24 Questions
What are the two kinds of flows in the circular flow of income?
Product flows and Money flows
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?
land, labour, capital, and organisation
The income method uses the incomes earned by the four factors of production to calculate the ______________________.
GDP
What is included in the net operating surplus in the income method?
Profits earned by entrepreneurs
Match the following components of national income with their descriptions:
Compensation of employees = Includes all salaries and wages Net operating surplus = Includes all profits earned by entrepreneurs Consumption of fixed capital = Refers to indirect taxes levied on economic transactions Taxes on production and products = Capital goods consumed during production
The income method is also known as the expenditure method.
False
Why is a combination of the three methods used to measure GDP?
When a single method cannot be adopted due to lack of required data or conceptual problems.
What is the formula to convert Nominal GDP to Real GDP?
Real GDP = Nominal GDP / GDP Deflator
The GDP Deflator is a measure of the average price level of all final goods and services produced in an economy.
True
What is the GDP Deflator value if the price index number is 120?
1.20
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.
conceptual and data availability
What is the percentage increase in Nominal GDP from 2000 to 2005?
20%
The Real GDP increases at a higher rate than the Nominal GDP.
False
Match the following concepts with their definitions:
Gross Domestic Product (GDP) = The total value of goods and services produced within a country's borders Gross National Product (GNP) = The total value of goods and services produced by a country's citizens, regardless of location Net National Product (NNP) = The total value of goods and services produced within a country, minus depreciation Personal Income (PI) = The income earned by individuals within a country
What is the annual average rate of growth of Real GDP?
1.8%
What is the primary purpose of national income data?
All of the above
Gross Domestic Product (GDP) includes income earned by residents abroad and remitted at home country.
False
What is the sum of the market value of all final goods and services produced in a country during a specific period of time?
Gross Domestic Product (GDP)
The level of national income determines the level of all other macroeconomic variables, including _______________________, savings, and investment.
aggregate consumption
Match the following concepts with their definitions:
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. Gross National Product (GNP) = The sum of the market value of all final goods and services produced by a country's citizens, regardless of where they are produced. National Income = The aggregate money value of all final goods and services resulting from the economic activities of the people of a country over a period of one year. Personal Income (PI) = The income received by households from all sources. Net National Product (NNP) = GDP minus depreciation.
Which of the following is NOT a characteristic of Gross Domestic Product (GDP)?
Includes income earned by residents abroad and remitted at home country
National income is a microeconomic variable.
False
How is Gross National Product (GNP) different from Gross Domestic Product (GDP)?
GNP includes income earned by residents abroad and excludes income earned by foreigners in the country, whereas GDP includes income earned by foreigners in the country and excludes income earned by residents abroad and remitted at home country.
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.
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.
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