natuonal income and GDI

National Income

• Income to residents from economic activity.

Circular Flow of Income

• Flow of money between companies and households.

Expenditure Classification

• Aggregate demand: Y = C + I + G + X – M

Propensity to Consume

• APC: Proportion of income spent.

• MPC: Proportion of extra income spent.

• Example: MPC = 0.8.

Determinants of Consumption

• Income, credit, interest rates, income tax.

Determinants of Investment

• Cost of capital, expectations, government policy, capacity, technology.

• Example: R&D tax credits.

Determinants of Exports

• Incomes abroad, competitiveness, euro value, incentives.

Determinants of Imports

• Availability, prices, income, euro value, MPM.

Marginal Propensity to Import (MPM)

• Proportion of extra income spent on imports.

The Multiplier

• Injection impact on national income.

  • Formula: Multiplier = 1 / (1 - MPC)

  • Example: MPC = 0.8, multiplier = 5.

Marginal Propensity to Tax (MPT)

• Percentage of tax from extra income.

  • Formula: 1 / (1 - MPC + MPT)

  • Example: 20% tax, multiplier = 0.83.

Marginal Propensity to Save (MPS)

• Percentage of savings from extra income.

Economic Effects of Increased Savings

• Reduced spending, increased investment funds, reduced inflation, reduced imports.

Marginal Propensity to Import (MPM)

• Percentage of money spent on imports.

  • Formula: Multiplier = 1 / (1 - MPC + MPM)

Transfer Payments

• Payments without factor production.

  • Examples: Social welfare, pensions.

Impact of Transfer Payments

• High MPC, increases circular flow.

Impact of Economic Shocks

• Negative: Increased oil prices.

• Positive: Data center opening.

Trade Cycles

• Recurring economic expansions and contractions.

Phase 1: Recovery/Expansion

• Growth in GDP, employment, investment.

Phase 2: Boom/Growth

• Increased employment, inflation, asset bubbles.

Phase 3: Recession

• GDP falls, unemployment rises.

Phase 4: Depression/Slump/Trough

• Real GDP decline > 10%, high unemployment.

Measuring National Income

• Income, output, expenditure methods.

Key Terms and Definitions

• Gross: Before deduction.

• Domestic: Home produced.

• Product: Amount produced.

• National: Focused on residents.

• Factor costs: Costs of production factors.

• Net factor income: Income earned by residents abroad - income earned by foreigners in the country.

• GDP: Output by factors in the domestic economy.

• GNP: Output by Irish-owned factors.

• GNI: Domestic and foreign income earned by residents.

• GDNI: Income available for savings and consumption.

Uses of National Income Statistics

• Standard of living, international comparisons, policy formulation, policy evaluation.

GNI* (GNI Modified)

• GNI excluding effects of redomiciled companies and IP depreciation.

  • Introduced to remove globalization effects.

  • Formula: Gross national income - adjustments

GDP vs. GNP

• Difference is net factor income from abroad.

  • GDP > GNP in Ireland due to profit repatriation.

  • GDP: economic activity, GNP: standard of living.

GDP vs. GNI

• US company profits in Ireland count towards Irish GDP but US GNI.

  • GNI is a better reflection of economic welfare.

GNP vs. GNI

• Difference is interest and dividends.

GNI vs. GNDI

• GNI captures incomes related to production factors; GNDI includes unilateral transfers.

Best Indicator to Use

• GNDI is the better indicator of living standards.

Per Capita Measurements

• Takes population into account for comparisons.

Limitations of National Income Statistics

• Population distortions, inflation, welfare, distribution, hidden social costs, international comparisons.

The Hidden Economy

• Unrecorded economic activity.

Economic Effects of a Rise in the Hidden Economy

• Loss of tax revenue, decline in legitimate business, increased enforcement costs, pressure on government finances.

Social Effects of the Hidden Economy

• Increased crime, vicious cycle, public outrage, decreased public services.

Strategies to Discourage the Hidden Economy

• Reduce taxes, better enforcement, educate the public.

Exam Focus

• Calculations and formulas

Gross domestic product

• C + I + G + (X – M)

Gross national product at current market prices

• GDP + Net factor income from the rest of the world

Gross national product (GNP) at factor cost

• GNP @ market prices + price subsidies – indirect taxes = GNP @ factor cost

Gross national income (GNI)

• Measures total income earned by a country’s residents

  • GNP @ Current market prices + EU Subsidies – EU Taxes = GNI @ current market prices

Gross national disposable income (GDNI)

• Measures the income available to the nation for gross savings and final consumption.

  • $$GNI @ current market prices + current transfers from the rest of the world