Answer to Question #197656 in Management for Kwabena

Question

Distinguish between the following concepts:

Real income and nominal income;

Real GDP and nominal GDP;

National income at current price and national income at constant price;

GDP Deflator and Consumer Price Index;

Real income and real income per capita.

a) State four general problems encountered in national income accounting.

b) Explain four uses of national income data to a friend in Junior High School.

Answer 1

The distinction of Different Concepts

Real income is the sum of money earned after inflation has been factored in, whereas nominal income is the amount earned before inflation has been factored in.

Nominal GDP is the yearly manufacturing of goods and services at current prices, whereas Real GDP is the annual output of goods and services measured at current prices without taking inflation into account.

Current prices are those that are displayed at a specific point in time and are referred to as nominal prices while Constant prices are real-valued prices that have been adjusted for price variations in relation to a baseline.

The GDP Deflator is a measure of the prices of goods and services whereas the CPI is solely a measure of products purchased by consumers.

Real income is an economic metric that estimates a person's actual purchasing power in the free market after taking inflation into account. The amount of money earned per person in a country is measured by per capita income.

Problems Encountered In National Income Accounting.

•Choosing which products and services to include in the national income calculation.

•Insufficient output data.

•Some money-generating activities are considered unlawful and are excluded from national income calculations.

•Calculating the national output value

Uses of national income data to a friend in Junior High School

• A measure of citizens' standard of living - an increase in national income reflects an increase in citizens' standard of living.

• Comparing countries' standards of life - countries with a high national income are considered to have a high quality of life.

• Evaluating the economy's performance over time - the period with the highest national income is considered to be better.

• Economic Planning - comparing performance across sectors and regions aids the government in making better resource allocation decisions.