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National income and GDP

by Jeff Cope

In 1976 New Zealand’s GDP per head was 5% below Australia’s, in 2006 it was 26% below. What is GDP, how does it relate to national income, and what else can such measurements tell us?


National accounts

National income is an important indicator of how New Zealand’s economy is performing. Along with other key economic variables, for example the gross domestic product (GDP), national income is presented in the national accounts.

National economy

Just as business accounts provide a summary record of a firm’s financial operations, so the national accounts for a country summarise the economic behaviour of the nation. The national accounts show:

  • the rate the economy is growing or contracting
  • industries that are growing faster than others
  • the proportion of total income made up of wages
  • the amount of goods and services purchased by households and government, or exported
  • the amount of income saved
  • the level of investment.

In any developed market economy, it is not a simple task to measure how the economy is operating. Millions of transactions amongst businesses, government, non-profit institutions and individuals take place every day, within New Zealand, and between New Zealand and the rest of the world.

The national accounts summarise this complex range of transactions. They provide macroeconomic aggregates – the big picture – so economic management and monitoring can be measured.

Key economic measures

Public attention often focuses on three key measures of total economic performance that are found in the national accounts.

  • The production aggregate, the gross domestic product (GDP), is a measure of domestic production, how much is produced within New Zealand.
  • The expenditure aggregate, the gross national expenditure (GNE), is a measure of internal demand for both domestic and overseas production.
  • The income aggregate, the gross national disposable income (GNDI), is a measure of the total income of New Zealand residents, from domestic production and from net income flows with the rest of the world.

Good try

In 1866 Auditor General Charles Knight demonstrated his flair for statistics in a report to government which included the first estimate of New Zealand’s national income, £15.8 million (around $1.5 billion in 2009 terms). An analysis a century later concluded that Knight’s effort had ‘great intellectual merit, overcoming a lack of data and an absence of methodological precedent’.1

GDP over time

The official GDP and national income series for New Zealand are produced by Statistics New Zealand. The current price series are available from 1939, while constant price series have been produced since 1955. The first estimate of national income was made in 1866. Unofficial series going back to 1859 have been produced by a number of academics.

Measures of income, saving and wealth

A full set of national accounts includes information on other important variables such as saving and net borrowing, and these are linked to underlying changes in financial assets and liabilities. National balance sheets are also compiled to illustrate how both the real and financial transactions that occur during a year can lead to changes in New Zealand’s net wealth. As each summary macroeconomic measure is built up from finer-level data, it is possible to break down totals such as GNE and GDP into their industry, sector or commodity components.

Footnotes
  1. J. A. Dowie, ‘A century-old estimate of the national income of New Zealand’, Business Archives and History, 6 (August 1966). Back

Gross domestic product

Gross domestic product (GDP) is probably the most quoted and well-known indicator of total economic activity in New Zealand. Despite its limitations, GDP is widely accepted as the best measure of overall economic performance.

Defining GDP

GDP provides a summary measure of the ‘size’ of the market economy – it has been described as combining ‘in a single figure, and with no double counting, all of the output (or production) carried out by all the firms, non-profit institutions, government bodies and households in a given country during a given period ... provided the production takes place within the country’s economic territory’.1

Daily bread

Flour purchased by a baker is an intermediate good. The baker does not consume the flour but uses it as an input in the manufacture of bread. When the household purchases the bread then this is a final goods purchase.

Gross domestic product is defined as the total market value of goods and services produced in a given time period in New Zealand, after deducting the costs of goods and services used in the process of production. There is no deduction for the cost of using fixed capital – the wear and tear on the machinery and buildings used in production. If the cost of using capital assets is taken into account, the resulting value is net domestic product (NDP).

Elements of GDP

The calculation of GDP has five important elements.

  • Market value. GDP measures activities that produce goods and services for sale in the market, plus the non-market services of government and non-profit institutions, the rental value of dwellings occupied by owners, and people’s production of goods for their own use.
  • Market prices. In order to sum the values of all of the goods and services that are produced, prices in the market are used. Government services which are provided free or at a reduced price, such as education and health services, are measured at their market costs of production.
  • No double counting. Goods and services can be divided into two categories: final, which is goods and services actually used or consumed by individuals and businesses; and intermediate, which is goods and services purchased for further use in the production process. GDP only measures the value of final goods and services produced.
  • Domestic production. GDP is confined to production that takes place within New Zealand’s geographical area, regardless of whether the employers or owners of labour and capital that contribute to production are resident or non-resident.
  • Defined period. GDP is a ‘flow’ statistic, it measures value added over a stated period, usually for a quarter or for a year.

Production, income and expenditure

The economy can be viewed as a circular flow of money, with each stage in the flow providing a different measure of GDP.

  • Production – GDP(P). In the first stage, goods and services are produced. GDP(P) combines the value added by all producers. Individual industries’ contribution to GDP is their total output minus their intermediate consumption (goods and services they used to make their products). GDP(P) also includes the net taxes on production (such as import duties and GST) which are not paid by producers.
  • Income – GDP(I). In the next stage incomes are generated and paid to the individuals and groups who own the means of production: labour, capital invested, land, natural resources and entrepreneurship. GDP(I) measures the incomes earned from domestic production including wages, salaries and gross operating surpluses.
  • Expenditure – GDP(E). In the final stage incomes are spent on items produced. GDP(E) measures the value of goods and services produced within New Zealand for final use. This is obtained by first measuring internal demand, the gross national expenditure (GNE), and then adding exports and deducting imports.

In theory all three approaches result in the same total, but in practice they are often a little different because of different data sources, and measurement and timing issues.

Footnotes
  1. F. Lequiller and D. Blades, Understanding national accounts. Paris: OECD, 2006. Back

Growth in GDP

Tracking economic growth

Economic analysis is not carried out simply on current levels of the gross domestic product (GDP), but its change over time – to measure the real growth of the economy. Changes in the quantities of goods and services produced and available for consumption, investment or export directly impact on New Zealanders’ welfare.

Volume measures of GDP

In periods of high inflation, changes in current-price GDP alone do not show real quantity changes.

To measure the growth of the economy, analysts distinguish between that part of a change in current price GDP due to changes in quantities produced, and that due to price changes.

Volume measures of GDP are calculated by expressing the different components of production in the constant prices of a chosen base year, and then summing them to get total GDP. Such series are referred to as being ‘in constant prices’, or, more correctly, as being expressed in volume terms. In New Zealand both GDP(P) (GDP for production) and GDP(E) (GDP for expenditure) in volume terms are calculated in this way, both annually and quarterly.

By dividing the current price GDP(E) series by its volume equivalent, the result is an indicator of the change in prices – the GDP implicit price deflator. This is a key economic indicator as it provides a broad measure of price change across the whole economy.

For example during the period of high inflation in New Zealand in the 1970s the annual growth rate in the GDP was over 14%, but of this over 12% was the result of price inflation. The actual annual growth rate in volume terms was about 2.2%.

GDP and population change

The volume measure of GDP is also affected by population growth. If the population increases rapidly, the quantity of goods and services produced should also increase. Growth in GDP per inhabitant (GDP per capita) over the medium to long term is a better indicator of the New Zealand population’s economic well-being.


International comparisons

GDP growth rates across countries

Comparing economic growth rates across countries is relatively straightforward because rates of change are compared, rather than actual gross domestic product (GDP) levels. Measures of volume GDP track the growth of the economy over time, comparing one period with another, and international comparisons can be made by simply comparing growth rates given by each country’s own volume GDP series, usually the GDP per capita series.

In the 1970s and 1980s the rate of economic growth for New Zealand was below that of both Australia and the average of all OECD countries (a group of 30 developed economies). After 1990 the situation changed, with the growth rate of the New Zealand economy above the OECD average. In the early 2000s New Zealand’s growth rate was slightly faster than Australia’s.

Although GDP per capita is acknowledged as an incomplete measure of economic well-being, it is a key indicator of relative economic performance across countries.

Comparing GDP levels

Unlike international comparisons of GDP growth rates, comparing GDP levels across countries is not straightforward because each country calculates its GDP and national income statistics using its own prices expressed in its own national currency. In order to compare countries, common prices need to be used, expressed in a common unit or currency. Using currency exchange rates (for example converting New Zealand GDP per capita to US dollars using prevailing market exchange rates) can be misleading because exchange rates are influenced by factors such as currency speculation, and do not reflect standard price levels. Instead purchasing power parities (PPPs) are used.

Purchasing power parities

PPPs are rates of currency conversion that eliminate differences in price levels between countries. They are calculated by measuring the relative amounts of national currencies required to purchase a common ‘basket’ of basic goods and services consumed by households – if a basket of items in New Zealand costs NZ$30 and in Australia A$20, then the PPP between New Zealand and Australia would be 1.5; for every Australian dollar spent in Australia on this basket of goods, NZ$1.50 would have to be spent to buy the same goods in New Zealand.

PPPs for different groups of commodities can be developed, and ultimately aggregated to cover all production measured by GDP.

In 2006 the PPP between New Zealand and Australia was estimated by the OECD at 1.08. Across all the goods and services included in GDP, price levels in New Zealand expressed in New Zealand dollars were approximately 8% above the price levels for similar goods and services in Australia, expressed in Australian dollars. So to compare the GDP between the two countries, it is necessary to divide the New Zealand GDP by 1.08.

Per capita GDP ranking

One of the most frequent uses of PPPs is to compare GDP and GDP per capita levels across countries. These comparisons are approximate indications of the size of economies, and of economic well-being.

In 1976 New Zealand was in the upper half of the OECD per capita GDP table, with per capita GDP approximately 11% higher than the OECD average. New Zealand was approximately 5% below Australia, but higher than a number of similar-sized countries such as Norway and Ireland. Subsequently – particularly during the 1970s and 1980s – the New Zealand economy grew at slower rates than most countries in the OECD, and the relative GDP per capita for New Zealand fell. By 2006 New Zealand was 22nd in the 30-member OECD, with GDP per capita falling to approximately 26% below Australia.


National income

Gross national income

The gross domestic product for income (GDP(I)) is one of the three ways of calculating GDP. It measures the incomes generated from domestic production, whether income goes to New Zealand residents or to people overseas. To understand the income, consumption and saving behaviour of resident New Zealanders, economists measure national income as distinct from domestic income – national income is the income New Zealanders earn and have available to spend or save.

Just as income generated in domestic production is paid to non-residents as a return on their investments in New Zealand, similarly New Zealand residents receive income from investments overseas. Gross national income (GNI) measures the incomes earned by New Zealand residents from their ownership of factors of production, regardless of where those factors are employed. It is derived from GDP(I), subtracting the income earned from domestic production remitted overseas, but adding incomes received by residents from other countries. GNI was formerly known as gross national product (GNP).

Because of New Zealand’s high levels of overseas borrowing, investment flows leaving the country are greater than investment flows coming in. This lowers New Zealand’s national income. This net outflow has increased as a proportion of GDP – in the early 1970s GNI was approximately 98% of GDP, but by the mid-1990s it had fallen to about 93%. For a decade it stayed close to this level, even picking up slightly, but from 2004 the downward track resumed as overseas borrowing increased.

National disposable income

GNI is a better measure of New Zealanders’ income or claim on resources than GDP. GNI is further refined by:

  • adjusting GNI for other net transfers with the rest of the world, such as foreign aid, insurance claims and personal remittances, to produce the gross national disposable income (GNDI)
  • deducting consumption of fixed capital (wear and tear on machinery and buildings) which is technically a charge against production, to produce net national disposable income (NNDI).

NNDI is the national equivalent of the disposable income an individual might have to either spend or save.

Real gross national disposable income

A constant price income measure, the real gross national disposable income (RGNDI) measures the real purchasing power of national disposable income, by taking account of changes in the terms of trade (the relative value of exports and imports) and the real value of net investment and transfer incomes with the rest of the world. It is a measure of the volume of goods and services New Zealand residents have command over.

Trends in national income

New Zealand has a large trading sector and significant international investment flows, and the real purchasing power of the incomes received by New Zealanders may be greater than or less than the volumes produced as measured by the conventional GDP volume statistic.

New Zealand’s net investment income from the rest of the world has been recorded as being in deficit since official national accounts were first released for 1938/39. This reflects the fact that the country has always relied heavily on foreign investment to develop its economy.

There have been changes in the shares of national income taken by labour, business and government. In the 1970s workers’ share of national income averaged 63% of NNDI, but this had fallen to an average 53% in the 2000 to 2007 period. Over the same time the income share going to resident businesses increased by 3%, and government’s share rose by 7%, reflecting the shift by government to raise revenue through indirect taxes in the late 1980s, with the introduction of a goods and services tax (GST).


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How to cite this page: Jeff Cope, 'National income and GDP', Te Ara - the Encyclopedia of New Zealand, http://www.TeAra.govt.nz/en/national-income-and-gdp/print (accessed 15 October 2019)

Story by Jeff Cope, published 11 Mar 2010