National Income and Macroeconomic Objectives
Domain 7 tests measurement of national income, the circular flow, and the objectives governments pursue.
The circular flow
Households supply factors of production and receive incomes; firms produce goods and services. Injections (investment, government spending, exports) and withdrawals (saving, taxes, imports) determine the level of activity.
Measuring national income
GDP can be measured by output, income or expenditure; the expenditure approach sums C + I + G + (X - M). GDP counts output produced inside the country; GNI counts income earned by residents, including net factor income from abroad. Nominal GDP uses current prices; real GDP is adjusted by a price index. Per capita GDP divides real GDP by population.
Objectives
Governments pursue economic growth, price stability, full employment, balance of payments equilibrium and equitable distribution of income. These objectives often conflict: rapid growth can worsen inflation and the current account.
Worked example
Nominal GDP is N$220 billion and the GDP deflator is 110. Real GDP = 220 x 100 / 110 = N$200 billion. If real GDP last year was N$190 billion, growth is (200 - 190) / 190 x 100 = 5.3%. With a population of 2.5 million, real GDP per capita is N$80,000, though this says nothing about how income is shared.
Traps that cost marks
- Including transfer payments, second-hand sales or intermediate goods in GDP.
- Confusing GDP with GNI when factor income from abroad is significant.
- Treating nominal growth as real growth when prices have risen.
- Assuming higher GDP per capita means better welfare.