<Last updated 11.04.2020>
Hi! If you are interested in Economics, I’ve prepared the below to help your understanding about indicators. You should take a look at this short article in which I discuss how measuring output is distinguished between Domestic and National Indicators.
When we have an open economy, it means that there is a flow of income that is not flowing only inside the geographical borders of the country but both flows in and out of the country. Total Output/Production in a country is distinguished between domestic and national product/output depending on where production took place and the permanent place of factors of production.
Businesses owned by foreigners (permanent residents of other countries) produce and provide/sell goods in this country receiving income. This income is money flowing outside this country (profits, interest, dividends, remuneration) > Income to Abroad.
Businesses owned by domestic residents (permanent residents of this country) produce and provide/sell goods in countries abroad receiving income. This income is money flowing inside this country (profits, interest, dividends, remuneration) > Income from Abroad.
> Net Income from Abroad: The difference between the Income to Abroad and the Income from Abroad.
> National Product (NP) is the output that is produced by permanent residents of a country, no matter where production took place, during a period.
NP= Domestic Product + Income from Abroad – Income to Abroad (Net Income from Abroad).
An example: A person works in London temporally but is permanent residence of Cyprus (For Cyprus is Income from Abroad but also domestic output for the UK).
> Domestic Income: Income the factors of production earn when used within the geographical borders of the country for a period of time, respective of their nationality.
> National Income: Income earned by the permanent residents of a country, irrespective of where production took place.
> National Expenditure: Total expenditure for buying national product.
> Domestic Expenditure: Total expenditure for buying domestic product.
What is Depreciation and why is it taken in to account? > The periodical decrease of the value of fixed capital used in production. A reduction in the value of an asset over time, due in particular to wear and tear.
> Net National Product = National Product – Depreciation
Now, what major role does the government haw in an economy?
> Governments intervene to promote equity, and reduce inequality by imposing taxes: tax the rich more heavily and give additional money to the poor (a progressive tax system designed in such a way that the rich pay a higher percent in income taxes than the poor (> Redistribution)).
Must be careful > An extremely high degree of redistribution, with very high taxes on the rich, would be likely to discourage work and entrepreneurship.
The government also provides social service and support to people in need (to people with disability, single parent families, unemployed, low income workers etc.) With more social services provided and improved quality in their provision, a higher level of standard of living is achieved. These above only affect the distribution of income and do not contribute to a higher level of income.
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