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Macro economics.docx

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ECON 1010
Sarrah Vakili

Macro economics 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 approach. 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
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