TOPIC

Measuring National Output

and National Income

Why are countries rich or poor

Is it because of the resources they have

- Japan hardly has any natural resources

Is is because of the money they have

- paper money can be made

Is is due to the real wealth they generate.

- what then is real wealth.

Real Wealth or Income

Real wealth is the wealth generated by a country
in terms of the goods and services it produces.
Paper money is nominal wealth and goods and
services generated is real wealth.

National Income Accounting

National income accounting a
set of rules and definitions for
measuring economic activity in the
aggregate economy that is, in the
economy as a whole.
National income accounting is a way
of measuring total, or aggregate
production.

National income accounting includes the

following concepts:
Gross Domestic Product (GDP) and Gross National
Product (GNP)
Net National Product or Net National Income (NNP)
GDP/GNP at market price and factor cost
Personal income (PI) and Personal Disposable income
(PDI)
Personal Consumption Expenditure and Personal savings
Real and Nominal Income
Per capita income (PCI)

Gross Domestic Product

Gross domestic product (GDP) is the
current market value of the total final
goods and services produced within a
given period by factors of production
located within a country.
The term final goods and services refers to
goods and services produced for final use.
Intermediate goods are goods produced by
one firm for use in further processing by
another firm. These are not used in the
computation of GDP.

Value Added
Value added is the difference between
the value of goods as they leave a
stage of production and the cost of the
goods as they entered that stage.
In calculating GDP, we can either sum up

the value added at each stage of

production, or we can take the value of final
sales. We do not use the value of total
sales in an economy to measure how much
output has been produced.

Value Added
Value Added in the Production of an Automobile
Stage Of Production

Value at End of Each

Stage of Production
$

600

Value Added by Each

Stage of Production

(1)

Iron and other raw

materials

600

(2)

Pig iron and other

processed materials

1,200

600

(3)

Steel ingots, etc

2,400

1,200

(4)

Sheet steel, etc

5,500

3,100

(5)

Automobile parts

8,000

2,500

(6)

Assembly

11,500

3,500

(7)

Automobile delivered at
showroom

16,900

5,400

46,100

16,900

GDP Versus GNP

GDP is the value of output produced by factors of
production located within a country. (deals with
location)
Gross National Product (GNP) measures the output
produced by a countrys citizens, regardless of where
the output is produced. (deals with ownership of
resources)
GNP = GDP + value of goods & services produced by
the countrys owned resources abroad value of goods
& services produced by foreign resources in the country
GNP= GDP + NFIA (Net Factor Income Earned From Abroad)

Calculating GDP
GDP can be computed in two/three ways:
The expenditure approach: A method of computing
GDP that measures the amount spent on all final
goods and services during a given period. (Y= C+I+G+
(X-M) )
The income approach: A method of computing GDP
that measures the incomewages, rents, interest,
and profitsreceived by all factors of production in
producing final goods. (Y = W+R+I +P )
The Output/ Value added approach: In some cases
value of final output generated or value added by each
producer is taken as a method to compute national
income (Y= value of final goods & services/value
added in the primary, secondary and tertiary sectors)

The circular flow of income: The

inner flow
Firms

Factor Services
Factor
payments

Goods and services

Price of goods
and services

Households

The circular flow of income

INJECTIONS
Export
expenditure (X)
Investment (I)

Factor
payments

Consumption of
domestically
produced goods
and services (Cd)

Government
expenditure (G)
BANKS, etc

Net
saving (S)

GOV.

ABROAD

Import
Net
expenditure (M)
taxes (T)

WITHDRAWALS

The Income Approach

National income is the total income earned by
the productive resources owned by a countrys
citizens.
The income approach to GDP breaks down
GDP into four components:
GDPmp = national income + depreciation + (indirect taxes
subsidies) + net factor income from rest of the world + other
National Income = Compensation of employees +Proprietors
income + Corporate profits + Net interest + Rental income

The Income Approach

Components of GDP, 1999: The Income Approach
BILLIONS OF
DOLLARS
Gross domestic product
National income
Compensation of employees
Proprietors income
Corporate profits
Net interest
Rental income
Depreciation
Indirect taxes minus subsidies
Net factor payments to the rest of the world
Other
Source: See Table 17.2.

9,299.2
7,469.7
5,299.8
663.5
856.0
507.1
143.4
1,161.0
689.7
11.0
32.2

PERCENTAGE
OF GDP
100.0
80.3
57.0
7.1
9.2
5.5
1.5
12.5
7.4
0.1
0.3

From GDP to Disposable Income

GDP, GNP, NNP, National Income, Personal Income, and Disposable Personal Income,
1999
DOLLARS
(BILLIONS)
GDP
9,299.2
Plus: receipts of factor income from the rest of the world
+ 305.9
Less: payments of factor income to the rest of the world
316.9
Equals: GNP
9,288.2
Less: depreciation (capital consumption allowance)
1,161.0
Equals: net national product (NNP)
8,127.1
Less: indirect taxes minus subsidies plus other
675.5
Equals: national income
7,469.7
Less: Undistributed profits
485.7
Less: social insurance payments
662.1
Plus: personal interest income received from the government and consumers
+ 456.6
Plus: transfer payments to persons
+1,011.0
Equals: personal income
7,789.6
Less: personal taxes
1,152.0
Equals: disposable personal income
6,637.7
Source: See Table 17.2.

From GNP to NNP

Net national product equals gross national product
minus depreciation; a nations total product minus what is
required to maintain the value of its capital stock.
NNP = GNP Depreciation (capital consumption allowance)

Capital consumption allowance (depreciation) represents

the amount of depreciation and obsolescence in the GNP.

From NNP to National Income (NI)

Alternative measures
Total productive resource costs of the goods and

services produced by the economy

The income earned by the owners of productive

resources in producing GDP

NI = NNPmp (Indirect business taxes + Subsidies)

+ statistical discrepancy = NNPfc

National income accounting: a summary

NYA

GNP
(and
GNI)
at
market
prices

G
I
X-Z
C

NYA

Deprec'n
Net Indirect
taxes

GDP
NNP
National
at
at
market market Income
or
prices prices NNP at

Profits,
rents
Selfemployment

Wages
factor cost and
salaries

From GDP to Personal Income

Personal income is the total income of households.

=
(national income) - (undistributed corporate profits)
(social security payments) + interest income received from
the government and households +Transfer payments).
Transfer payments
A payment of money in return for which no current goods or

services are produced

The current income received by persons from all

sources:
Wages, salaries, proprietors incomes, rental income,

interest income, dividend income, and transfer payments

From Disposable Personal Income to

Personal Saving
Disposable Personal Income and Personal Saving, 1999
DOLLARS
(BILLIONS)
Disposable personal income
Less:
Personal consumption expenditures
Interest paid by consumers to business
Personal transfer payments to foreigners
Equals: personal saving
Personal savings as a percentage of disposable personal income:

6,637.7
6,268.7
194.8
26.6
147.6
2.2%

Source: See Table 17.2.

Personal Consumption Exp. = PDI Personal savings

Personal Savings = PDI Personal Consumption Exp.

Disposable Personal Income and

Personal Saving
Disposal personal income is the
personal income minus personal taxes.
The personal saving rate is the
percentage of disposable personal income
that is saved. If the personal saving rate
is low, households are spending a large
amount relative to their incomes; if it is
high, households are spending cautiously.

GDP at market and factor price

GDP at Market price = GDP at factor cost +
Indirect Taxes subsidies

GDP at factor cost = GDP at Market price Indirect Taxes + subsidies

GDP
Plus: receipts of factor income from the rest of the world
Less: payments of factor income to the rest of the world
Equals: GNP
Less: depreciation (capital consumption allowance)
Equals: net national product (NNP)
Less: indirect taxes minus subsidies plus other
Equals: national income (NNP at factor cost)
Less: Undistributed profits
Less: social security payments
Plus: personal interest income received from the government and consumers
Plus: transfer payments to persons
Equals: personal income
Less: personal taxes (Income tax, wealth tax, etc)
Equals: disposable personal income
Less Personal consumption expenditures
Interest paid by consumers to business
Personal transfer payments to foreigners
Equals: personal saving

GDP by Expenditure method

Four major components
Consumption
Investment
Net exports
Government
GDP = C+I +G + (X-M)

Personal Consumption Expenditures (C)

Personal consumption expenditures (C)

are expenditures by consumers on the
following:
Durable goods: Goods that last a relatively

long time, such as cars and appliances.

Nondurable goods: Goods that are used up

fairly quickly, such as food and clothing.

Services: Things that do not involve the

production of physical things, such as legal

services, medical services, and education.

Gross Private Domestic Investment (I)

Investment refers to the purchase of
new capital.
Total investment by the private
sector is called gross private
domestic investment. It includes
the purchase of new housing, plants,
equipment, and inventory by the
private sector.

Gross Private Domestic Investment

Nonresidential investment includes
expenditures by firms for machines, tools,
plants, and so on.
Residential investment includes
expenditures by households and firms on
new houses and apartment buildings.
Change in inventories computes the
amount by which firms inventories change
during a given period. Inventories are the
goods that firms produce now but intend to
sell later.

Gross Private Domestic Investment

Remember that GDP is not the
market value of total sales during a
periodit is the market value of total
production.
The relationship between total
production and total sales is:
GDP = final sales + change in business inventories

Gross Investment
versus Net Investment (G)
Gross investment is the total value of all
newly produced capital goods (plant,
equipment, housing, and inventory)
produced in a given period.
Depreciation is the amount by which an
assets value falls in a given period.
Net investment equals gross investment
minus depreciation.
capitalend of period = capitalbeginning of period + net investment

Government Consumption
and Gross Investment
Government
consumption and gross
investment (G) counts
expenditures by federal,
state, and local
governments for final
goods and services.

Net Exports (X-M)

Net exports (EX IM) is the
difference between exports and
imports. The figure can be positive
or negative.
Exports (EX) are sales to foreigners of

U.S.-produced goods and services.

Imports (IM) are U.S. purchases of

goods and services from abroad).

Exclusions of Used Goods

and Paper Transactions
GDP ignores all transactions in
which money or goods change
hands but in which no new
goods and services are
produced.

Calculating GDP: Some Examples

Selling your two-year-old car to a
neighbor does not add to GDP.
Selling your car to a used car dealer
who then sells your car to someone
else for a higher price, adds to GDP.
The value of the dealer's services is
added to GDP.

Calculating GDP: Some Examples

Selling a stock or bond does not add
to GDP.
The stock broker's commission from the sales
does add to GDP.

Calculating GDP: Some Examples

Social security payments, welfare
payments, and veterans' benefits, are not
included in GDP transfer payments

Only the cost of transferring is included in

GDP.

Calculating GDP: Some Examples

The work of unpaid housespouses
does not appear in GDP calculations.

GDP only measures market activities so

unpaid value added is not included in
GDP.

The Circular Flow

Wages, rents,
interest, profits
Factor services
Goods

Firms
t
n
e (production)
m
n
r
e
Taxes Government Gov ding
pen tment
Savin
S
gs Financial markets Inves
I mp
Personal consumption
orts
rt s
o
p
x
E
Other countries

Household

Per Capita GDP/GNP

Per capita GDP or GNP measures a
countrys GDP or GNP divided by its
population.
Per capita GDP is a better measure
of well-being for the average person
that its total GDP or GNP.

Value of Nonmonetary Transactions

GDP for the most part takes into account only
currently produced goods and services supplied
through monetary transactions
The underground economy is the part of
an economy in which transactions take
place and in which income is generated that
is unreported and therefore not counted in
GDP.

International Comparisons of GDP

=
Purchasing power parity
The number of units of currency needed in one
country to buy the same amount of goods and
services that 1 unit of currency will buy in
another country