A2 Economics Revision – National Income

GROSS DOMESTIC PRODUCT (GDP) – Under new definitions introduced in the late 1990s, Gross Domestic Product is also known as Gross Value Added. It is defined as the value of output produced within the domestic boundaries of the NZ economy over a given period of time, usually a year. It includes the output of foreign owned firms that are located in NZ, such as the majority of Trading Banks in the market – ASB, Westpac, ANZ, BNZ etc. It does not include output of NZ firms that are located abroad. There are three ways of calculating the value of GDP  all of which should sum to the same amount since by identity:

NATIONAL OUTPUT = NATIONAL INCOME = NATIONAL EXPENDITURE

1.       THE EXPENDITURE METHOD – This is the sum of the final expenditure on NZ produced goods and services measured at current market prices (not adjusted for inflation). The full equation for calculating GDP using this approach is: GDP = Consumer expenditure (C) + Investment (I) + Government expenditure (G) + (Exports (X) – Imports (M))

GDP = C + I + G + (X-M)

2.       THE INCOME METHOD – This is the sum of total incomes earned from the production of goods and services. By adding together the rewards to the factors of production (land, labour, capital and enterprise), we can see how the flow of income in the economy is distributed. The rewards to the factors of production can be loosely summarised by the following:

Land – Rent. Labour – Wages and Salaries. Capital – Interest. Enterprise– Profit.

Only those incomes generated through the production of a marketed output are included in the calculation of GDP by the income approach. Therefore we exclude from the accounts items such as transfer payments (e.g. government benefits for jobseekers allowance and pensions where no output is produced) and private transfers of money.The income method tends to underestimate the true value of output in the economy, as incomes earned through the black economy are not recorded.

3.  THE OUTPUT MEASURE OF GDP – This measures the value of output produced by each of the productive sectors in the economy (primary, secondary and tertiary) 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. For example, if the raw materials and components used to make a car cost $16,000 and the final selling price of the car is $20,000, then the value added from the production process is $4,000. We use this approach to avoid the problems of double-counting the value of intermediate inputs. GDP will, therefore, be equal to the sum of each individual producer’s value added.

Below is a useful mindmap using OminGraffle software (Apple). It is adapted from CIE A Level Economics Revision Guide by Susan Grant

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