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Economics Assignment Methods of Calculating National Income

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Economics Assignment MEASURING NATIONAL INCOME Methods of Calculating National Income * There are three methods of calculating national income: * The expenditure method: o This adds up all the spending in the economy: C + I + G + X - M. o It is called Gross Domestic Product (GDP) at market prices and includes: * C: Consumption * I: Investment which includes: Planned investment in capital, Unplanned increases in stocks or inventories * G: Govt. spending on goods and services. Because they are often provided free of charge (no market value), they are valued at cost. * X: Exports: the domestic economy receives the money * M: Imports: these must be subtracted because it is spending on goods and services from outside the domestic economy. * The income method: adds up all the sources of income in the domestic economy. o Transfer payments (pensions, unemployment and welfare benefits) are excluded: no good or service is produced for the income. o Income includes: * Wages and salaries * Self-employed income * Profits: divided into dividends given to shareholders and undistributed or earnings retained by the firm * Rent ...read more.


o Capital equipment, machinery and buildings, and residential housing o Gross investment consists of: * Net investment (new physical capital and stocks or inventories) * Depreciation or capital consumption: repair and maintenance to existing stocks of capital or replacement of worn out capital. * Net Domestic Product (NDP) = GDP - depreciation. Because depreciation is an estimate, most economists prefer to work with GDP. * Gross National Product (GNP) includes the value of final goods and services produced by factors owned by domestic households all over the world: GNP = GDP + Foreign investment income - investment income paid to foreigners o For developing countries, GDP tends to exceed GNP: factor payments made to foreigners exceed factor payments received from foreigners o For industrialized countries, GDP is smaller than GNP: factor payments received from foreign countries are larger than what is paid to foreigners. * Personal Disposable Income is obtained by: GNP = GDP at market prices + net property income from foreign economies GNP at factor cost = GNP at market prices - indirect taxes + subsidies Net National Product (NNP) ...read more.


* Quality of life: pollution regulations or more vacation time can lead to a fall in GDP but lead to an increase in the quality of life; how should we adjust? * Govt. services: how do we value national defense or govt. medical services? We count them at cost which may be too high or too low an estimate. Comparing Across Countries * Purchasing power parity: rather than use a single currency to compare we convert to PPPs which measure the actual purchasing power of domestic income in terms of what it can buy within the country. * Accounting systems are different amongst countries. Many LDCs cannot afford comprehensive systems and use a lot of guesswork or estimation to fill the gaps. * Climate differences: some countries spend more on energy to heat or cool houses and offices. * There may be considerable differences in the distribution of income, the size of the non-market sector, the balance between consumption and capital goods production and between production of consumer goods and weapons for war. ...read more.

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