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Strategies to Calculate National Income

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Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UK Essays.

Published: Tue, 17 Oct 2017

  1. Introduction

There are several ways to calculate national income. The most commonly methods used are product, income and expenditure approach.

Product Approach

The product method is also called the output method using Gross National Product or GNP. These output for example are mineral, forestry and agricultural outputs. However only the final goods are considered in the national income.

Fundamentally, GNP is the total value of all final goods and services. The goods and services have to be produced within the border of the country in a particular year, plus income earned by its citizens. Which include income of those located abroad regardless of their location.

The data used to assess GNP include the manufacturing of tangible goods for example automotive, machinery and agricultural product and the intangible services for example education and healthcare. Note that GNP does not include the services used to produce manufactured goods because their value is included in the price of the finished product. However, GNP does include the depreciation and the indirect business taxes for example sales tax.

The formula for GNP is:

Gross National Product = Consumption + Government Expenditures + Investments + Exports +

Foreign Production by Foreign Companies – Domestic Production by

Foreign Companies

The difference between GNP and GDP (Gross Domestic Product) is that GNP includes the value of products made by the country’s citizens and companies from overseas. GDP only accounts for products made within a country’s borders.

Income Approach

The income approach by using the Gross National Income or GNI is the sum of a nation’s gross domestic product (GDP) plus net income received from overseas. Gross national income (GNI) is defined as the sum of value added by all producers who are residents in a nation, plus any product taxes (minus subsidies) but do not include in the output production.

Expenditure Approach

The expenditures approach (expenditure = Y), the product approach is the Gross Domestic Product or GDP. Gross Domestic Product or also called GDP is the market value of all final goods and services produced within a country in a given period of time (Mankiw, 2013).

GDP is one of the primarily indicators used to measure the well-being of a country’s economic condition.

National Output = National Expenditure (Aggregate Demand) = National Income

The Expenditure Method – aggregate demand (AD)

The GDP equation approach

GDP = consumption + investment + (government spending) + (exports – imports)

Where;

Y : Income

C: Household spending

I: Capital Investment spending

G: Government spending

X: Exports of Goods and Services

M: Imports of Goods and Services

In the circumstance of Income Method – adding together factor incomes

GDP is the sum of the incomes earned over the production of goods and services.

Gross Domestic product = Income from people in jobs and in self-employment

(by factor incomes) + Profits of private + sector businesses

+ Rent income from the ownership of land

2.1Move over, GDP: How should you measure a country’s value?

Generally, Gross Domestic Product (GDP) measures the value of output produced within the domestic boundaries of a country over a period of time. A sustainable increase in real GDP means there is a sustained increase in the output of goods and services in the economy. However, GDP ignores to include the quality of life. The limitations of GDP are that it ignores the quality of life, it take too lightly illegal markets, and overestimates the negative external factors.

The quality of life is used to measure the overall well-being of individuals and societies. It is also should not be confused with standard of living base on income. Instead, the quality of life should include education, employment, physical and mental health, etc. It is related with the human right, freedom of speech, making choices and live in harmony. Adequate welfare is the goal towards good health, happiness, and prosperity of a person.

For example, while Russia and Saudi Arabia are an oil-rich countries most of its people live in poverty, meaning they have a low quality of life because they lack basic human needs such as food and shelter. The United States of America however has the most comprehensive healthcare in the world yet have low life expectancy.

Using GDP alone is not an adequate measure of welfare. Using Social Progress Index (SPI) we can measure domestic output and income, as well as health and happiness of a person.

2.2Guest Post: Counting Brazil’s Gross National Happiness

Setting happiness, as the ultimate goal, involves in the best encompassing measure. According to some people the happiness of one person depends primarily on family, friends, work satisfaction and activities. Even though income does play a major role. Unfortunately, society-wide happiness as assessed via surveys does not change much over time. Understanding the different level of well-being is important for understanding choices made by individuals and policymakers which is the government.

It is impossible for GDP cannot measure the quality of the environment. Having higher real GDP does not mean people have a better quality of life if the air, water, and other resources are polluted. GDP does not reflect how production contributes to the quality of people’s lives. Its only measures how much output a country produces.

2.3The Rise of the Intangible Economy: U.S GDP Counts R&D, Artistic Creation

Gross domestic product and its related concepts (such as real GDP, per capita GDP, and per capita real GDP) are incomplete measures of a country’s standard of living. There are many productive activities that are not included in GDP because it only measures output produced and sold in legal markets. It does not include productive activity that does not have a market transaction.

GDP concepts are only useful in measuring a country’s output, income, and standard of living, There are many other aspects of life that are not considered in the calculation of GDP that include happiness, environmental, and health.

GDP only measures the output produced and sold in legal markets. It does not include productive activity that does not have a market transaction. Honestly, all data have their limitations. Though GDP data are not perfect measures of the quality of life in a country, it is still useful in determining the standard of living.

2.4The good and the bad of China’s Growth

China’s economy grew at the slowest rate for the first quarter of the year, raising fears that the government will miss its 2014 growth target of 7.5%.

Gross domestic product (GDP) increased by 7.4% compared with the same period a year earlier, for the following 7.7% growth in the fourth quarter of 2013. Chinese government are trying to target 7.5% of GDP this year (2014).

According to the National Bureau of Statistics data, it was the slowest rate of growth for second largest economy in the world since the third quarter of 2012, however faster than the 7.2% increase predicted by some economists.

The slowing growth rate raised stimulus package from the China government in order to cushion the economic slowdown prompted by the rebalancing of China economy. The package was to boost growth adding support to the small and medium enterprises.

The representation of the percentage worsened when the first three months of 2014 are compared with the final three months of 2013 with the growth slowing down to 1.4% from 1.8%.

On a separate data showed that Chinese economy was dependable on investment. The expenditure comprise of building, infrastructure plant and equipment already reached 40% of its GDP.

Relatively, an improved measurement of the latest economic momentum should have further eased fears that the country is facing economic slowdown. This is because the Chinese economy is likely to decline further more as the total liabilities on China Banking System reached $15 Trillion during this period.

The government is trying to increase the domestic consumption due to export demand warming and infrastructure investment possibly bottoming out, subsequently a sharp slowdown could be avoided. However, the latest data is not suggesting forthcoming need for a massive government intervention and China will continue with this path of reform.

2.5Does size matter? China poised to overtake US as world’s largest economy in 2014

The gross domestic product (GDP) is one the primary indicators used to measure the condition of a country’s economy and this include China. The GDP is increasingly criticized for its failure to adequate measure the standard of living. In my view, the criticism is seemed right. With its recent GDP growth at 7.4% it hardly capable to measure the overall living standard of its citizens.

Though China has the largest population in the its GDP (gross domestic product) has grown faster compare to the United States as the main global player in the astonishing global economy. Even though the report of the GDP is an essential measurement, it is not the best indicator of their citizens’ standard of living.

Despite the increase in GDP growth poverty in China is becoming a problematic when it comes to improving standards of living. In the affair of a slowing economy and unwarranted political moment of rising criticism of one party state, China socioeconomic discrepancy is has risen concern.

Though China’s growth declined to 7.4%, it still remains a global economic powerhouse. The government regulations rely heavily on investments both domestically and internationally for sustainability. China’s economic growth emphasis on increasing the economy domestically.

GDP figures ignore the impact of declining standard of living. This because high GDP data are achieved at the expense of environmental degradation for example more pollution and congestion. Resulting with the very low standard of living.

China GDP doesn’t take into account black economy or the illegal such as piracy, prostitution, drugs etc. into account.

2.6The Rise of the Intangible Economy: U.S GDP Counts R&D, Artistic Creation

Intangible assets which include computer software, research and development (R&D), intellectual property, workforce training, and spending to promote the innovative creativity of firms. Recently, intangibles assets are consider a key driver of the competitiveness of United States of America economic growth and sustainability.

The Bureau of Economic Analysis (BEA) specifies the important of intangible assets can be in terms of its impact on the nation’s economy. Transforming from the current method of gross domestic product (GDP), which currently a category that includes under assets as buildings, structures, equipment and tools.

In particular, the focused on the role of talent and intellectual property as the intangible assets most important to future economic development.

The new GDP revisions not only for the changes but also due to the fact that they are expected to instantly add about 3% to the overall size of U.S.A GDP.

The significant biggest change to the GDP methodology will be the insertion of R&D as a capital investment. The changes will have a swelling effect. This new method will make corporate profits rich and assertive, as companies will no longer need to calculate the net of R&D after depreciation as a cost.

Whenever we calculate the value of an investment in a new building, we rely on the market price of the land, labor, and the material it takes to construct it. However, research and development and artistic originals are not commodities.

2.7Boundary problems: America has changed the way it measures GDP

This explanation of GDP is necessarily, it only described the principle of the concept. The easiest way of understanding GDP is as the total of all production of goods and services. In the economy this transaction is associated with money changes hands.

Excluding in certain organized business of barter transactions which are counted as income for individuals or corporations. GDP usually does not include transactions in which no money changes hands.

The exercise of associating wealth and prosperity with GDP is completely vulnerable. Wealth, is the total of all resources belonging to a country or individual citizen. We can say that a change in wealth is equal to the amount of wealth being created and the amount being destroyed or used up.

2.8World Bank chief economist on future of India’s economy

India is Asia’s third largest economy has annual growth rate is below 5%. It has been weighed down by high inflation, weak currency and a decrease in Foreign Direct Investment (FDI). According to the Indian Chief Economic Advisor, overall the fundamentals of the economy are resilient. However, India economy has been relatively under the weather and there are two big challenges to overcome.

The first is the poor corporate governance. This due to lake of urgency in decision making, the bureaucracy is extremely troublesome. It is not easy to change the culture over the last 60 years.

The second is India need a better infrastructure. This is reasonably possible to accomplish and India needs to improve its infrastructure between five to 10 years. The prospect will be vast if only both governance and infrastructure can be improved within this period of time. When crisis occur, people will begin to take extra precautions. In order to have a full potential growth, India will need a governance overhaul.

Nevertheless India has its own unique strengths for example India’s intellectual citizen, technical and engineering skill workers are countless. The motivation behind its high intellectual resource is the fact that as an emerging economy, India after Independence invested excessively in higher education.

That is why there is the large Indian presence in Silicon Valley which makes about half the professional immigration to the US consists of Indians.

The other strength is labour. In the past, labour resources was difficult to mobilize in the global market. With the modern technology the biggest global break through which is also a factor behind the global crisis the global labour market is gradually becoming a common pool and utilized in this is moving global economy.

It shows the level of surplus labour engaged in agriculture sectors. However the major stumbling block is the poor infrastructure. China has successfully used their new small towns effectively. India can follow this concept to string of new small towns because the property is much cheaper. The Indian government has to come with a solution on how to deliver basic infrastructure and law and order.

Inflation in India has occurred in at the early stages of development and that was between 2003 and 2011, India was growing at an average of 8%. In 2008, inflation was close to 10% and that is going to make the economy hurt even more.

2.9Thai GDP Growth Slows as Unrest Increases Rate-Cut Pressure

According to the Bloomberg, the Thailand state planning agency today cut its 2014 GDP growth forecast to 3% to 4% from a range of 4% to 5%. Thailand GDP was mostly came from the services sectors, while agriculture and other industry hardly contributed.

The economy slowed due to the weak demand from the domestic and meanwhile the exports were slow-moving. Thailand economy grew at the slowest pace in two years last quarter since the political unrest hurt local demand and tourism.

Political tensions has weakened the private consumption, investment, and government spending during this time worsened. This result reflected mainly when the Thailand government became unfocussed by political pressure and staggered by legal challenges. The economic viewpoint is subject to unusually high of uncertainty.

After antigovernment protests worsened in November 2013. The Thailand government dissolved the parliament in December to scheduled national elections for 2 February. This situation cause more tension and restrictions on its reliability and capability to borrow, spend, or make policy decisions.

2.10Singapore Raises 2013 GDP Growth Forecast on Manufacturing

According to the Bloomberg, Singapore’s Gross domestic product (GDP) expanded an annualized 1.3% last quarter from the previous three months, compared with a 1% decline earlier.

This is due to profiting from the monetary stimulus aided by the U.S. Federal Reserve’s extension as global risks remain from budgetary bickering in Washington and a promising recovery in the Europe.

Singapore GDP grew 5.8% in the three months through September from a year earlier, compared with an earlier estimate of a 5.1% expansion.

Being the world’s busiest container ports, Singapore has remained vulnerable to fluctuations in external demand for manufactured goods even as the government boosts financial services and tourism to cut reliance on the exports.

3.0Conclusion

For many years, especially since 1929 nations have associated economic growth with progress and sustainability. Economic and income growth is an increase in the production and consumption of goods and services, and is indicated by increasing Gross Domestic Product (GDP). GDP, therefore, has become the standard measure of economic progress. Even though it was only intended as a macroeconomic accounting tool.

The disadvantage with GDP is that it does not separate costs from benefits. It simply adds them together under the heading of economic activity. GDP is a good measure of income size and nothing else.

At the individual level, economic activity is required for wellbeing, but the relationship becomes very weak after a surprisingly low per capita GDP is derived. GDP does not shows about how income and wealth are distributed among the people.


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