Using National Income Data (AQA A Level Economics)

An Introduction to National Income

• National income is the total value of the new output of an economy over a period of time

  • The output is produced by the physical (machinery) and human capital in the economy 

• National income gives an indication of the economic performance of a country

• Nominal and real GDP are often used to measure national income

  • A fall in national income may indicate the economy is going into a recession 

  • A rise in national income indicates the economy is experiencing economic growth

Gross national income

• Gross national income (GNI) is another measure of national income

  • It represents the total income earned by a country's residents, both domestically and abroad

• GNI includes the following components

  • GDP and Net income from abroad

  • Net income from abroad accounts for income earned by residents of a country from their investments or employment in foreign countries, minus income earned by foreign residents within the country 

• It can be calculated in one of two ways

  • Using GDP data plus net income from abroad

• Using income data from the factors of production plus net income from abroad

Using GDP to make Comparisons Between Countries

• While national income data can provide valuable information for policy makers, it is also limited in how useful it is when making international comparisons

The Usefulness of National Income Data to Assess Changes in Living Standards

The Limitations of Using GDP for Comparisons

 The Limitations of Using GDP Data to Compare Living Standards Between Countries over time

Purchasing Power Parity (PPP) for Making International Comparisons

• Using GDP per capita to compare living standards may not be accurate because currency values are different

• [popover id="4ukZPd6hY55mt67Q" label="Purchasing power parity (PPP)"] adjusts exchange rates based on the price levels of a standard set of goods and services in different countries, aiming to account for differences in the cost of living

• PPP is conversion factor that can be applied to GDP, GNI and GNP

• It calculates the relative purchasing power of different currencies

  • It shows the number of units of a country's currency that are required to buy a product in the local economy, as $1 would buy of the same product in the USA 

• If a basket of goods cost $150 in Vietnam (once the currency has been converted) and the same basket of goods cost $450 in the USA, the purchasing power parity would be 1:3

  • It seems like the cost of living is much higher in the USA

  • However, if the USA GNP/capita is more than three times higher than the GNP/capita of Vietnam, it could be argued the USA has better standards of living

  • Conversely, if the GNP/capita in the USA was less than three times that of Vietnam, it could be argued that Vietnamese citizens enjoy a higher standard of living as they spend less income to acquire the same goods/services