National Income, Macroeconomic Objectives and Indicators
What the domain tests
National income, macroeconomic objectives and indicators covers circular flow, GDP/GNP measurement, real versus nominal values, inflation, unemployment, growth and the limitations of indicators.
Core rules
- Circular flow: households supply factors and buy output; firms produce and pay incomes. Injections (investment, government spending, exports) and withdrawals (saving, taxes, imports) determine equilibrium national income.
- GDP is output produced within a country; GNP/GNI is income earned by residents. Nominal GDP uses current prices; real GDP is adjusted for inflation using a deflator.
- GDP per capita = GDP/population; PPP adjustments compare living standards better across countries.
- Macroeconomic objectives usually include price stability, full employment, growth, balance of payments equilibrium, redistribution and sustainability.
- Unemployment types: frictional, structural, cyclical, seasonal. Inflation is a sustained rise in the price level, measured by CPI; it redistributes income and creates uncertainty.
Worked example
Nominal GDP rises by 8%, the GDP deflator rises by 5%, and population grows by 2%. Real GDP growth ≈ (1.08/1.05 − 1) × 100 = 2.86%. Real GDP per capita growth ≈ (1.0286/1.02 − 1) × 100 = 0.84%. So output per person barely rose, even though nominal GDP looked strong.
Traps
GDP is not a welfare measure: it ignores inequality, unpaid work, environmental damage and leisure. Do not subtract inflation directly from nominal growth when compounding matters. The unemployment rate excludes discouraged workers. A current account deficit is not the same as a budget deficit.