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Measuring the Economy
National Income
A measurement of the economy (by evaluating national income) is essential to understand the level of activity taking place within the economy - i.e. within the market.
Measuring the economy consists of measuring two components:
i) The level of economic activity?ii) people’s economic welfare
National Income (sometimes termed National Product) is the primary means of measuring economic activity. It also indicates the average living standards within an economy. The CEM definition is as follows:
National income is the extra product wealth generated by an economy during the course of a year.
Within the economy, the two significant groups of decision makers include:
i) Households - factors of production: labour, land, capital and entrepreneurial skill? - buying and consuming goods and services?ii)
Firms - employing these factors of production?
- producing and supplying goods and services
It is obvious that firms employ individuals to manufacture goods and services, but these employees subsequently make up the consumers of their products (either directly or indirectly). Hence we can assess a circular flow of income:
1) Spending ON goods and services by households?
2) SUPPLY of goods and services by Firms
?3) SUPPLY of factor services by Households
?4) Payments FOR factor services by firms
From our definition - “extra product wealth generated” is represented by (2) above. However, we can also measure this as the income generated ...