Command term: Suggest

National income can be described as a rise in real gross domestic product or a rise in real national output in an economy.  National income can be measured by rises in GDP (gross domestic product) or gross national income (GNI).  This can be calculated by either the output, expenditure or income method.  [Key term].

Economic growth is illustrated in the following two diagrams, the first showing a right shift in PPF (diagram to the right), indicating an increase in the productive capacity of the economy - a rise in the quantity of goods and services that the economy can produce, [Diagram 1 illustrated showing economic growth], while diagram two (below) illustrates the AD / AS curve, with a right shift in the AD curve, resulting in a rise in economic activity from Y1 to Y2.  [Diagram 2 illustrated showing economic growth].

So why do governments measure national income?  [Main body of the essay introduced].

Firstly, just as a parent might request a term report from their children’s school, measuring national income is a good indicator of living standards.  This is because why economists accept that national income is not a perfect measure of living standards, it does provide a relatively accurate illustration of the living standards in a nation. This is then important because the state of the economy is a good indicator of the government's own performance.  It is not uncommon for governments to pin their entire reputation on their own competence at managing the economy and providing a high living standards for its citizens.  [Possible reason explained].

Secondly, GDP data can also provide a good yard stick with which to compare the economic performance between the nations own economy and the economies of rival nations.  [Additional reason explained].

Thirdly, when a nation is part of a multinational association such as the EU, Nato or the UN, calculating national income statistics is also compulsory as the contribution that each nation pays to the organisation is allocated on a % of their national income.  With almost all nations part of the UN, this reason alone dictates that a government should calculate its national income data in an accurate and consistent manner.  [Additional reason explained].

Very importantly also national income data can also be used as the basis for economic forecasts as well as the basis of future decisions by businesses and governments, e.g. tax or interest rate policy.  One of the most difficult economic policy decisions that a nation faces is the control of interest rates and tax policy.  In many cases the level of interest rates or income tax will be set by central banks and the rate of growth of national income is a key determinant of any decision.  For instance in periods of time, when there is a slowdown in economic activity, the central bank will choose to boost their economy by a combination of cutting taxes, raising government spending or reducing interest rates in the economy.  Similarly, when the economy is facing inflationary pressures then they are likely to do the opposite, reducing government spending, raising taxes and / or increasing interest rates in an attempt to reduce inflationary pressures in the economy and stabilise the currency value.  [Additional reason explained].

Lastly, and perhaps most cynically, many governments may also use national income data for their own ends, to use either as a weapon to beat the opposition with or gain support from their own supporters.  [Additional reason explained].

In conclusion governments calculate national income data for a number of reasons – some necessary, some sensibly and others more cynically.  [Conclusion].

 Key terms used: National income, economic growth, aggregate demand, aggregate supply, GNI, PPP

Command term: Evaluate

In this example the command term evaluate requires candidates to make a judgement on how effective national income statistics are in making comparisons of the standard of living over time.  Responses should include an overall conclusion, based on the evidence provided.  [Command term addressed].

National income has already been defined in the first part of the response and measures improvements in GDP.  By contrast, the standard of living is measured by HDI and measures life expectancy, education, and per capita income.  [Key term].

So to what extent does national income data provides an accurate way of measuring living standards?  [Main body of the essay introduced].

One argument in support of the argument that national income statistics provide an accurate reflection of the standard of living in a nation are that countries with high levels of GDP normally also have a high HDI. The wealthiest countries in the world are almost exclusively found in the Western world and without exception all have have levels of development also.  [Argument in support of the statement identified].  This is unsurprising because human development index, which measures living standards, has three components and national income per capita is one of these.  [Real world example].

Countries with a high GDP generally have happier (as measured by the happy planet index), healthier (as measured by life expectancy) and more educated (spending more years at school).  [Second argument in support of the statement identified].  In part this is because wealthier nations have greater resources to invest in infrastructure and improvements to health and education, the other two components of HDI, while a larger economy provides a greater number of goods and services for its citizens.  [Analysis].  Increased employment opportunities, higher salaries, a cleaner environment and superior healthcare services are also consistent with wealthy nations.  [Analysis].  

This link between living standards and economic growth can also be evidenced in fast growing nations, for example Singapore and Rwanda that have made significant strides in both GDP and HDI, by investing significantly in infrastructure projects as well as human infrastructure.  Unsurprisingly both nations are among the fastest growing in their regions and have also enjoyed significant improvements in living standards.  [Real world examples].

On the other hand, we cannot say definitively that the link between national income and living standards is linear, with national income data also containing weaknesses/limitations that make it less than a perfect measure of living standards.  [Counter argument introduced].

One such weaknesses of using GDP as a measure of HDI is the impact of different price levels between different nations.  Wages and salaries are much higher in nations with a high gross domestic product but very often so is the cost of living. [Argument in support of the statement identified].  For example, a glance at average income levels within Turkey and its neighbours in Europe highlights that workers, in Europe, earn sometimes three or four times more (on average) than comparable workers in Turkey.  The same is true when comparing average earning levels in wealthy USA with its middle income neighbour, Mexico.  Does this genuinely mean that the average person in either Mexico or Turkey is actually 3 or 4 times poorer (in real terms) than their counterparts just across the border?  The answer is no, with those middle income developing nations also cheaper to live than their wealthier nations.  In reality, therefore, the difference between the costs of living in those places makes up some of the difference in wages between wealthy and poorer nations.  [Real world example].

A second weakness of the statement in the title is that that despite some uniformities countries do use slightly different methods of recording national income data.  This means that there will always be a margin of error in any national income data.  [Argument in support of the statement identified]. Examples of this might be the UK, Spain and India that record GDP using the output method, while many other major use the income method.  This made it almost impossible to compare growth (or shrinkage) rates during the Covid pandemic of 2020-2021, as national income by output were much lower than when measured by income.  This was because income levels were artificially boosted by government support packages, while the UK, India and Spain recorded their negative growth rates differently and appeared to fall by a much larger amount.  [Real world example].  Equally, in any national income calculation it must be remembered that only official transactions are calculated, with grey market and unofficial payments discounted. While this makes little difference when comparing GDP levels within developed nations, the rate of 'unofficial' economic transactions is very high in many developing nations, again making a comparison of living standards difficult.  [Evaluation].

A further weakness includes disparities in the distribution of income, with average GNI/GDP not indicating how the income in the nation is distributed.  [Argument in support of the statement identified].  For example, USA and Europe are widely reported to be wealthy, fully developed nations.  However, USA enjoys a higher average national income than almost all nations on the European continent, by a significant margin than some nations in Europe and yet poverty rates and income inequality are often perceived to be higher in USA as well.  Does this mean that USA's higher average income level is something of a mirage, with the average dragged higher by a small number of very high net worth individuals?  [Real world example]. Impossible to know for sure but it is likely that this explains, at least in part, the differences in income levels, rather than higher living standards in general. [Evaluation]. Equally, within developing nations, a small number of high net worth individuals can also distort average GDP figures, with the often quoted examples being Nigeria, Pakistan and Honduras.  Three nations with similar GNI per capita but very different levels of citizens living in absolute poverty. [Real world example].

Finally, while GDP/GNI data is clearly good at making financial comparisons (though economists argue over the degree of accuracy), it does not always reflect non economic indicators of the standard of living, e.g. changes in working conditions, increased life expectancy and other quality of life indicators, new products, environmental conditions, defence expenditure, the size of underground economy or the value of non-marketed output e.t.c.  [Conclusion].

Key terms used: national income statistics, standard of living, GDP/GNI, HDI, income inequality, unofficial economic transactions, national income calculations, poverty levels.