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National income statistics

Introduction

This lesson begins by looking at national income statistics and why governments collect this data.  A simple way for your classes to understand this concept is to think about national income statistics as being similar to a school report.  In other words why do schools compile school reports? 

The lesson also questions the limitations of national income data.  This does not imply that national income data is an ineffective indicator of a country's standard of living.  However it does mean that your classes should take a critical view of GDP data.  Another way of looking at this is to consider two nations, one with a higher GDP than the other.  The question to ask your class is 'How can we be sure that country A is richer than B, just because it has a higher GDP or even GDP per capita than country B?' 

Enquiry question

Why do governments collect national income statistics?  Is it important for citizens to be informed of how well their government is doing?  What are the costs of economic growth, is growth always good?

Lesson time: 80 minutes

Lesson objectives:

Understanding why governments collect national income data.

Evaluate the use of national income statistics, including their use for making comparisons over time, their use for making comparisons between countries and their use for making conclusions about standards of living.

Explain the meaning and significance of “green GDP”, a measure of GDP that accounts for environmental destruction.

Teacher notes:

1. Beginning activity - begin with the opening activity and allow 10 minutes for your classes to complete this.

2. Processes - technical vocabulary - the students can learn the key concepts through the notes, the first part of which which should take 5 minutes to go through and discuss. 

3. Practise activity 1 - requires students to apply logic in completing the table.  You will find that while some students may try and cheat by checking the information online, they can actually complete the exercise applying the logic attached to the question. (10 minutes)

4. Processes - technical vocabulary - the students can again learn the key concepts through the notes, the second part of which which should take 10 minutes to go through and discuss.

5. Activities 2 - 7 are short answer questions and will take around 40 minutes to complete properly.  A number of these are linked to a short video which needs to be viewed before answering the questions. (30 minutes)

6. Activity 8 - is also a short answer question but can be used as a TOK exercise, i.e. what is the opportunity cost of the world's military spending. (15 minutes)

7. Activity 9 - link to the assessment, contains a paper one style examination question which can be completed as a class or homework exercise.  (10 minutes)

Why do countries collect national income statistics?

Governments collect national income statistics for a variety of reasons.  Some of these include the following:

1. National income statistics are effectively a record of how successful an economy has been over time. 

2. Governments and other agencies also use national income statistics to compare the performance of different countries as well as within a country between different time periods.

3. National income statistics can also be used to predict future trends and develop policies that form the basis of long term economic planning.

Available as a handout at:  Why countries measure GDP 

Activity 1: The importance of collecting national income data

Former British prime minister Margaret Thatcher famously used the phrase, first used by James Carville in 1992, 'its the economy stupid'.  Margaret Thatcher knew the importance of a successful economy and the sense of economic well being that goes with this, in determining election success.  She believed that a standing government, governing in a period of economic growth would almost always retain power.  Only in situations where the economy was performing poorly would the government be in danger of losing the election, with the electorate turning their anger towards any government unfortunate enough to be in power when incomes were falling and unemployment rates rising. 

Study the table below which illustrates the performance of the UK economy from 1960 to the present day.  Then complete the work point which follows:

Looking at the table above, can you guess which political party won the following general elections:

Year of electionWinnerYear of electionWinner
1964

the standing government

1992

the standing government

1966

the standing government

1997

the opposition party

1970

the opposition party

2001

the standing government

1974

the opposition party

2005

the standing government

1979

the opposition party

2010

the opposition party

1983

the standing government

2015

the standing government

1987

the standing government

2017

the standing government

2019

the standing government

2019

the standing government

To what extent does the above table support the 'its the economy stupid' theory?

As with all theories and correlations there are exceptions to every rule but the pattern of general election victories supports this view.  The 1960s were a period of prosperity in the UK economy and so it is little surprise that both elections were won decisively by the standing socialist government.  The British electorate had little appetite for change during this decade.  The 1970s, by contrast, were a period of hyper inflation and low economic growth - all three elections in this decade were won by the opposition party.  During this decade the electorate voted for change, believing what the government was doing was not working.  The 1980s were also a period of prosperity in the UK and the standing government won both elections in this decade - with significant majorities.  However the mid 1990s saw a downturn in the UKs economic prospects and the opposition socialist party rose to power again in 1997.  With the UK back on track, throughout the end of the 1990s and the 2000s, the standing government won all the elections in this period.  Only after the financial crisis of 2008 did the opposition Conservative party finally win an election.  Then as the economy recovered, after the financial crises, the standing Conservative government won the elections of 2015, 2017 and 2019.    

Limitations of national income statistics

While the collection of national income statistics provides a very good measure of a countries economic performance, it should be noted that there are limitations to their uses:

Calculation errors or incomplete statistics - particularly middle and low income nations less so.

The grey or unofficial economy - this sector which includes wages paid unofficially, unofficial transactions such as between friends or family members, foreign migrant workers employed without registration papers, as well as illegal activity such as the sale of boot leg cigarettes.

Military output  - many nations spend large proportions of their national output on building up a vast army as well as diverting a significant proportion of their factors of production towards the production of military goods, which do not improve living standards.

Costs of economic growth - another limitation of GDP data is that while it records the rate of growth in an economy, it does not necessarily tell you whether the growth is actually good for its citizens or not?  For example, in recent decades China has experienced fantastic growth rates.  While there are many positives to such development this level of growth has also come at a cost e.g. environmental costs, higher income inequalities and rapid (largely unplanned) urban development.

Green GDP - a record of GDP after taking into account any damage to the environment.  This is calculated by the formulae:  Nominal GDP minus environmental costs of production.

Activity 2: The grey economy

What approximate proportion of GDP do you believe is made up by grey economy in Developed nations, as well as Developing economies.

The average size of the informal economy, as a percent of official GNI in the year 2022, in developing countries is 41%, in transition countries 38% and in OECD countries 18%.   Some examples of nations are included in the next table:

Size of the grey economy as a % of the total GDP (2012 - 2022 average)

United States

  7.5%

Germany

14.3%

Italy

22.8%

Turkey

29.6%

Bulgaria

33.6%

Russia

50.4%

Activity 3: The challenges faced by the informal economy

Start by watching the following short video and then complete the questions that follow.

(a) What is the grey or unofficial economy?

Any transaction which is not officially recorded, operating outside of official government channels, but is part of the total economic activity of the economy.  For example the video describes the following activities as being part of the grey economy - the person who sells fruit on the side of the road, IB students working as baby sitters and getting paid in cash.

(b) How do economists calculate the size of the grey economy?

One method is to compare a nation's recorded income level and its total expenditure, which is easier to calculate.  A second is to measure the demand for case - the greater the use of cash in an economy the larger the size of the unofficial economy.  Electricity use can also be used.

(c) How large do economists believe the informal might be worldwide?

Huge, potentially trillions of $s.  This of course differs between nations with many developed nations having relatively small informal sectors but many developing ones have a grey sector close to half of total activity.

(d) What % of India's workers are part of the official economy?

Just 10%.

(e) Outline the problems associated with a large informal economy in measuring national income.

The primarily difficulty is the impact is on the difficulty of accurately predicting output / income levels created in the grey economy.  This means that in many middle and low income countries the level of GDP is probably underestimated.

(f) Are there any positives identified from the video, regarding the size of the informal economy.

The video highlighted that the grey economy often provides an important safety net for the unemployed or working poor, providing a source of income for those unable to find work in the official economy.

Activity 4: The informal sector in Mexico

As the first video highlights the grey economy or unofficial sector presents particular challenges for many LEDCs, due to the large size of the grey sector in many LEDCs amd the lack of opportunities in the official sectors.  The following video highlights the informal sector in Mexico, where one third of the workforce is employed in this sector.

Explain why the large informal sector presents an obstacle for the Mexican government as it tries to grow its economy.

A large grey or unofficial economy makes it significantly more difficult to collect tax revenue.  Many middle and low income countries are characterised by a relatively low tax base, meaning the number of people contributing to tax revenues.  For this reason many nations have switched the primary focus of tax revenue collection to sales taxes which are seen as easier to collect than income taxes.  However, such a policy also presents its own problems as such taxes are generally regressive, placing a higher burden on the poor, rather than wealthier households who have a lower marginal propensity to consume than low income households.

Activity 5: The role of military spending in national income data

The following table illustrates the level of defence spending by nations around the world. 

RankNationSpending 2022 (B$) % of GDP spent on defence
1USA8013.2
2China2931.7
3India76.52.0
4United Kingdom68.42.1
5Russia65.93.1
6France63.82.3
7Germany56.01.4
8Saudi Arabia55.96.6
9Japan54.01.1
10South Korea48.12.8

(a) How does the size of a nation's spending on defence impact on the nations:

i. GDP

Gross domestic product measures only the size of a nation's output and so all of the spending will increase GDP by the same amount.  Of course, military spending on overseas bases, military personnel e.t.c. will only increase GDP and not GNI, unless that money is later repatriated back home.

ii. Standard of living

This is much less obvious, many economists would argue that spending on defence adds nothing to a nation's GDP.  Others argue that spending on the military makes a nation feel safer, increases its global influence and leads to the discovery of new products..

(b) In the 1980s a number of American politicians claimed that the Defence industry was as important to the American economy as IBM or General Motors.  Analyse this statement from the viewpoint of American GDP as well as living standards in the country.

As above, there is little doubt that high levels of defence spending during the cold war was a major driver of economic growth, creating many jobs directly as well as indirectly in ancillary industries such as Aerospace and engineering.  In many cases products designed initially for military use ended up in civilian use.  Examples include: GPS systems, duct tape, the jeep, microwave ovens and super glue.  That said who knows what additional products may have been invented had those resources instead been allocated to civilian use.  Regardless of the impact on GDP it is hard to argue that the billions spent around the world on defence has any significant impact on improving the quality of life for its citizens.

Activity 6: Does the military budget offer value for money?

Watch the following video which offers an alternative view of how the US government could use its military spending of $600 billion.  Afterwards investigate other uses for this money and present your findings to the class.

Hint:

The USA military budget could of course be spent in other areas, for comparison the $600 billion (its actually $640 by 2019) is around the same level as the USA total spending on education, twice the amount spent on welfare payments and half of the amount spent by US citizens on their own healthcare - itself the highest in the world.

Activity 7: the costs of Economic growth

In November of 2018, Istanbul opened the first stage of its new airport.  Once it is completed it will be one of the world's largest and was built at a cost of EUR 32 billion.  Once operating, however, it is expected to add considerably to the Turkish economy and will replace the existing airport in the city - Istanbul Ataturk airport, which has operated for more than a hundred years.  In building the new facility, which occupies approximately 67.6 million square metres, significant areas of forest and otherwise productive land was built on.

Outline the factors that we need to consider when calculating the economic impact of the new airport?

As with any facility of this size the airport will have a significant impact on the GDP and GNI of the country.  In building the facility 32 billion Euros was spent and much of this will have gone into th economy generating additional wealth for those involved in the construction as well as additional businesses that profit indirectly.  This includes substantial upgrades to the cities transport infrastructure and once built, the new airport is expected to bring an increase of millions of new visitors to the city, many of who will boost the local economy.

However, as with any economic decision there are also costs associated with the project.  The first being the sheer cost of the project, 32 billion Euros and counting and this before the airport brings in any revenue to the city.  Then there are the opportunity costs to consider, in this case this means the loss of revenue previously earned from the existing airport as well as the value earned by the land prior to the airports construction. 

Lastly there is the economic cost of the environmental damage which is very difficult to calculate.  The airports construction is almost certainly likely to lead to a rise in air pollution and traffic in the city which also comes at an environmental and economic cost.

Activity 8: Does GDP measure the right things?

Start by watching the following short video and then answer the question, does GDP measure the right things?

While GDP growth is good and can provide resources for public services which do of course increase welfare.  However, the economist in this video believes that the way national income is measured requires improvement.  For instance locking up prisoners adds to GDP but not necessarily welfare.  Similarly rises in GDP, concentrated in the hands of a small number of people and corporations does not improve welfare - except for the super rich.

Activity 9: Link to the assessment

Part (a)

Explain two reasons why governments measure national income.  [10 marks]

Command term: Explain

Key term to explain: National income

Responses should provide two of the following, developing each reason provided (consider as 2 x 5 marks)

  • like any report card GDP statistics can be used to judge the relative effectiveness of any government in managing the economy
  • GDP data can be used to formulate future policy or develop economic models
  • GDP data can be used to compare the living standards between different nations
  • GDP or GNI data can be used to calculate a nation's contribution towards associations such as the UN or the EU, which calculate contributions based on a % of GNI.

Part (b)

Using examples from the real world, evaluate the use of national income statistics in making comparisons of the standard of living over time. [15 marks]

Command term: Evaluate

Key terms to explain: national income, standard of living

With the command term evaluate, responses must consider the extent to which this statement is true or not?

Real world examples might include a comparison of two nations with similar levels of GDP per capita but very different HDI rankings or nations with comparable HDI e.g. Nigeria and Rwanda but where one (Nigeria) has a much larger GDP per capita because of its oil reserves.  

As with any part (b) response there are different views to consider.  On one hand a rise in national income, measured by growth in real GDP per capita can make genuine improvements to a nation's standard of living.  Higher incomes mean greater disposable income to spend on luxury consumer goods and services and greater life choices.  A rise in economic growth also means more tax revenue for the government and this can be invested in public services such as health, education and infrastructure improvements.  For this reason there is a very high correlation between rising economic growth and improved living standards, measured by HDI.  The wealthiest nations by real GDP are in most cases those that also enjoy high levels of human development.  Examples of this would include the Nordic nations, who occupy the top of both rankings, while other wealthy Western nations are also close to the top of the HDI rankings.

However, as with any theory there are examples when rises in economic growth have not contributed to improvements in living standards.  This is because of the difficulties associated with accurate income data collection, the presence of externalities such as pollution and rapid urbanisation which often result from economic growth as well as increasing levels of income inequality as the gains of growth are not shared equally.  An example of this might include a number of the oil wealthy nations of the middle east, where great wealth has not brought about proportionate rises in HDI and enormous wealth inequalities remain.  Another good example might the case of African nations with comparable HDI e.g. Nigeria and Rwanda but where one (Nigeria) has a much larger GDP per capita because of its oil reserves.  The nations reserves have brought relative wealth to the nation but achieved little for development as the wealth is concentrated within a small number elite.

GDP statistics also omit factors such as social costs and the number of hours worked by citizens to achieve the gains in GDP.  For example the USA which has a larger GDP per capita than almost all European nations but much of this advantage is negated by longer working hours and shorter holiday periods.

If GDP is used as a measure of growth then this variable neglects the affect of changes to population size and changes to general price levels.

Responses should then reach a conclusion as to the validity of the statement supported by appropriate evidence.  The conclusion should not include new information, not previously expressed in the response.

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