1. What is meant by
national income?
In a layman term, it
refers to the total income generated by an economy/ a country over a period of
time. Somehow, there are two popular indicators of national income. First is the
GDP (Gross Domestic Product) which is most widely used. It is the market value
for all final goods and services which are produced within the country. If I
lecture in one of the UK universities, the value of my service contributes to
UK’s GDP. Similarly, Toyota’s car assembly plant in Burnaston, Derbyshire will
also add to the GDP. In short, it does not matter who or which firm and from
where, as long as the production of goods and services takes place within the
UK, it must be included in the GDP. There are three ways to calculate GDP,
namely the output, income and expenditure method. In theory, all these three
methods will eventually yield the same value. The logic is simple. If a person
produces an output (output method) worth £100 for another person, then the
first person must be paid with an income (income method) of £100. With this
money, he/ she will then have the ability to spend (expenditure) that much
money back into the economy. That is why output = income = expenditure
I will discuss this in
greater details in a separate post in near future
Second is the GNP
(Gross National Product) or GNI (Gross National Income). Again, whichever it
is, output will be the same as income. It is the market value of all final
goods and services produced by the factors of production owned by a country.
For example, if UK firms have business interest in other parts of the world,
the repatriation of profits will add up to the UK’s GNP. Similarly, if Toyota
and Ford repatriate some of their profits back to Japan and USA respectively,
this will add to their GNP. In short, we need to take into account both inflow
and outflow of money from the UK. As such GNP = GDP + Net property income from
abroad (NPIA)
Between these two,
GDP is the more popular one and so the rests of our discussion will solely
focus on GDP
2. What can contribute
to the national income (GDP)?
This is very simple.
As long as there is money flowing into the economy, then it will contribute to
the national income. When you spend money buying goods and services produced
within the country e.g. attending to hospital service, sending your child to a
local college, eating in a restaurant etc these will all go under CONSUMPTION (C)
When a firm purchases
machineries which are produced locally, again this adds up to the GDP. If a
firm is expanding its chain of outlets or building a new factory to cater for
its expansion plan, then again this will increase the national output. For
instance, HELP University’s (the place where I work) new state-of-the-art
campus in Subang Bestari 2 is part of INVESTMENT (I)
The third component
is government/ public spending (G). One good example would be the up-coming MRT
project based in Klang Valley. Other types of government expenditure include
construction of new schools, hospitals, road works, airport regeneration etc
Last but not least is
the NET EXPORT (X-M). The word ‘net’ is used to indicate that ‘OVERALL’ exports
are greater than imports and there will be more inflow than outflow of money
into the nation’s circular flow of income GDP will increase
In short, GDP = AD
(aggregate demand) = AE (aggregate expenditure) = C + + + G + (X-M)
3. How can a fall in
exports affect the national income?
In the most recent
report (10th July 2013), China is taken by surprise with its ‘unexpected’
decline in exports. Assuming (ceteris paribus) that imports are unaffected, a
fall in exports will lead to a fall in GDP or national income from Y0 to Y1. This
can be illustrated using the Keynesian’s 45 degree line analysis as seen above.
The macroeconomic implications are not just that. In fact it is more than one
would have thought of. First China is an export-driven economy just like Taiwan
and Singapore. So, a fall in demand for Chinese manufactured goods would have a
large impact onto its growth and labour market, particularly those industries
that are labour-intensive. Through the negative multiplier effect, house prices
will fall and share prices of companies affected will swing to the down side
The only good news
is, a fall in AD = AE will at least remove some inflationary pressure off the economy as can be seen from the falling price level from P1 to P2 .The poorest households will be less burdened by the regressive effect
4. Why do exports fall?
China’s
main market are the United States and European Union and with ongoing
uncertainties and sluggish recovery in Western economies, I personally think
that China should reduce its over-dependency on international trade. Pursuing
consumption-led growth is not that bad either considering the demographic structure
of its people which is largely made up of young working class.
Secondly,
labour costs are fast rising over the past few years. Since all firms have a
desired margin of profit, some of these costs that cannot be cut elsewhere will
have to be inevitably passed to international market. China is gradually losing
out in terms of price competitiveness
My
third argument is related to the second. Since costs are rising, many foreign
firms have left for other countries such as Vietnam, which is now known as the
second China of the Asia. With fewer firms left, obviously the total volume of
exports would have fallen thus explaining for the narrowing of trade surplus
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