National Income (Real GDP) and the Standard of Living

National Income (Real GDP) and the Standard of Living

National Income (Real GDP) and the Standard of Living

There are a variety of uses for measures of national income. Governments are interested in national income since it helps them determine levels of taxation and the economic activity generated by the nation as a whole. Trade agreements can be based on a nation’s national income and its income relative to other economies. Companies are interested in national income in order to determine countries which might represent significant new markets, or to gauge the effectiveness of competitors based on other countries. Individuals might be interested in national income in order to identify potential investment opportunities, or to even make relocation decisions. These are only some of the reasons which support the desire to develop some type of national income measure. This research examines national income in general, and the use of one metric (real GDP) in particular. Real GDP is then contrasted against standard of living for its relevance and appropriateness.

Although the abstract idea of a measure of national economic activity has a distinct appeal, the actual definition of national income is more problematic. At its simplest, national economic activity can be defined as the value of all goods and services produced in a given period of time, most usually one year. Immediately, there are problems assigning quantitative values for services (such as health care) in which products are not exchanged or in which case is not the basis for the transaction. Similarly, some businesses produce goods and services which are used as inputs for other services, further complicating the calculation. Another approach for gauging economic activity is to total the expenditures when output is sold. Still others recommend that producers’ incomes be used as a measure of economic activity since all spending is eventually received as income (“Gross Domestic Product,” 1999, p. 5).

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