This document provides an overview of key concepts related to measuring national income and standards of living, including: 1) National income measures the monetary value of goods and services produced in an economy over a period of time, usually one year. It is used to track economic growth, changes in living standards, and income distribution. 2) Gross domestic product (GDP) is the total value of national output and can be calculated in three ways: expenditure, factor incomes, or value of output. GDP per capita is used to measure standards of living. 3) Other indicators like the Gini coefficient and Human Development Index provide alternatives to GDP per capita by incorporating additional economic, social, and environmental factors.

1. AS Macro Revision
National Income and the Standard of
Living
Spring 2014

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3. What is meant by National Income?
National Income
• National income measures the monetary value of the
flow of output of goods and services produced in an
economy over a period of time (usually one year)
Uses of National Income data
• Measuring the level and rate of growth of national
income (Y) is important for keeping track of:
• The rate of economic growth (real GDP)
• Changes to living standards (real GDP per capita)
• Changes to the distribution of income between
groups within the population

4. Gross Domestic Product (GDP)
Gross domestic product (GDP) is the total value of national
output produced in a given time period (normally one year)
There are three ways of calculating GDP: National Output =
National Expenditure (Aggregate Demand) = National Income

5. GDP – By Sum of Spending, Factor Incomes or Output
GDP (Expenditure)
• Consumption
• Government
spending
• Investment
spending
• Change in value
of stocks
• Exports
• - Imports
• = GDP (or
aggregate
demand AD)
GDP (Factor
Incomes)
GDP (Value of
Output)
• Income from
people in jobs
and in selfemployment
(e.g. wages and
salaries)
• Profits of private
sector
businesses
• Rent income
from the
ownership of
land
• Value added
from each of the
main economic
sectors
• These sectors are
• Primary
• Secondary
• Manufacturing
• Quarternary

6. Manufacturing Industries
1. The process or business of producing goods in factories.
2. The part of a company that is concerned with making goods,
rather than designing or selling them
The manufacturing sector
accounted for 10% of UK
economic output (Gross
Value Added) in 2012
In 2013 there were 2.6
million jobs in the
manufacturing sector,
this was 8% of all jobs in
the UK economy
Food processing
Earth moving
equipment
Additive
manufacturing (3D)

7. Service Industries
1. Services are part of the tertiary sector of the economy
2. There are many different service industries – some focusing on
business to business and others business to consumer products
Hotels and
restaurants & retail
Education, health
care, legal services
Transport and logistics
In 2012, the service
sector accounted for 79%
of UK economic output
(Gross Value Added) and
for 83% of jobs.
In 2013 there were 27.1
million jobs in the service
sector, 83% of all jobs in
the UK

8. The Meaning and Importance of Value Added
Value added is the increase in the market value of goods or services
as a result of the production process. It excludes the costs
incurred in supplying the output of a good or service.
Value added = Value of production - Value of intermediate inputs
Low Value Added Industries
• Textiles
• Processed foods
• Farming
• Manufacturing assembly
• Social care
High Value Added Industries
• Information technology
• Renewable energy
• Life sciences
• Aerospace
• Bio-technology

9. Gross National Income (GNI)
• GNP is GDP plus net
income from overseas
investments and
remittances
• Remittance money
transfers are hugely
important for some
developing countries
• Remittance flows to the
developing world
exceeded $406bin in 2012
and $450bn in 2013
Top countries for remittance
income as % of GDP in 2012
Tajikistan (47%
Liberia (31%)
Lesotho (27%)
Nepal (22%)
Samoa (21%)

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11. Measuring Real National Income (GDP)
• Nominal GDP measures
the value of national
output at current prices
with no adjustment for
the effects of inflation
• Real GDP measures the
volume of output. It is
adjusted for inflation and
measured at constant
prices
• When economists are
discussing economic
growth they are referring
to real GDP
Turning nominal GDP into real GDP
1. Let the nominal (or money)
value of UK GDP in 2013 be
£1,400 bn
2. The price index for 2013 is 100
3. In 2014, the nominal value of
GDP rises to £1450 bn
4. In 2014, price index rises to 103
Therefore .......Real GDP in 2014
= Nominal GDP x 100/price index in
2013 = £1,450 bn x 100/103
Real GDP = £1,408bn
(expressed at constant 2013 prices)

12. Measuring National Income Per Capita
Population
estimates
UK
Population
Forecast
• In many countries,
official population data
is inaccurate
• There has been a sharp
rise in migrant flows
• UK pop projected to
increase by 9.6 million
over the next 25 years
• Projected population to
reach 70 million in 2027
UK
Population
(Millions)
1980
56.3
1990
57.2
2000
58.9
2005
Per capita
income
• Per capita means
income per head of
population
• = GDP / total population
Year (Mid
Year
Figure)
60.2
2010
62.3
2013
63.6

13. Real GDP or GNI Per Capita – Purchasing Power Parity
1. Real GDP measures the value of national output at
constant prices i.e. Adjusted for inflation
2. PPP stands for purchasing power parity
3. PPP measures how many units of one country’s
currency are needed to buy exactly the same basket of
goods and services as can be bought with a given
amount of another country’s currency
4. In countries where the cost of living is relatively high,
there will be a downward adjustment to a nation’s
PPP-adjusted GDP or GNI per capita
5. PPP is an estimated figure and volatile exchange rates
can have a big effect on real purchasing power of a
given amount of currency e.g. $100 in each country

14. Inaccuracies when Calculating GDP
Published national income data is subject to errors in measurement
• Official data on GDP understates real national income per
capita due to the shadow economy and the value of unpaid
work by volunteers and people caring for their family
• The "shadow economy" includes illegal activities such as
drug production and distribution, prostitution, theft, fraud
and concealed legal activities such as tax evasion on
otherwise-legitimate business activities such as un-reported
self-employment income
• Often official GDP data is inaccurate as many lower income
countries do not update their reporting often enough, so
their GDP numbers may miss large and fast-growing
economic sectors, like cell phones

15. Measuring the Standard of Living (SoL)
The base line indicator for standard of living is real GNI per capita
(adjusted for purchasing power parity) – but this data hides........
• Regional variations in income and spending:
• Inequalities in income and wealth
• Changes in leisure and working hours and working conditions
• Imbalances between consumption and investment
• Changes in life expectancy
• The value of non-marketed output, unpaid work
• Innovation and the development of new products
• The impact of growth on the stock of natural resources
• Defensive expenditures - protecting against crime, or spending to
clean up the effects of pollution and waste

16. Problems with using GDP to measure living standards
Human Happiness
Beyond Markets
Externalities
Quality of Life
Non Market Activities
Environmental Factors
Black Market
Sustainability
Make up of GDP
Informal Economy
The Long Run View
Balance of spending

17. Alternatives to Real GNI Per Capita as measure of SoL
Many other published indicators and surveys are now available
taking in economic, social, humanitarian and environmental aspects
Happy Planet Index
Genuine Progress Indicator
OECD Better Life Index
Human Development Index

18. We add new resources / links / articles every day
to our Economics blogs
Follow this link for the AS Macro Blog on Tutor2u
www.tutor2u.net/blog/index.php/economics/categories/C59

19. Basics of Index Numbers
1. Index numbers are a useful
way of expressing data time
series and comparing /
contrasting information
2. An index number is a figure
reflecting price or quantity
compared with a standard or
base value
3. The base value always has an
index number of 100 and the
index number is expressed as
100 times the ratio to the base
value
4. Note that index numbers have
no units!
Examples
• FTSE-100 Share
Prices Index
• Consumer Prices
Index (CPI)
• Exchange rate index
• Index of house
prices
• Index of GDP
• Human
Development Index

20. Calculating an Index Number
Index number in Year Y = (Data Value in Year Y / Base Year Value)*100
Year
Average House
Price (£s)
Index of
House Prices
(2007=100)
2007
192,651
100.0
2008
194,658
101.0
2009
159,961
82.2
2010
167,973
105.0
2011
162,915
97.0
2012
161,648
99.2
2013
163,593
101.2
The chosen base year
Large fall – housing slump
A recovery in house prices
but little higher than 2007

21. The Difference between Income and Wealth
Income
Wealth
Income is a flow of money going
to factors of production
Wealth is the current value of a
stock of assets owned by
someone or society as a whole
Wages and salaries from jobs
Savings in bank accounts
Rental income from property
Ownership of property
Interest from savings
Shares / stocks in businesses
Profits flowing to shareholders
Wealth held in pension schemes

22. Inequality of Income and Wealth
Who Earns What In the Economy?
1. Median income = £21,400
2. Mean income = £30,100
3. Average income for top 1% of UK
income distribution = £150,000
4. Average income for poorest 1%
in the UK = £8,430
5. The richest 10% of taxpayers
receive 1/3rd of income
6. The bottom 40% of households
get almost half of their income
from state welfare benefits
7. The UK is one of world’s most
unequal rich countries: the
poorest 10th get 1% of total
income; richest 10th,31%
The Gini Coefficient
1. The Gini coefficient is a
measure of income
inequality that
condenses the entire
income distribution for
a country into a single
number between 0 and
1: the higher the
number, the greater the
degree of income
inequality
2. The latest value for the
Gini Coefficient in the
UK is a figure of 0.36

23. Aggregate
Demand (AD)

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