Standard of Living and Quality of Life
Difficulties in Calculating National Income
*Only goods and services for which payment is given in exchange will be included in the national income *However goods and services that are not exchanged for money must have an estimated monetary value *A rule to follow is if the income from the good or service forms part of the person's regular income then it should be included in the NI. If it does not, it should be excluded.
Personal Disposable Income (PDI) Formula
GNP(wages,salaries, profits,rents and foreign net income ) +Transfer Incomes (pensions, tax rebates) -Income tax -company tax -NIS contributions -Undistributed Profits -Profits and rents from government owned business
Income Method Formula
Income from employment + Profits+ Rents+ Income from Abroad=GNP =GNP-Depreciation =NI
Transfer Incomes
Incomes that were earned in previous years but are now redistributed to people such as pensions and grants to students hence they must be deducted from the year's national income under consideration.
Real National Income vs Money National Income
It is important for money national income to be converted to real national income for comparisons to be made between years.The important factor is to remove inflation so that actual production can be compared.This is done through the use of a statistical formula called the price index
Gross National Product (GNP)
It takes into account not only what is produced locally, but what is produced by forms abroad that are owned by individuals and the government. *includes income from a country's citizens living abroad *includes depreciation
Expenditure Method Formula
Investment expenditure at market prices+Consumption expenditure at market prices+ Subsidies+ Net Factor Income from Abroad_ Indirect taxes =GNP =GNP-Depreciation =NI
Output Method Formula
Total domestic product of GDP+ Net factor income form abroad=GNP =GNP-Depreciation =NI
Services rendered by consumer durable goods
*All consumer durable goods are included at their price when bought. *Subsequent services rendered are excluded form the National Income
Uses of national income
*Give an indication of the standard of living in a country *compare the standard of living different countries *give an indication of the changes in the distribution of income *determine the rate at which the national income is growing *establish relationships which arise between different areas of the country
Where the government acquire figures by income method
*Obtained mainly from income tax returns *Figures that are usually estimated are small incomes that are below the income tax threshold and the incomes of those who evade taxed such as babysitters, taxidrivers, car repairmen, and people who sell items on the sidewalk *Transfer incomes *Government Services *Consumer Durable goods
Output Method
*The output method, which is the combined value of the new and final output produced in all sectors of the economy, including manufacturing, financial services, transport, leisure and agriculture. * The figure is arrived by totaling the value added by each firm to a good or service at each stage of production or by taking final cost of the product
Where the government acquire figures by expenditure method
*the census of distribution which records the value of shop sales *the census of production which records the value of investment goods produced and additions to stock.
Reasons whether National Income is necessarily a good indicator of a country's standard of living. (I)
1.The NI is a monetary figure and is derived from total production of goods and services, while the standard of living looks at the well being or the quality of life of a people. The standard of living is usually measured by examining the amount and state of the goods and services consumed by the people. 2.The standard of living is therefore primarily centered around consumer goods and services, while NI looks at both the production of consumer goods and services as well as producer goods.Even though the producer goods may be responsible for a higher standard of living in the future, it does not increase present welfare
Reasons whether National Income is necessarily a good indicator of a country's standard of living. (II)
3. An increase in NI figures may occur as a result of an increase in exported goods and services over imported goods and services. This increases foreign currency earnings but does not add to the quantity of consumer goods and services available. An increase in NI may be due to inflation
Basket of Goods
A collection of products, raw materials and services which comprise the Consumer Price Index (CPI) over a period. The group typically indicates consumer buying behavior across a diverse set of offerings.
Price Index
A price index is a single number summarizing price levels. A larger number conventionally represents higher prices.
Purchasing Power Parity (PPF)
A theory which states that the exchange rate between one currency and another is in equilibrium when their domestic purchasing powers at that rate of exchange are equivalent. In short, what this means is that a bundle of goods should cost the same in Canada and the United States once you take the exchange rate into account.
Net Factor Income From Abroad
An income that is earned in foreign countries. The income can also be non-residents in a country. This figure can either be negative or positive because foreigners remit income to their home country and in doing so more income could leave the country than that which comes in or vice versa.
Social Accounting
The system of record keeping that reports on the economic and financial activity on a nation's economy for the year.
Per Capita Income Formula
National Income ------------------------ = Per Capita Income Total Population
National Income
National Income refers to the total value of a nation's income usually over a period of one year. This income would normally comprise the wages, profits, interests, rents and pension payments for the period.
Real National Income
Nominal or money national income (output) adjusted for inflation. It is difficult to arrive at real national income because the price index is not always stable. This is due to the variation in how much people can consume because of the diversity of new goods that are brought onto the market. The quality of goods also changes. For these reasons, real national income statistics cannot be precise. Additionally, it cannot measure distances between one part of a country and another. Despite this, these statistics provide some basis and instruction for comparison.
Per Capita Income
Per Capita Income or average income per head is a statistical average and does not tell us how the national income is distributed withing the economy.Most of it may go to the rich and very little to the rest of the people in society.
Personal Disposable Income (PDI)
Personal Disposable Income (PDI) relates to the amount of money that individuals have to spend after all deductions are taken out.
Quality of Life
Quality of life refers to the extent to which the population enjoys the benefits of its wealth. It includes the overall economic, social, political and cultural conditions under which people live.
National Income ( NI) or Net National Product (NNP)
Refers to the total money value of all goods and services produced in a country for investment and consumption during a one year period after deducting depreciation. *includes income from a country's citizens living abroad *excludes depreciation
Government Services
Services rendered by government institution, for e.g. health, education and transportation are similar to these serviced rendered by the private sector. As a result they are included in the national income at the cost that it takes to provide these services to the public.
Expenditure Method
The expenditure method, which adds up all spending in the economy by households and firms on new and final goods and services by households and firms. It involves totaling the amount spent on investment and consumer goods and services produced during the course of the year.
Income Method
The income method, which adds up all incomes received by the factors of production generated in the economy during a year. This includes wages from employment and self-employment, profits to firms, interest to lenders of capital and rents to owners of land.
Gross Domestic Product (GDP)
The total money value of goods and services it produces during a one year period. This figure does not take into account goods and services produced by firms abroad that are owned by local entities or the government. As the term domestic indicates, it looks at only what is actually produced in the country itself. *excludes income from a country's citizens living abroad *includes depreciation
Gross
There is no correction for depreciation in the capital stock
External Factors that Determine a Country's Material Standard of Living
~Foreign loans loans and investments. Net income from foreign investments will see an increase in welfare for countries involved. ~Terms of trade.Better terms of trade can only mean an increase in the material welfare of the country. ~Gifts from abroad. Countries that receive gifts from other countries for the purpose of economic development and defense can also improve their standard of living.
Factors that indicate a country's wealth
~Level of consumption of goods and services ~Average disposable income of the population ~Access to modern technology ~Levels of national ownership of capital equipment ~Levels of investment i research and technology
Factors that determine a country's Standard of Living
~Level of consumption of goods and services; how much people consume and by extension their levels of income ECONOMIC FACTORS ~Average personal disposable income; how much income persons have to spend, what they are able to buy, and the quantities in which they buy them. ~Distribution of the national income; how the total national income is divided among individuals or households in a country. It tells on average how much income people can earn, and therefore how much of the basic necessities of life they can afford. [in most countries, the majority of persons fall in the lower income category with much fewer in the higher income category]
Standard of Living
~The level of economic well being enjoyed by members of a country. ~The standard of living of a nation refers to the quantity and quality of life that the people of a country have. It is the quality and quantity of consumer goods and services that persons find proper and fitting. It is also viewed as an assessment of the social wealth or the degree of prosperity of a nation
Internal Factors that Determine a Country's Material Standard of Living
~The total original natural resources that it has e.g. mineral deposits, sources of fuel and power, etc. ~The nature of the people, in particular its labor force, e.g. the number of workers- how willing and hardworking they are ~ The capital equipment available. This can enhance the productivity of the people. ~How the country's resources are organized. ~Technology know-how.If capital expenditure is devoted to research and technology and invention, then the benefits from these can be used to develop the productive capacity of the country. ~Political Stability.A stable government means that foreign investors will have confidence in the economy and investments in long term projects will be guaranteed.
Factors that determine quality of life
~the extent of the security enjoyed by a people ~political and economic factors ~the availability of health, educational and recreational facilities and opportunities ~the availability and access to nutritious food ~life expectancy ~the rate of infant mortality ~access to public utilities, e.g. electricity and potable water ~the quality of housing ~The quality of transportation ~the quality of communication
