Measuring National Income
We need information on how much spending, income and output is being created in an economy
over a period of time. National income data gives us this information as we see in this chapter.
Measuring national income
To measure how much output, spending and income has been generated in a given time period
we use national income accounts. These accounts measure three things:
1. Output: i.e. the total value of the output of goods and services produced in the UK.
2. Spending: i.e. the total amount of expenditure taking place in the economy.
3. Incomes: i.e. the total income generated through production of goods and services.
What is National Income?
National income measures the money value of the flow of output of goods and services produced
within an economy over a period of time. Measuring the level and rate of growth of national
income (Y) is important to economists when they are considering:
The rate of economic growth
Changes over time to the average living standards of the population
Changes over time to the distribution of income between different groups within the population
(i.e. measuring the scale of income and wealth inequalities within society)
Gross Domestic Product
Gross Domestic Product (GDP) measures the value of output produced within the domestic
boundaries of the UK over a given time period. An important point is that our GDP includes the
output of foreign owned businesses that are located in the UK following foreign direct
investment in the UK economy. The output of motor vehicles produced at the giant Nissan car
plant on Tyne and Wear and by the many foreign owned restaurants and banks all contribute to
the UK’s GDP.
There are three ways of calculating GDP - all of which should sum to the same amount since the
following identity must hold true:
National Output = National Expenditure (Aggregate Demand) = National Income
(i) The Expenditure Method of calculating GDP (aggregate demand)
This is the sum of spending on UK produced goods and services measured at current market prices. The
full equation for GDP using this approach is GDP = C + I + G + (X-M) where
C: Household spending
I: Capital Investment spending G: Government spending
X: Exports of Goods and Services
M: Imports of Goods and Services
The Income Method of calculating GDP (the Sum of Factor Incomes)
Here GDP is the sum of the incomes earned through the production of goods and services. The
main factor incomes are as follows:
Income from people employment and in self-employment +Profits of private sector companies
+Rent income from land= Gross Domestic product (by factor income)
It is important to recognise that only those incomes that are actually generated through the
production of output of goods and services are included in the calculation of GDP by the income
We exclude from the accounts the following items:
Transfer payments e.g. the state pension paid to retired people; income support paid to
families on low incomes; the Jobseekers’ Allowance given to the unemployed and other