national income

National Income Defined: income accruing (earned) by permanent residents of a country from current economic activity during a specific period, usually 1 year.

Measures •

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Gross national product (GNP) is the total income earned by the domestic (Irish) citizens regardless of the country in which their factors of  production are located. National income (net national product) is the GNP minus the capital that is consumed(depreciation) consumed(depreciation) during d uring the the year. year. produced Gross domestic product: Is the output produced by the FOP in the domestic economy irrespective of whether the factors are owned by Irish nationals or not.

Factor Cost •

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cost paid to the factors of production for producing goods & services. It includes subsidies and excludes excludes taxes.

Market Market Prices Prices •

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Current prices – measured at the prices paid for output at present Constant prices - measured as the total output this year at the market market prices for the previous year o

This is a more realistic measure of national income as it takes out the effect of inflation on National Income Figures

Net Factor Income from Abroad: Is the difference between: Incomes earned by foreign Factors Of Production in Ireland and sent back to home country e.g. USA (repatriated). Foreign owned co.’s in Ireland repatriating profits. Immigrants sending wages back home. (Remittances) Repayments of National Debt to foreign institutions. •

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and Incomes earned by Irish Factors Of Production abroad and returned to Ireland. - Irish workers on contract abroad, - Irish Irish subsi subsidia diary ry Compan Companies ies worki working ng abro abroad ad repa repatri triat ating ing pro profit fitss - Emigr Emigran ants ts Remi Remitt ttanc ances: es: Money Money sent sent home home by by Irish Irish abr abroad oad.. Is this + or - for Ireland ?

Is this + or - for Ireland Ireland ? Minus in 2010 because: •

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Large no. of foreign owned co.’s in Ireland repatriating profits.

Immigrants sending wages back home. (Remittances) Repayments of National Debt to foreign institutions. Therefore GNP < GDP

Repatriating Profits = Companies sending profits back to their home country

Subsidy Is a direct payment by the government to a producer/exporter producer/exporter in order to decrease the cost of production and/or the price per unit.

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Indirect Taxation = taxes levied on goods on services •

VAT

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Excise Duties

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Customs Duties

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Stamp Duties

Gross National Product (GNP) @ Current Market Prices Is the output outpu t produced by the Fact Factors ors Of  Production in the domestic economy that is owned by Irish nationals. Less incomes earned by foreign firms that are repatriated. Plus incomes earned by Irish I rish FOP abroad that is sent back to Ireland. GNP = GDP + Net factor Income from abroad(this is negative in 2011) •

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Calculating Gross National Product @ Factor Cost GNP @ Current Market Prices Minus indirect taxes (leakage) Plus subsidies (injection) Equals GNP @ Factor Cost

Distortions to the market price

Calculating Gross Domestic Product @ Factor Cost GDP @ Current Market Prices Minus indirect taxes (leakage) Plus subsidies (injection) Equals GDP @ Factor Cost

Calculating Gross Domestic Product @ Market Prices GDP + Indirect Taxes  – Subsidies = GDP @ Market Prices

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Calculating Gross National Product @ Market Prices •

GNP + Indirect Taxes  – Subsidies = GNP @ Market Prices

Calculating Gross National Product @ Market Prices 1.

GDP + Indirect Ta Taxes – Subsidies = GDP at Market Prices

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GDP GDP @ Mark Market et Pric Prices es + Net Net Fac Facto torr Inc Income ome from from Abr Abroa oad d= GNP @ Market Prices

Calculating Net National Product @ Factor Factor Cost GNP @ Factor Cost Less Depreciation NNP @ Factor Cost This is also known as National Income

Depreciation: Is the reduction in the value of capital of capital goods/fixed goods/fix ed assets in the production of goods & services in the economy.

Example of Calculating GNP at Factor Cost

Example of Calculating NNP at Fact Factor or Cost

Measurement of National Income Measured by the CSO (Central Statistics Office) Income is the reward for supplying the factor of production Why is it necessary to calculate National Income? (Exam Question) •

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To Measure Economic Growth: The % by which Nation Income rise (GDP) = Economic Growth Rate. To compare it to other countries national income and (International onal Comparisons) C omparisons) see if we could improve(Internati To give an indication as to whether the standard of  living is improving or not

Measurement of National Income  –  3 ways The Output/production method: Adding up the value of all types of production. (Total Output) The Income method: Adding up all the incomes received by the individuals and firms. (Total Income) The Expenditure method: adding up the total value of all sales of goods and services. (Total Expenditure) •

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All three of these should equal each other as all money spent (expenditure) (expenditure) is spent on goods and services that are produced (production) (production) and all incomes are earned from the production of goods and services. All just show the figures from a different perspective.

Simplified Example of Measurement Income Method

Output Method

Expenditure Method

= Income Received

= value of goods produced

= amount spent on goods

€46,000

€46,000

€46,000

per year

per year

per year

A worker makes 10 lamps a week @ €100 each for 46 weeks • • •

Her Output is €46,000 worth of lamps Her Income is €46,000 worth of sales from the lamps The Expenditure is €46,000 from all the lamp sales

Income Method •

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Adding up all the incomes received by individuals and firms in an economy during the year. Based on Data collected by the Revenue Commissioners (Tax) for the purpose of income tax assessment. Total incomes include personal incomes, farm incomes and profits, industrial wages and salaries, the profits of privat private e and public companies, the profits of semi-stat semi-state e bodies and the profits of governmen governmentt departments The production of goods and services involves a combination of some or all the factors of production. Therefore Total National Income is made up of the total earnings of the four factors of production. Rent, Wages, Wages, Interest Interest and Profits.

Definitions from Income Method •

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Net Domestic Product at Factor Cost = all incomes earned in a country valued at the Cost of Factors of Production . (NDP) Net Factor Income from the rest of the world = all income earned by Irish people & income earned by foreign companies abroad. (NFI) Net National product at factor cost = NDP at factor cost + NFI from the rest of the world valued at the cost of factors of production. Otherwise called The National Income (NNP)

Incomes in Kind Incomes received in non monetary form. form . Payment made in the form of good or service. E.g. Company car. Must be included in Measurement using Income Method (This is seen as Hidden Income) Example A farmer may consume some of the milk and eggs produced on her farm. A Salesman may have the use of a company car etc. The value of these benefits must be treated as part of the incomes of both the farmer and the salesperson. • •

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Transfer Payments Occurs when tax on income earned by one person is given as income to another. E.g. Social Welfare •

It is payment received for which no Factor Of Production of a good or service has been supplied.

Must be Excluded in Measurement of National Income When calculating total incomes we must exclude receipts receipts which are not income in the economic sense. Transfer Payments such as unemployment benefit, children’s allowance are not income in the economic sense. If these were entered these items would be double counting as transfer payments payments are simply a redistribution of wealth. E.g. If a carpenter earns €30,000 a year and pays €6,000 income tax which is redistributed redistributed by the government government to old o ld age pensions. The total wealth produced is only €30,000 as the old age pensioners do not produce goods or services. •

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Incomes should only include receipts directly related to production of goods and services, i.e. factor rewards

Output Method •

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Adding up the total value of all goods and services produced in the country during the year. Based in the Census of Production (published annually by the Government)

1. When When calcul calculati ating ng tot total al produ producti ction on care care mus mustt be tak taken to avoi avoid d DOUBLE COUNTING. •

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For Example, Example, a furniture firm produces a dining-room suite valued at €500 which incorporates timber purchased for €200. If  Statisticians value value the production of furniture firm at €500 they would be double counting as output at the timber firm would already have been valued at €200. They only calculate the “Value “Value Added” by each firm, i.e. they deduct the value of raw materials purchased. The output in the above example (furniture firm) would be €300.(€500 less €200).

Output Method 2. Any capital consumed during the course of production must not be included. Capital goods depreciate depreciate and wear out during dur ing the course of  production. Producers Producers when pricing their output include an element of compensation for capital depreciation.

NB: Capital Depreciation must be subtracted from total output to give a true value of current production.

Total Output before the deduction of capital depreciation is known as GROSS NATIONAL NATIONAL PRODUCT . Net National Income + Depreciation = Gross National Product Gross National Income  –  Depreciation = Net National Product

OUTPUT METHOD Example Example 2010(€m) 1 Agricultural Production (Farming, Forestry, Forestry, Fishing)

3,158

2 Industrial Production

43,459

3 Distribution, Transport Transport and Communications output

15,357

4 Government Services (civil and defence etc)

3,814

5 Professional Services and Entertainment

40,175 105,990

6 Adjustment for stock appreciation 7 Adjustment for financial services 8 Net factor income from the rest of the world

-156 -4226 -25,915 -30,297

Statistical Discrepancy (Add)

1,217

Net National Product at Factor Cost = National Income

76,910

Add Depreciation

13,260

Gross National Product at Factor Cost

90,170

Plus Taxes on Expenditure

16,097

Less Subsidies

-2,837

GROSS NATIONAL PRODUCT at market prices

103,429

Notes of Output Method •

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Stock Appreciation: In an inflationary period, stocks may rise in value due to price changes alone. alone . If value of stock goes up because of inflation - this must be deducted Financial Services : Excess of interest and dividends received by financial institutions over payments of interest interest to depositors. Seen as the cost of providing services , already factored in therefore must be deducted

Question 2010 Q 5 (b) HL Explain the economic effect which each of the following could have on the level of GNP at Market Prices. (i) (i) A red reduc ucti tion on in in the the gen gener eral al lev level el of of VA VAT (ii) A reduction in the subsidies paid to farmers. farmers.

(i)A reduction in the general level of VAT Short Run •

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GNP will decrease Because A reduction in VAT reduces the price of goods & services paid by consumers

Long Run GNP will increase Because Lower prices may encouraged consumers to buy more goods & services. When aggregate demand increased so does GNP. • • •

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(ii)A reduction in subsidies paid to farmers Short Run GNP will increase Because A reduction in subsidies paid to farmers will increase prices for agricultural products which in turn will lead to an increase in GNP •

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Long Run GNP will decrease Because Higher prices may discouraged consumers from buying agricultural produce. When aggregate demand falls so does GNP. • •

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The Expenditure Method = All the Spending of  the Country on Goods and Services Income (Y) = Consumption Spending (c) + Investment Spending (I) + Government Spending (G) + Exports (X) - (Minus) Imports (M)

Y=C+I+G+X-M

Limitations of National Income Statistics as a measure of Standard of Living (Re (Refer fer to Book) 1.

We must use constan constantt prices as a rise in national income may be due to higher prices (inflation), NOT extra output being produced.

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May be affected by Population Growth & Currency - Need to measure GNP or GDP per capita(person) capita(person) at the same currency

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Distri Distribut bution ion of of Incom Income e is not indica indicate ted d by by incom income e per per capit capita a figur figures. es. In 200 2005 5 GNP GNP per capita in Ireland = €32,903, however however many people in Ireland earn multiples of  this figure and may earn less than this figure. f igure.

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reward is Non-market ac activities are not included, work that receives no financial reward not included despite its contribution to society e.g. Charity Work

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Type pess of of Goo Good ds and and Se Serv rvic ices es pr prod odu uce ced d is not considered. It may not mean there has been an increase in Standard of of Living of citizens. E.g. Increase Increase in national income could be due to increased weapons manufacturing over education or health.

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Nati Nation onal al Inco Income me may ha have ris risen en due due to to people working more hours and Taking Taking Shorter holidays  –  Standard of living of stressed out workers may not have risen.

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Unrecorded economic activity reduce the size of the The Black Economy – Unrecorded National Income and are not factored into statistics statistics e.g. Sale of Illegal goods such as drugs, counterfeit products and people working for cash in hand and not paying

The Black Economy/ Black Market E.g. Doing Nix Nixers ers (Building an extension for for someone for cash instead of putting it through the books) •

Buying Counterfeit Products e.g. Cigarettes

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Un-Declaring of Income

The Black Economy/Black Market  – Economic Economic Effects

The Black Economy/Black Market  –  Economic ways to discourage this activity

Circular Flow of Income •

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Basic Model of how an economy of any country operates Injections = anything that causes a rise in the circular flow of income. Leakages = anything that causes a reduction in the circular flow of income.

Circular Flow of Income Diagram NB

The Circular Flow of Income Explained 1. 2. 3. 4. 5. 6. 7. 8.

Househ Household oldss supp supply ly the the fact factor orss of pro produ ducti ction on (e.g. (e.g. labo labour) ur) to firms. firms. Firms pay for these factors (wages) Househ Household oldss in in turn turn spend spend their their income incomess on the output output of firms. firms. Househ Household oldss usual usually ly do not spend spend all their their inc income ome.. Some Some is is saved saved.. This represents a leakage from the circular flow of income. Howev However er fun funds ds sav saved ed can can be be used used for for inve investm stmen entt purpo purposes ses (can (can be borrowed by firms). This represents an injection into the circular flow of income. Some Some mon money ey ear earne ned d by by hous househ ehol olds ds is is spen spentt on imp impor orts ts and and creates wealth abroad (leakage) Export Exportss on on the the other other hand hand repr represe esent nt an injec injectio tion n (in (injec jectio tion) n) Some Some inc incom ome e is ta taxxed by the the gove govern rnme men nt (lea (leak kage) age) Gove Govern rnme men nt spen spendi ding ng (Inj (Injec ecti tion on))

Injections and Leakages Leakages

The effect on employment If Leakages exceed Injections? •

If Leakages are greater than injections then national income will fall leading to a drop in demand for goods and services/ec ser vices/economic onomic activity and thus a fall in demand for labour. The level of employment will fall

The Multiplier Refers to the number of times an injection leads to an increase in national income Definition in Marking Schemes •

Simple Example from Rapid Revision Joe gets €10 in pocket money. He spends €8 on a haircut. The hairdresser spends €7 of this on Groceries in a local shop. The shopkeeper spends €5 of this on a taxi. The Initial Injection into the economy of €10 results in a total increase in income of €30 , i.e. €10 (Joe) + €8 (hairdresser) + €7 (shopkeeper) + €5 (taxi driver). The Multiplier here is 3. The initial injection of €10 has resulted in income of  €30, 3 times the initial amount

The Size of the Multiplier depends on the following

1. The Mar Margin ginal al Pro Propen pensit sity y to to Consu Consumer mer (MP (MPC) C) = the fraction of extra income that is spent on consumer goods and services ∆ (  )

∆ (  ) Or MPC = 1  –  MPS (Marginal Propensity to Save) The bigger the MPC the bigger the multiplier

The Size of the Multiplier depends on the following

2. The Marginal Propensity to Save (MPC) = the fraction of extra income that is saved

∆ (  ) ∆ (  ) Or MPS = 1  –  MPC (Marginal Propensity to Consumer) The bigger the MPS the smaller the multiplier

The Size of the Multiplier depends on the following

3. The Marginal Propensity to Tax (MPT) = the fraction of extra extra income that is paid in i n taxes taxes

∆ (  ) ∆ (  ) The bigger the MPT the smaller the multiplier

The Size of the Multiplier depends on the following

4. The Marginal Propensity to Import (MPM) = the fraction of extra extra income that is spent on imports

∆ (  ) ∆ (  ) The bigger the MPM the smaller the multiplier

Versions of the Multiplier 1. Multip Multiplie lierr for for a clos closed ed econo economy my (no import importss or exports) with taxation taxation ignored. 1 1  1     2. Multiplier for an open economy with taxation ignored:   − +

or

 +

Versions of the Multiplier 3. Multiplier for an open economy with taxation:   − − ++ + 

or

 ++

To calculate the increase in national income resulting from an injection, the following formula can be used: Increase in National Income = (Relev (Relevant ant Multiplier X Injection)

Affect Affect of Consumption on the Multiplier 1. When When Consu Consump mpti tion on incr increa eases ses more more economic activity is generated within the economy. 2. The The val value ue of of the the mult multip ipli lier er incr increa ease ses. s.

Affect of Savings on the Multiplier 1. Savin Savings gs are are a leak leakage age from from the the Circula Circularr Flow Flow of Income. There is less consumption on goods and services in the economy. 2. When When Sav Saving ing incre increase asess less less econo economic mic activi activity ty is generated within the economy. 3. The The val value ue of of the the mult multip ipli lier er dec decre rease ases. s.

Affect of Imports on the Multiplier 1. Imports Imports are are a leaka leakage ge from from the the Circula Circularr Flow Flow of Income. Money spent on imports is not circulated circulated in this economy as money leaves the country. country. 2. When When Impo Imports rts incre increase ase less econo economic mic activi activity ty is generated within the economy. 3. The The val value ue of of the the mult multip ipli lier er dec decre rease ases. s.

Affect of Taxes on the Multiplier 1. Taxes axes dec decrrease ease spe spend nding ing with within in the the economy/ taxes are a leakage from the Circular Flow of Income 2. When When Spe Spendi nding ng Dec Decre reas ases es less less eco econo nomic mic activity is generated within the economy. 3. The The val value ue of of the the mult multip ipli lier er dec decre rease ases. s.

Multiplier Examples

Reasons why GDP is larger than GNP