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Measuring national income To measure how much output, spending and income has been generated in a given time period we use national income accounts. These accounts measure three things: 1. Output: i.e. the total value of the output of goods and services produced in the UK. 2. Spending: i.e. the total amount of expenditure taking place in the economy. 3. Incomes: i.e. the total income generated through production of goods and services. (i) The Expenditure Method of calculating GDP (aggregate demand) This is the sum of spending on UK produced goods and services measured at current market prices. The full equation for GDP using this approach is GDP = C + I + G + (X-M) where C: Household spending I: Capital Investment spending G: Government spending X: Exports of Goods and Services M: Imports of Goods and Services The Income Method of calculating GDP (the Sum of Factor Incomes) Here GDP is the sum of the incomes earned through the production of goods and services. The main factor incomes are as follows: Income from people employment and in self-employment + Profits of private sector companies + Rent income from land = Gross Domestic product (by factor income) It is important to recognise that only those incomes that are actually generated through the production of output of goods and services are included in the calculation of GDP by the income approach. We exclude from the accounts the following items:

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Transfer payments e.g. the state pension paid to retired people; income support paid to families on low incomes; the Jobseekers Allowance given to the unemployed and other forms of welfare assistance including child benefit and housing benefit. Private transfers of money from one individual to another. Income that is not registered with the Inland Revenue or Customs and Excise. Every year, billions of pounds worth of economic activity is not declared to the tax authorities. This is known as the shadow economy where goods and services are exchanged but the value of these transactions is hidden from the authorities and therefore does not show up in the official statistics!). It is impossible to be precise about the size of the shadow economy but some economists believe that between 8 15 per cent of national output and spending goes unrecorded by the official figures.

Output Method of calculating GDP using the concept of value added 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 a product at each successive stage of the production process. We use this approach to avoid the problems of doublecounting the value of intermediate inputs. The table below shows indices of value added from various sectors of the economy in recent years. We can see from the data that manufacturing industry has seen barely any growth at all over the period from 2001-2004 whereas distribution, hotels and catering together with business services and finance have been sectors enjoying strong increases in the volume of output. These figures illustrate a process of structural change, with a continued decline in manufacturing output and jobs relative to the rest of the economy. By far the largest share of total national output (GDP) comes from our service industries. Index of Gross Value Added by selected industry for the UK Mining and Manufacturing Construction Distribution, Business quarrying, hotels, and services inc oil & catering; and gas repairs finance extraction 2001 weights in total GDP 28 172 57 159 249 (out of 1000) 2001 100 100 100 100 100 2002 100 97 104 105 102 2003 94 97 109 108 106 2004 87 98 113 113 111

We can see from the following chart how there have been divergences in the growth achieved by the manufacturing and the service sectors of the British economy. Indeed by the middle of 2006, the index of manufacturing output was below the level achieved at the start of 2000. In contrast the service industries have enjoyed strong growth, leading to a continued process of structural change in the economy away from traditional heavy industries towards service businesses.

We have three methods to measure national income. 1. Total output method . In this method we take the summation of monetary value of final goods and services produce in a economy during a year. 2. Factor income method. IN THIS METHOD WE TAKE THE SUMMATION OF REWARDS OF FACTORS OF PRODUCTION IN A ECONOMY DURING YEAR 3. TOTAL EXPENDITURE METHOD. IN THIS METHOD WE TAKE THE SUMMATION OF TOTAL EXPANDATURES BY THE PRODUCERS OF PRIVATE SECTOR AND GOVT SECTOR IN AN ECONOMY DURING A YEAR. Measurement of national income in an economy is very important because it gives an estimation of the welfare of the economy. National income is the total of the value of the goods and the services

which are produced in an economy. The basic measures of national income include GDP, GNP, GNI, NNP and NNI. There are three approaches through which national income can be calculated including; output approach, income approach and expenditureapproach. All of these approaches give the same value of the national income. The method for calculating National Income by Output, Value Added method: GDP at market price = Value of Output in a year - Intermediate consumption NNP at factor cost = GDP at market price - Depreciation + NFIA (Net Factor Income from Abroad) - Net Indirect Taxes The measurement of National Income by Income Method: NDP at factor cost = compensation of employee + operating surplus + Mixed income of self employee National Income = NDP at factor cost + NFIA (net factor income from abroad) The measurement of National Income by Expenditure Method: GDP = C + I + G + (X - M) Where: C = Personal consumption expenditures I = Gross investment G = Government consumption X = Gross exports M = Gross imports