Eco 561 - What Is National Income?

Week 4

William

ECO 561

March 14, 2015

Dr. Professor

Week 4

What is national income?

A Country’s income (national income) is the total value of all goods and services produced in any particular year. Study of macroeconomics will explain how national income is created. Macroeconomics deals with large-scale properties and institutions that characterize the system as a whole. As a measurement of a country’s economic activities, as the economy is expanding or shrinking, macroeconomics evaluates the gross domestic product (GDP). National income can be calculated by the income method which combines value of the new and final output produced in all sectors of the economy; the output method which combines manufacturing, financial services, transport, leisure, and agriculture; or the expenditure method which combines all spending in the economy by households and firms on new and final goods and services by both households and firms.

List its components.

The components of national income are consumption, investment, government spending, exports, and imports. Consumption is usually the largest national income component in the economy. Investment consists of any business investment. Spending by individuals on new houses is also included in investment. Government spending is the total of government expenditures on final goods and services. Exports represent the value of net exports which is the value of exports of goods and services minus the imports of goods and services. Unbalanced imports and exports often occur, and this value will be negative when imports exceed exports.

What is the definition of GDP?

Gross Domestic Product (GDP) is the total monetary value of goods and services produced in a country during a year. For economic analysis and accounting purpose, GDP is the most important aggregate of national income. “The best single indicator of a state’s power may be its total GDP, which combines overall size, technological level, and wealth. But even GDP is, at best, a rough indicator; not surprisingly, economists do not even agree on how to measure it. GDP is a useful estimator of material capabilities, but not a precise one” (Goldstein & Pevehouse, 2011).

How would the value of output produced at an American-owned factory in the U.S. and a foreign-owned factory in the U.S. be treated in GDP accounting?

For the purpose of GDP accounting, the value of output produced at an American-owned factory in the U.S. and a foreign-owned factory in the U.S. would both be treated as part of domestic output. In GDP accounting, GDP represents all domestic production regardless of who owns it.  

Identify the two major ways economic growth is measured.

The two major ways to measure economic growth are gross national product (GNP) and gross domestic product (GDP). GNP is the total net value of goods and services produced by a nation during one year. It is roughly equivalent to the total of net income from foreign investments added to GDP. GDP is defined as the sum of goods and services produced in a country during a year.