Calculating national income

Introduction

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.

Enquiry question

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

Lesson objectives:

Examine the output approach, the income approach and the expenditure approach when measuring national income.

Distinguish between the nominal value of GDP and GNI and the real value of GDP and GNI and the difference between total GNI / GNI per capita.

Teacher notes:

1. Beginning activity - begin with the opening video (5 minutes). 

2. Processes - technical Vocabulary - the students can learn the key concepts through the key terms and by completing all of the activities.  Allow 10 minutes for discussion before the students start completing the activities. 

3. Practise activities - included on the handout are a number of short answer activities which should take around 35 minutes. 

4. Final reflection activity - end your lesson with this final activities and allow 10 minutes for your classes to complete this.  Before showing the short video have your classes write down at least 10 nations that they believe should be in the list of wealthiest nations. (10 minutes)
Key terms:

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 (GNI) - made up of GDP plus net property income (current transfers) from abroad. A GNI that is larger than GDP must have a positive figure (balance) for net property income (current transfers)..

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 

Activities

Watch the following short video and then complete the activities included on the page.

(a) What is GDP?

Determines the size and growth in the economy and measures the total value of all goods and serves in the economy.

(b) Why are tyres used in car production not included in GDP where as used tyres sold in a a garage are?

Because only finished goods are included in GDP figures, otherwise the tyres would be counted twice - once when they are produced and sold to the car factory and then again when sold as part of the car.

(c) Would a car manufactured by Ford in Mexico count in the USA's GDP or Mexico's? 

Mexico's

(d) What is the difference between nominal GDP and real GDP?

Real adjusts for changes in prices.

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.

In national income calculations the primary sector contributes $5 to the product, the secondary sector contributes $35 and the bar operating in the tertiary sector adds $40.  The total value added to GDP, therefore, is $80 and to then get from GDP at market prices to GDP at factor cost we take off the value of depreciation and net taxes (sales taxes - subsidies)

Activity 3

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?

By adding up the market value of all finished goods and services produced in one year, within a country.

(b) What are finished goods and services?

Goods which will not then be sold on.

(c) What are capital goods?

Goods which are finished and designed to add value to other businesses e.g. tractors or machinery.

(d) How is the value of national assets such as mountains, forest and wildlife included in a nation's GDP?

They are not, only goods which are sold and have a marketable value are included in calculations.

(e) Outline the impact on the GDP / GNI of your country of the following:

Multinational businesses which have established subsidiaries in your country?

GDP measures the level of economic output in the country and so the income generated by MNCs is included in GDP.  The output generated also counts towards GNP but the amount repatriated overseas will be deducted from the total figure. 

(f) When citizens of your nation work or set up businesses overseas and then send remittances back to their family?

Citizens earning a salary or profit overseas will not be included in GDP calculations but the funds repatriated back home will be included in the GNI / GNP of the nation.

 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?

£ 2,828,602

Activity 5

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 2019.

CountryGDP per capitaGNI per capitaGDP - GNI
Luxembourg$ 105,863$   70,260

$ 35,603

Norway$   75,389$  66,520

$ 8,869

Singapore$   57,713$  54,530

$ 3,183

Ireland$   68,710$  55,920

$ 12,790

Luxembourg, Ireland and to a lesser extent Singapore, among other nations have a very high number of MNCs who base their headquarters in those countries.  The governments of both Ireland and Luxembourg have been proactive in presenting themselves as attractive destinations for business.

Activity 6

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.

The earthquake will have had a significant immediate impact on GDP in terms of lost working hours in the immediate aftermath of the earthquake as well as loss of output, in addition to the collateral damage caused.  However, as the island is in the process of repair, in no small part thanks to outside donations, Haiti may have even see a small rise in GDP as the nation rebuilt its infrastructure.  

Activity 7

1. Provide the correct terms to the definitions included.

Term

Definition

GDP

The total output of a nation or the total income of a country

GNI

Gross domestic product, plus net property income from abroad

Real GDP

GDP or GNI adjusted for the effects of inflation

GDP / GNI per capita

GDP or GNI divided by the number of people in a nation

Activity 8

(a) Calculate the GDP of the following nation using the expenditure method:

Billion £
Private consumption1,220.311
Business investment  503.209
Government spending  174.072
Exports  300.000
Imports  428.000
Total GDP (expenditure method)

1,769.592 (the sum of C+G+I+(X-M))

(b) Calculate GDP via the income method:

Billion £
Income from wages / government benefits1,300.000
Income from rent    510.450
Interest earned    489.000
Dividends and profits earned 1,100.000 
Net taxes paid 1,550.545
Total GDP (income method)

1,848.905  (the sum of all income received minus net tax)

Activity 9

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

All materials on this website are for the exclusive use of teachers and students at subscribing schools for the period of their subscription. Any unauthorised copying or posting of materials on other websites is an infringement of our copyright and could result in your account being blocked and legal action being taken against you.