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Study notes

Measuring National Income (GDP)

  • Levels: AS, A Level, IB
  • Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC

National income measures the monetary value of the flow of output of goods and services produced in an economy over a period of time

GDP and GDP per capita - revision video

Measuring the level and rate of growth of national income (Y) is important for keeping track of:

  • The rate of economic growth
  • Changes to living standards
  • Changes to the distribution of income between groups within the population

Gross Domestic Product

  • Gross domestic product (GDP) is the total value of output produced in a given time period
  • GDP includes the output of foreign owned businesses that are located in a nation following foreign direct investment. For example, the output produced at the Nissan car plant on Tyne and Wear contributes to the UK’s GDP
Three ways to measure GDP

There are three ways of calculating GDP - all of which in theory should sum to the same amount:

National Output = National Expenditure (Aggregate Demand) = National Income

(i) The Expenditure Method - Aggregate Demand (AD)

The full equation for GDP using this approach is

GDP = C + I + G + (X-M) where

  • C: Household spending on goods and services
  • I: Capital Investment spending
  • G: Government spending
  • X: Exports of Goods and Services
  • M: Imports of Goods and Services

The Income Method – adding together factor incomes

GDP is the sum of the incomes earned through the production of goods and services. This is:

  • Income from people in jobs and in self-employment (e.g. wages and salaries)
  • +
  • Profits of private sector businesses
  • +
  • Rent income from the ownership of land
  • =
  • Gross Domestic product (by sum of factor incomes)

Only those incomes that are come from the production of goods and services are included in the calculation of GDP by the income approach. We exclude:

Transfer payments e.g. the state pension; income support for families on low incomes; the Jobseekers’ Allowance for the unemployed and other welfare assistance such housing benefit and incapacity benefits

Private transfers of money from one individual to another

Income not registered with the tax authorities Every year, billions of pounds worth of activity is not declared to the tax authorities. This is known as the shadow economy.

Published figures for GDP by factor incomes will be inaccurate because much activity is not officially recorded – including subsistence farming and barter transactions

Gross Value Added and Contributions to a nation’s GDP

  • There are three main wealth-generating sectors in an economy – manufacturing and construction, primary (including oil& gas, farming, forestry & fishing) and a wide range of service-sector industries.
  • This measure of GDP adds together the value of output produced by each of the productive sectors in the economy using the concept of value added. .

Value added is the increase in the value of goods or services as a result of the production process

Value added = value of production - value of intermediate goods

Say you buy a pizza from Dominos for £9.99. This is the retail price and will count as consumption. The pizza has many ingredients at stages of the supply chain – tomato growers, dough, mushroom farmers and also the value created by Dominos as they put the pizza together and deliver to the consumer.

Some products have a low value-added, for example cheap tee-shirts selling for little more than £5. These are low cost, high volume, low priced products.

Other goods and services are such that lots of value can be added as we move from sourcing the raw materials through to the final product. Examples include designer jewellery, perfumes, meals in expensive restaurants and sports cars. And also the increasingly lucrative computer games industry.

Manufacturing in the UK was 11% of GDP in 2015.

Manufacturing in the World Economy

  • The creative force behind 10bn unique products
  • It accounts for 15-20 per cent of world economy
  • It employs about 300m people (roughly 5 pc of world population)

GDP by Output (Value Added)

  • The majority of UK GDP comes from service industries such as banking and finance, tourism, retailing, education and health.
  • In 2017, the service industries accounted for 79% of total UK economic output (Gross Value Added) and accounted for 83% of workforce jobs in September 2017.

Manufacturing

Manufacturing is one of the production industries, which also include mining, electricity, water & waste management and oil & gas extraction. In 2015, the UK manufacturing sector accounted for 10% of total UK GDP and it accounted for 8% of jobs.

Service sector industries

The main service sector industries in the UK are:

  • Hotels and restaurants, and a range of services provided by local government
  • Transport, logistics, storage and communication
  • Business services and finance, motor trade, wholesale trades and retail trade
  • Land transport and air transport, post and telecommunications
  • Real estate activities, computer and related activities, Education, Health and social work
  • Sewage and refuse disposal
  • Recreational, cultural and sporting activities
Manufacturing
Services
Difference between GDP and GNP

Per Capita Gross National Income

How much does each person earn on average? We use per capita measures to give us a guide to this. Income per capita is a way of measuring the standard of living for the inhabitants of a country.

Gross National Income per capita = Gross National Income / Total Population

Per capita national income

Problems with using GDP as a measure for standard of living

10 flaws in GDP (living standards) - revision video

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