Unit Two - National Income






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  • Created on: 13-01-14 18:37
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National income is the flow of new output produced by the economy in a particular period.
National income is measured by:
The increase in the potential level of real output the economy can period of time
This is the long-run economic growth ­ increase total productive capacity
Whereas short-run ­ makes use of spare capacity and takes up the slack in the
Economic growth requires the stock of physical capital to grow in size and for its
quality to improve
· Investment in both physical and human capital
· Technical progress
· Growth of the working population
Net investment enlarges the stocks of capital, while technical progress leads to better
quality capital replacing capital goods that have become obsolete or out of date. This also
leads to higher labour productivity, which is another feature of growth.
Gross National Product [GNP] is the gross value of all the final products without deducting the
depreciation of fixed capital. It is the total of market value of final goods and services
produced in a years. Net National Product [NNP] is the value of net output in an economy
during a period of one year. The net national product is calculated by deducting depreciation
from the gross national product. NNP = GNP ­ Depreciation
The Capital Consumer Allowance represents a significant variance between GDP and NNP.
This factor equals the depreciation value lost that occurs to inventory while it sits before
being sold or consumed. It can include consumption of goods in the production of other
goods or services. A common example includes the wear and tear that occurs with capital
equipment such as assembly line machinery, transportation vehicles, office equipment and
tools. All of these items eventually wear down and need to be replaced.
The difference between GDP and GNP is that GNP includes net foreign income rather than
net export and imports. Essentially GNP adds net foreign investment income.
GNP is the GDP of the country plus income earned from overseas investments by residents,
minus income earned within the domestic economy by overseas residents. GNP is focused on
who owns the production regardless of where the production takes place. GNP calculates
the value of output produced by the people (nationals) of the region.

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The more different GDP and GNP are, the more the country is involved in international trade
and finances. A great example of this would be Japan.
Real flows are actual goods, services and resources flowing from one sector to another,
usually in exchange for money through money flows. e.g: Households provide labor to
producers (a real flow) in exchange for wages (a money flow).…read more

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Two separate measures of inflation used in the UK:
RPI (Retail Prices Index) - based on a representative cross-section of products
purchased by a typical UK household. In October 2012 RPI inflation was 2.6%.
CPI (Consumer Prices Index) - more closely comparable to measures used
throughout the EU. Excludes costs associated with home ownership. In October 2012
CPI inflation was 2.2%
The government's target is to have CPI inflation at 2% per annum.…read more

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The economic cycle is the tendency of national or global economic activity to fluctuate
between boom, recession, slump and recovery.
Boom a time of rapid economic growth, typically linked with:
Increased consumer spending as people feel confident and are more likely to
borrow money to finance more spending.
Low unemployment.
Increased investments as businesses seek to expand.
Upward pressure on prices as demand increases, which leads to inflation.…read more

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For many businesses price
discount were used to offload excess stocks. Others took the decision to close down
some of their production operations. Real GDP fell by more than 6 per cent from the
peak of the economic cycle to the trough.
· 2/ As a result of lower production and employment, actual GDP is less than potential
GDP. This implies that the level of spare capacity in the economy has risen.…read more

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· When aggregate demand is well below the productive potential of the economy
(so called potential GDP) then a negative output gap exists. In simple terms, current
output and spending is well below what the economy could normally sustain. In this
situation there is spare capacity in the economy.
· The implication is that the rate of inflation is likely to fall because inflationary
pressure is falling.…read more


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