Calculating national income
This lesson focuses on how national income is measured. Your classes will need to understand the fact that national income can be calculated in different ways but that the answer should be the same - regardless of the method used. A good way to start this lesson is to have your students think of their class as the economy of a nation. One person's output is another's consumption and from this comes income in the form of factor rewards. I will often give everybody a job in the class and explain how each of us work to provide services for the others and so that we are all dependent on each other to keep the economy working. If part of that chain breaks, because some members of the class do not work, or provide goods and services that the other members do not wish to consume then the economy slows down. The national income of the class is equal to the value of the goods and services produced and economic growth comes from each of us producing more goods and services over time. This page also contains one activity which is classified as HL only. While methods of calculating national income is on the both the SL and HL syllabus, the unit contains some additional requirements in HL. For example, in SL students are required to be distinguish between GDP and GNP/GNI as a measure of economic activity, recognise the difference between nominal and real values for national income and distinguish between total and per capita figures. They would also be expected to be able to examine the three approaches to measuring national income. However calculating GDP, from a given set of data is part of the HL syllabus only.
How do governments measure national income? What is the difference between GDP and GNI and which is the better measure of national income?
Lesson time: 1 hour
Examine the output approach, the income approach and the expenditure approach when measuring national income.
Distinguish between the nominal value of GDP and GNP / GNI and the real value of GDP and GNP / GNI and the difference between total GDP / GNI and GDP / GNI per capita.
Gross Domestic Product (GDP) or national output - the total value of all final goods and services produced in an economy in a given time period (usually one year).
Income method - measures the value of all income earned in a country from wages (including benefits such as health insurance), self-employment, rent, shares and bank interest, minus of course deductions to taxes.
Output method - calculates the total output produced in a country, counting only the value added so that there is no double counting.
Expenditure method - calculates GDP by adding up the total money spent in the economy. This includes private spending by households, investment spending by firms and public sector spending by the government. The expenditure method also includes the value of net exports, which is calculated by subtracted the value of imports (foreign goods and services purchased by domestic citizens) from exports (goods and services purchased by overseas residents).
Gross National Income / Gross National Product (GNI/GDP) - made up of GDP plus net property income (current transfers) from abroad. A GNP that is larger than GDP must have a positive figure (balance) for net property income (current transfers).
NNI - Net national income (NNI) is equal to GNI minus the depreciation of the nation's assets e.g. roads, railways, machinery e.t.c.
Real GDP / GNI - GDP or GNI adjusted for the effects of inflation i.e. the rise in general prices.
GDP / GNI per capita - GDP or GNI divided by the number of people in a nation. This is a more accurate measure of living standards than the previous measurements because it considers not only the size of a nation's income but the number of people that it is shared between.
The activities on this page are available as a worksheet at: Calculating national income
Watch the following short video and then complete the activities included on the page.
(a) What is GDP?
(b) Why are tyres used in car production not included in GDP where as used tyres sold in a a garage are?
(c) Would a car manufactured by Ford in Mexico count in the USA's GDP or Mexico's?
(d) What is the difference between nominal GDP and real GDP?
Activity 2: Avoiding double counting
When calculating national income via the output method, a beer company records the following data:
A farmer grows malt and barley worth $5 to the brewer. The brewer then turns the malt and barley into beer worth $40 which it sells to a bar or cafe. A bar then sells the beer for $80 in individual units. Calculate the size of the additional GDP belonging to each industrial sector and what is the total value added to GDP.
Watch the following short video which illustrates the difference between GDP and GNI as a measure of national income. Then answer the following short questions.
(a) How is GDP calculated?
(b) What are finished goods and services?
(c) What are capital goods?
(d) How is the value of national assets such as mountains, forest and wildlife included in a nation's GDP?
(e) Outline the impact on the GDP / GNI of your country of the following:
Multinational businesses which have established subsidiaries in your country?
(f) When citizens of your nation work or set up businesses overseas and then send remittances back to their family?
Activity 4: Gross national income (GNI)
In 2018 the UK's GDP was recorded as £ 2,828,643 billion. However, that figure included included goods and services produced by overseas companies who immediately repatriate those profits back to their home country. Similarly, this figure does not include profits enjoyed by UK residents on businesses located overseas. The difference between the two figures (net property income) was calculated at - £ 41 b. What was the UK's GNI?
While the majority of countries have approximately the same value for GDP and GNP / GNI, with the net transfers of money into and out of the country largely cancelling out, there are notable exceptions. What might explain the disparity between GDP and GNI for the four countries in the table below: All figures obtained from the IMF and relate to 2017.
|Country||GDP per capita||GNI per capita||GDP - GNI|
|Luxembourg||$ 105,863||$ 70,260|
|Norway||$ 75,389||$ 66,520|
|Singapore||$ 57,713||$ 54,530|
|Ireland||$ 68,710||$ 55,920|
In January 12, 2010, on the West Indian island of Hispaniola, comprising the countries of Haiti and the Dominican Republic, a large-scale earthquake occurred. The most severely affected was Haiti, occupying the western third of the island. An exact death toll proved elusive in the ensuing chaos. The Haitian government’s official count was more than 300,000, but other estimates were considerably smaller. Hundreds of thousands of survivors were displaced and many thousands of buildings destroyed.
Outline the impact on Haiti's GDP and NNP of both the earthquake and rescue operation.
In national income accounting why is net national product a more effective measure of economic growth than GNP? Explain in relation to the economies of both LEDCs and fully developed nations?
1. Provide the correct terms to the definitions included.
(a) Calculate the GDP of the following nation using the expenditure method:
|Total GDP (expenditure method)|
(b) Calculate GDP via the income method:
|Income from wages / government benefits||1,300,000|
|Income from rent||510,450|
|Dividends and profits earned||1,100,000|
|Net taxes paid||1,550,545|
|Total GDP (income method)|
Which nations experienced the largest fall in GDP in 2020, this short presentation has the answer. Before watching it write down a list of nations you expect to be in this list.
A full rank of nations by GDP can be found at: GDP of different nations