National income MCQ 1

Limitations of National Income Statistics

• National income growth rate can be misleading if it's slower than the population growth rate, resulting in a decrease in average income per head and a fall in standard of living.
• The quality of goods and services produced affects standard of living: a country prioritizing healthcare and education over military spending will have a better standard of living.
• Inflation and deflation affect national income: an increase in prices may boost national income, but it can lead to a decrease in standard of living; GDP calculated at constant prices is a more accurate reflection of economic growth.
• The hidden/shadow economy is not accounted for in national income statistics: unrecorded economic activity is not included in national income calculations.

Distribution of Wealth and Inequality

• National income statistics do not consider the welfare of citizens or income inequality within a country.
• The inequality-adjusted Human Development Index (IHDI) can be used to better identify inequalities and overcome the limitations of national income statistics.

National Income

Leakages

• Reduce aggregate demand
• Types of leakages:
  • Taxes: reduce disposable income, decreasing aggregate demand
  • Savings: reduce consumer spending, decreasing aggregate demand
  • Imports: reduce domestic spending, decreasing aggregate demand

Injections

• Increase aggregate demand
• Types of injections:
  • Government Expenditure: increase aggregate demand through government spending
  • Investment: increase aggregate demand through investment in capital goods
  • Exports: increase aggregate demand through foreign spending on domestic goods

Importance of National Income Calculation

• National income calculation is crucial for measuring economic growth, providing an indication of a country's economic performance.
• It serves as a vital tool for economic planning, as policymakers rely on national income statistics to make informed decisions.
• National income calculation helps determine the standards of living, revealing whether it has increased or decreased over time.
• The calculation is essential for determining the debt-to-GDP ratio, which can impact interest rates on government borrowings.
• For EU member states, national income calculation is used to determine their contribution to the EU Budget, which is based on Gross National Income (GNI).

Learn about the limitations of national income statistics, including how population growth rate, quality of goods and services, and inflation/deflation affect national income and standard of living.