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1. National income- The flow of all goods & services produced in a country over a year.
2. Circular flow of income- A way how the national income is created & how it can be measured.
3. Simple Circular Flow
a) There is no government, no trade with other countries.
b) They do not save or pay taxes.
c) They do not retain any profit or pay any taxes.
4. Detailed Circular Flow
a) They save their income, & pay taxes to the government.
b) Firms use some their income for investment & pay company taxes.
c) The government is involved in the economy.
d) Other countries' citizens buy & sell goods &services to our imports.
5. Withdrawal- Withdrawn for the circular flow of income, household savings, taxes & imports spending.
6. Injections- Incomes that a firm receives from sources other than consumer spending.
7. 3 methods of calculating national income
a) Income Method
b) Output Method
c) Expenditure Method
8. Income method- Calculate the national income by adding:
a) Wages & salaries.
b) Rent from tenants.
c) Undistributed profits.
d) Interest earned
e) Income of self-employed people.
9. Problem encountered in using income method
a) Certain types of incomes should not be included in the calculation of national income as there is no increase in the production of goods & services. They are known as transfer payments. E.g.: Pensions, Scholarship, Unemployment benefits & social security benefits.
10. Transfer Payments- Income received without any corresponding increase in the production of goods & services.
11. Output method- Calculate the national income by adding the total value of goods & services from the 3 sectors in the economy.
12. The 3 sectors are
a) The primary sector. E.g.: Agriculture & fishery industries.
b) The secondary sector. E.g.: Manufacturing & Construction industries.
c) The tertiary sector. E.g.: Financial & Tourism industries.
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13. Expenditure method- Calculate the national income by adding the 5 items.
a) Consumer expenditure (C)
b) Gross investment (I)
c) Government expenditure on goods & services (G)
d) Exports (X)
e) Imports (M)
National Income= C + I + G + (X - M)
14. Problems in measuring National Income
a) The lack of skilled labour makes the computation of national income difficult.
b) With low literacy rate, the people may not able to provide the required data.
c) The people may give false information to avoid paying high personal income tax.
d) Arbitrary definitions. E.g.: A maid & a housewife doing same household chores. But, the services of a maid are included in the calculation whereas housewife are not included.
15. Domestic Income- Income earned within the territorial boundaries of a country.
16. National Income- Income earned by the nationals of the country.
17. To derive national income from domestic income, we have to minus the income made by other country's citizens in the host country & add the income made by the host country's citizen in other countries.
E.g.: Earnings from Country A in Country B are not part of Country B’ national income because they are not nationals of Country B. Country B companies based in Country A will have their earnings added to Country A’ national income because these income are made by Country B nationals.
18. Market prices- The prices consumers pay for whatever is prevailing.
19. Factors cost- Cost price of a product.
20. Sometimes the consumers pay more than the factor cost. This is because of indirect tax. Market price is higher than the factor cost.
Factor cost= Market Price + Subsidies - Indirect Taxes.
21. Gross investment- Actual amount invested.
22. Depreciation- When a machine becomes obsolete.
23. Net investment- Actual addition to total physical stock.
24. Nominal national income- Value of the current year’s national income.
25. Real national income- The current year’s national income at constant or base year prices.
26. Calculate the net investment
Net Investment= Gross Investment - Depreciation
27. To calculate the real income
Real Gross National Product= Money / Consumer price index X 100
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28. Gross Domestic Product (GDP)- Total value of final goods & services produced within a territorial boundary.
29. Gross National Product (GNP)- Total value of final goods & services produced by the nationals of the country.
30. Uses of National Income statistics
a) It can be compared the economy of the country has improving or not.
b) National income of the country are compared with other country.
c) The government able to identify the amount of contribution each sector makes to the economy.
d) National figures is to help governments do national planning.
e) National income figures will indicates the purchasing power of the people.
f) The government can pinpoint the taxable capacity of the people.
31. Standard of Living- Amount of goods & services available in a country.
32. Factors that affects the calculation of standard of living
a) The working hours of a worker.
b) Income distribution.
c) Negative externalities.- When social cost is greater than private cost.
d) Hectic lifestyles. E.g.: Increase in working hours.
e) Government expenditure. E.g.: Military equipment.
f) Higher national incomes does not mean higher standard of living if the money is not spend on building infrastructures.
g) High birth rate cancels out the benefits of an increase in national income.
33. Best measurement of standard of living -Measured the Real Per Capita Income. This is derived by dividing the real national income with the population of the country.
34. Real Per Capita Income-The average earnings of the population over a period of time a year.
35. Reasons for differences in standard of living between developing & developed countries.
-In developed countries, basic infrastructures is well-developed & all the infrastructures are in place. People able to find jobs with the necessary qualifications & skills. The availability of affordable health care to the public. Investors will be attracted to the country, thus creating new jobs, more goods & services for the locals. Some of these countries have large amount of natural resources. Selling these natural resources can increase the country’s national income. Thus increases the standard of living.
-Lack of infrastructures, educational opportunities & health care services. Low production of goods & services due to the lack of investments in the country. Most of the people will be living in poverty due to income inequality. Due to illiteracy, they would not able to find jobs and these countries might be facing natural disasters & epidemics. Low standard of living.
36. Economic Growth- An increase in a country's total output of goods and services which brings about a rise in standard of living.
37. Factors that contribute to Economic Growth
a) Better quality of labour can lead to economic growth.
b) Land with rich natural resources, natural harbour, climatic conditions, landscapes, raw materials & geographical location.
c) The more capital-intensive the economy is, the higher is the level of national income.
d) This is the important factor of production as the entrepreneur coordinates all the other factors.
e) With political stability, there will be a peace & economic activities can be carried out.
f) Governments can encourage competition among businesses. Governments also invest in human capital by providing subsidies for workers which send their worker for training.
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38. Benefits of Economic Growth
a) Higher standard of living. Higher national income means that there are more goods & services generated.
b) When a country has a high economic growth, foreign investors will be attracted by the potential future market.
c) As the standard of living reaches a certain level, the country will be considered as a developed country.
39. Costs of Economic Growth
a) If the economy grows too quickly, there is the danger of inflation because producers can take advantage by raising prices of the goods & services.
b) Rapid growth creates negative externalities such as pollution, deforestation & traffic congestion.
c) All of the benefits of economic growth are not evenly distributed, this will cause income &wealth inequality in the society.
40. Indicators of Economic Growth & Development- GNP as the indicator of economic growth & development. This is too narrow because development is more than just growth & GNP does not accurately describe what happens in real life.
- The United Nations has 4 human development indices
a) Human Development Index
b) Gender-related Development Index
c) Gender Empowerment Measure
d) Human Poverty Index
41. Economic Recession- When an economy that has been growing previously slow down. - During an economic recession, the level of production declines, unemployment rises & consumers spending falls.
42. Problems of Economic Recession
a) A fall in the production of goods & services.
b) Weaker exchanges rates.
c) Adverse balance of trade. E.g.: More imports than exports.
d) Unemployment.
e) Closure of small companies.
43. Wealth- The stocks of assets in a particular country at a particular moment in time.
44. Factors that explain differences in wealth
a) Some people inherit a legacy from rich relatives.
b) Some people accumulates a substantial amount of savings.
c) Some people starts a company & build up their wealth as the company grows.
45. Ways to reduce wealth inequalities
a) Imposed inheritance tax.
b) Imposed wealth tax.
c) Availability of educational opportunities for the lower-income groups.
d) Mandatory saving scheme. Save a certain percentage of the monthly income & enable the use of this saving for educational & housing purpose.
e) Entrepreneurship is encourage through training, subsidies & availability of information.
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