Measures of real income for the total economy

10.57 It is not possible to divide income flows into a price and a quantity component and for this reason price and volume measures cannot be defined in the same way as for the flows and stocks described earlier. Income flows can be measured in real terms only if one chooses some selected basket of goods and services on which the income is typically spent and uses the price index for this basket as a deflator of current incomes. The choice is always arbitrary in the sense that income is seldom spent specifically for purchases during the period in question. Some of it may be saved for purchases in later periods or, alternatively, the purchases during the period may be partly financed from savings made earlier.

10.58 Gross domestic product at constant prices measures the total production (less the intermediate consumption) in volume terms for the total economy. The total real income of residents is influenced not only by this volume of production but also by the rate at which exports can be traded against imports from the rest of the world. If the terms of trade improve, fewer exports are needed to pay for a given volume of imports, so that at a given level of domestic production goods and services can be reallocated from exports to consumption or capital formation.

10.59 The real gross domestic income can be derived by adding the so-called trading gain to volume figures on gross domestic product. The trading gain - or, as the case may be, loss - is defined as:

i.e. the current balance of exports less imports, deflated by a price index P, less the difference between the deflated value of exports and the deflated value of imports. The choice of an appropriate deflator P for the current trade balances should be left to the statistical authorities in a country, taking of the particular circumstances of that country. In the circumstances in which there is uncertainty about the choice of deflator an average of the import and the export price indices is likely to provide a suitable deflator.

10.60 Various real income aggregates are identified and defined in the way shown in the following table.

Gross domestic product at constant prices

plus the trading gain or loss from changes in the terms of trade

equals real gross domestic income

plus real primary incomes receivable from abroad

minus real primary incomes payable to abroad

equals real gross national income

plus real current transfers receivable from abroad

minus real current transfers payable to abroad

equals real gross national disposable income

minus consumption of fixed capital at constant prices

equals real net national disposable income.

To be able to express the various national income aggregates in real terms, it is recommended that receivables and payables of primary incomes and transfers from and to abroad should be deflated with an index of gross domestic final expenditure. Real national disposable income is to be expressed on a net basis by deducting from its gross value the consumption of fixed capital at constant prices.