of income in the form of govt spending, earning from exports and investments

when will income rise, remain unchanged or fall in terms of leakages and injections

rise: if injections are greater than leakages, there will be extra spending int he economy causing income to rise

remain unchanged: injections and extra spending into the circular flow of income must equal leakages from the circular flow of income

fall: if leakages exceed injections, more spending will leave the circular flow of income and income will fall

in the 2 sector model of equilibrium income how many participants are there and what are they

there are 2 - firms and households

what is the graph for equilibrium income in the 2 sector model and explain its impacts

a rise in investment to I1 will cause a rise in GDP yo Y1, the higher investment results in an increase in production income and spending

a fall in savings means more spendings to firms produce more and GDP rises

what is the 4 sector model, what are the participants and explain the graph

households, firms, govt and international sector

Investment + Govt spending + Export = Savings, + Taxation + Imports

• shows that income will move to a higher level if any injection rises or any withdrawal falls

• if tax rates rises to T1 without any change in govt spending. People and firms have less to spend and output will fall to Y1