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Real income measures

Australian System of National Accounts: Concepts, Sources and Methods
Reference period
2020-21 financial year

20.3    The real income measures are a series of aggregates which measure the purchasing power of various income flows in the national accounts.

20.4    Income flows in the SNA (e.g. cash transfers or saving) are measured in nominal, monetary units and are not directly related to prices or quantities of goods or services. Income can be used to purchase goods or services, however, and is often defined as ‘the maximum amount that a household, or other unit, can consume without reducing its real net worth’¹⁰⁵. Real incomes measure the amount of goods and services that can be purchased with an income flow.

20.5    A numeraire is a set basket of goods and services. To measure the purchasing power of an income flow over a numeraire, the price of the numeraire in a specified reference period is used to deflate the nominal income value. Change in the deflated value of income over time, in comparison to the reference period, therefore measures change in the purchasing power of the nominal income flow over the numeraire. Real incomes are deflated in this way.

20.6    As GDP is a measure of the income generated in the economy by production, if GDP can be deflated, then real GDP is also a measure of real income. In this case, the numeraire is the set of all goods and services produced in the domestic economy. However, to move from domestic product in volume terms to national income in real terms, the power of income to purchase goods and services from the rest of the world also needs to be considered.

20.7    In a closed economy, without exports or imports, GDP is equal to the sum of final consumption and capital formation (otherwise known as domestic final demand). In this case, real GDP is an appropriate measure of the purchasing power of the income generated from domestic production. However, in an economy which is open to imports, and exports domestic production, the total real income that residents derive from domestic production also depends on the rate at which exports may be traded against imports from the rest of the world.

20.8    The terms of trade is the ratio of the price of exports to the price of imports. If the prices of a country’s exports rise faster (or fall more slowly) than the prices of its imports (that is, if its terms of trade improves), fewer exports are needed to pay for a given volume of imports. This means that at a given level of domestic production, goods and services can be reallocated from exports to consumption or capital formation. An improvement in the terms of trade therefore makes it possible for an increased volume of goods and services to be purchased by residents out of the incomes generated by domestic production.

20.9    The usual way to calculate real income figures is to start from real gross domestic income and add iterative adjustments deflated to real terms. The measures calculated are:

  • real gross domestic income
  • real gross national income
  • real net national disposable income
  • real net national disposable income per capita.

Real gross domestic income

20.10    Real gross domestic income (real GDI) measures the purchasing power of the total incomes generated by domestic production.

20.11    When the terms of trade changes there may be a significant divergence between the movements of GDP in volume terms and real GDI. This difference is described as the ‘trading gain’ (or loss). Alternatively, the trading gain or loss from changes in the terms of trade is the difference between real GDI and GDP in volume terms. If imports and exports are large relative to GDP, and if the commodity composition of the goods and services that make up imports and exports is very different, the scope for potential trading gains and losses may be large. This may happen, for example, when the exports of a country consist mainly of a small number of primary products, such as cocoa, sugar or oil, while its imports consist mainly of manufactured products. Trading gains or losses, T, are usually measured by the following expression:

    \(\large T = \frac{{X - M}}{P} - \left( {\frac{X}{P_x} - \frac{M}{{{P_m}}}} \right)\)

where

    \(X\) = exports at current values

    \(M\) = imports at current values

    \(P_x\) = the price index for exports

    \(P_m\) = the price index for imports

    \(P\) = a price index based on a numeraire

20.12    \(P_x\)\(P_m\) and \(P\) all equal 1 in the base year. The term in brackets measures the trade balance calculated at the export and import prices of the reference year, whereas the first term measures the current trade balance deflated by the numeraire price index. One may have a different sign from the other.

20.13    The 2008 SNA leaves the choice of the price index used to deflate the current trade balance to individual national statistical agencies. In Australia, the price index, \(P\), reflects import prices. As trade facilitates consumption of a different mix of products than are produced domestically, and exports generate income which finances the acquisition of imports, the price of imports is an appropriate deflator for the trade balance.

20.14    Real GDI is calculated by summing the volume measures of gross national expenditure (GNE), the statistical discrepancy for GDP(E) (SD), and exports and subtracting imports. Exports are first deflated by the imports deflator to account for the terms of trade.

    \({Real \ gross \ domestic \ income} = GNE + SD{\rm{ }} + deflated\ {\rm{ }}X - M\)

20.15    The chain volume measure is then benchmarked to the annualised real GDI estimate.

Real gross national income

20.16    Real gross national income (GNI) measures the purchasing power of gross primary incomes for all institutional sectors, including net primary income receivable from non-residents.

20.17    Primary incomes generated by the domestic production of resident units are distributed mostly to other residents; however, part of them may go to non-resident units. Likewise, some primary incomes generated in the rest of the world may be distributed to resident units. Real gross national income (GNI) accounts for these flows. Real GNI is equal to real GDI less deflated primary incomes payable to non-resident units, plus deflated primary incomes receivable from non-resident units. The implicit price deflator for GNE is used to deflate the primary incomes. In contrast to volume GDP, real GNI is not a concept of value added, but a concept of income.

20.18    By removing the volume measure of consumption of fixed capital from real GNI, real net national income is obtained.

Real net national disposable income

20.19    Primary incomes receivable by resident units may be used to make transfers to non-resident units. Likewise, resident units may receive transfers originating out of primary incomes in the rest of the world. Real gross national disposable income is equal to real GNI less deflated current transfers (other than taxes less subsidies on production and imports) payable to non-resident units, plus the corresponding deflated transfers receivable by resident units from the rest of the world. Again, the implicit price deflator for GNE is used. Real gross national disposable income measures the real income available to the total economy for final consumption and gross saving.

20.20    By removing the volume measure of consumption of fixed capital from real gross national disposable income, real net national disposable income (NNDI) is obtained. National disposable income is the sum of the disposable income of all resident institutional units.

Real net national disposable income per capita

20.21    Real NNDI per capita is calculated by dividing real NNDI by the estimated population as published in National, state and territory population and ABS projections.

Endnotes

  1. SNA, 2008, para 8.25.