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What are the two kinds of flows in the circular flow of income?
What are the two kinds of flows in the circular flow of income?
The income method of measuring national income is also known as the value-added method.
The income method of measuring national income is also known as the value-added method.
False
What are the four factors of production categorized as?
What are the four factors of production categorized as?
land, labour, capital, and organisation
The income method uses the incomes earned by the four factors of production to calculate the ______________________.
The income method uses the incomes earned by the four factors of production to calculate the ______________________.
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What is included in the net operating surplus in the income method?
What is included in the net operating surplus in the income method?
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Match the following components of national income with their descriptions:
Match the following components of national income with their descriptions:
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The income method is also known as the expenditure method.
The income method is also known as the expenditure method.
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Why is a combination of the three methods used to measure GDP?
Why is a combination of the three methods used to measure GDP?
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What is the formula to convert Nominal GDP to Real GDP?
What is the formula to convert Nominal GDP to Real GDP?
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The GDP Deflator is a measure of the average price level of all final goods and services produced in an economy.
The GDP Deflator is a measure of the average price level of all final goods and services produced in an economy.
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What is the GDP Deflator value if the price index number is 120?
What is the GDP Deflator value if the price index number is 120?
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The process of income generation in a modern economy is extremely complex, and therefore, collecting necessary data on sources and levels of income is beset with _______________ problems.
The process of income generation in a modern economy is extremely complex, and therefore, collecting necessary data on sources and levels of income is beset with _______________ problems.
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What is the percentage increase in Nominal GDP from 2000 to 2005?
What is the percentage increase in Nominal GDP from 2000 to 2005?
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The Real GDP increases at a higher rate than the Nominal GDP.
The Real GDP increases at a higher rate than the Nominal GDP.
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Match the following concepts with their definitions:
Match the following concepts with their definitions:
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What is the annual average rate of growth of Real GDP?
What is the annual average rate of growth of Real GDP?
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What is the primary purpose of national income data?
What is the primary purpose of national income data?
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Gross Domestic Product (GDP) includes income earned by residents abroad and remitted at home country.
Gross Domestic Product (GDP) includes income earned by residents abroad and remitted at home country.
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What is the sum of the market value of all final goods and services produced in a country during a specific period of time?
What is the sum of the market value of all final goods and services produced in a country during a specific period of time?
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The level of national income determines the level of all other macroeconomic variables, including _______________________, savings, and investment.
The level of national income determines the level of all other macroeconomic variables, including _______________________, savings, and investment.
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Match the following concepts with their definitions:
Match the following concepts with their definitions:
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Which of the following is NOT a characteristic of Gross Domestic Product (GDP)?
Which of the following is NOT a characteristic of Gross Domestic Product (GDP)?
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National income is a microeconomic variable.
National income is a microeconomic variable.
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How is Gross National Product (GNP) different from Gross Domestic Product (GDP)?
How is Gross National Product (GNP) different from Gross Domestic Product (GDP)?
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Study Notes
National Income Concept
- National income is the single most important macro variable that represents the 'economy as a whole'.
- The level of national income determines the level of other macroeconomic variables, such as aggregate consumption, savings, and investment, employment, and price level.
Importance of National Income
- Measuring the standard of living and economic welfare of a country's people.
- Formulating economic policies for managing the economy.
- Making international comparisons about the status of the economy.
Gross Domestic Product (GDP)
- The sum of the market value of all final goods and services produced in a country during a specific period of time, generally one year.
- Includes income earned by foreigners in the country and excludes income earned abroad by residents.
Gross National Product (GNP)
- Similar to GDP, but with a significant difference.
- Includes income earned by residents abroad and remitted back to the home country.
Methods of Measuring National Income
- Net Product Method or Value Added Method.
- Income Method.
- Expenditure Method.
Income Method
- Also known as the factor share method.
- National income is treated as equal to all the incomes accruing to the basic factors of production used in producing national products.
- Factors of production are categorized as land, labor, capital, and organization.
- National income is the sum of factor payments, including:
- Compensation of employees (salaries and wages).
- Net operating surplus (profits).
- Consumption of fixed capital (depreciation).
- Taxes on production and products (indirect taxes).
GDP Deflator
- Formula: GDP deflator = (Price index number of chosen year / 100).
- Used to convert nominal GDP into real GDP.
Converting Nominal GDP to Real GDP
- Formula: Real GDP = (Nominal GDP / GDP Deflator).
- Example: Nominal GDP of $500 billion in year 2000 and price index number of 100, and nominal GDP increases to $600 billion in year 2005 and price index number rises to 110.
National Accounting
- Estimating national income is an indispensable task of the government.
- Estimating national income is an extremely complicated and gigantic task due to conceptual and data availability problems.
- The basic approach is to measure the two kinds of flows generated by the economic activities of the residents of the country.
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Description
Test your understanding of national income, its importance, and its impact on the economy. Learn how national income determines other macroeconomic variables and is used to measure living standards and formulate economic policies.
