National Income Accounting

DepressionSurprise!

After being blind-sided by the Great Depression, policymakers

decided that they needed measures of economic activity.
A Keynesian economist, Simon Kuznets, was charged with
establishing the methodology for this in the late 1930s.
Kuznets later received the Nobel Prize for his efforts.

Macroeconomics and national income

accounts
GDP and its measurement
Output approach, income approach and
expenditure approach
The components of GDP
From GDP to GNP to National Income
How good an indicator of a countrys living
standards is GDP?

National income accounting

National income accounting is about measuring
economic activity
One of the most comprehensive measures of a
countrys economic activity is the value of total
production of its final goods and services, called
national product
The rate of economic growth is an important
indicator of a countrys economic performance
(although a high growth rate does not necessarily
lead to less poverty)

Gross Domestic Product

Gross Domestic Product (GDP) is the most widely
reported measure to indicate a countrys economic
performance

GDP is the market value of all final goods and

services produced in a nation during a specific
period of time, usually a quarter or a year

Gross National Product

Gross National Product (GNP) is the market value
of all final goods and services produced by
nationals (e.g. UK citizens) wherever they are
located.

GDP/GNP are expressed in monetary terms, thus

rely on the markets to establish the relative
values of goods and services

GDP vs. GNP

Gross Domestic Product (GDP) is the total value of final
goods and services produced during a given period within
the geographic boundaries of a country regardless of by
whom. The goods and services are produced domestically.
Gross National Product (GNP) is the total value of final
goods and services produced during a given period by the
citizens of a country no matter where they live. The goods
and services are produced by the nationals of the
country.

GDP and
Circular Flow

Points to remember when measuring GDP...

(a) Secondhand transactions are not included (since merely
exchanges of previously produced goods)
(b) Private or public transfer payments are not counted (e.g.
unemployment insurance benefits not made in exchange of
a service => no new production)
(c) Only final goods, intermediate goods not included (e.g.
bread yes, flour no)
=> If any of these items were included in the calculations,
the measurement of economic activity would be subject to
double-counting
(d) Excludes financial transactions since these do not reflect
production.

Three different ways of measuring GDP

1. Output approach
2. Income approach, and
3. Expenditure approach
1. Output approach
This may be measured as the total output of final goods and
services. This uses the concept of value added.
Value added: difference between the value of a good as it
leaves a stage of production and the costs of that good as it
entered that stage.
Summing the value-added of the different stages of
production gives the total value of economic activity.

GDP as
Valued-Added

Measuring value added

Stage of production Value of Sales Value Added
1 Oil Drilling

$0.50

$0.50

2 Refining

$0.65

$0.15

3 Shipping

$0.80

$0.15

4 Retail Sale

$1.00

$0.20

Total Value Added

$1.00

2. Income Approach
GDP may be measured as the total income earned
by the factors of production (i.e. land, labour and
capital) derived from producing the output => sum
of factor incomes.
Factors of Production and their Remuneration
1.Land: Rent
2.Labour: Wages and Salary
3.Capital: Interest
4.Entrepreneur:: Profit
GDP= Rent+ Wages and Salary + Interest + Profit

3. Expenditure Approach
GDP may be measured by using the expenditure on
total output. It is measured initially at market prices,
including indirect taxes such as VAT but excluding
subsidies. This approach provides a very useful
identity Y = C + I + G + (X M)
C= Consumption Expenditure by Household Sector
I= Investment Expenditure by Firms
G= Government Expenditure
X-M= Net Expenditure by Rest of the World

 The income and expenditure measures are expressed in

monetary terms at the market prices that prevail (i.e. at
current prices or in nominal terms)
Nominal GDP (p x q) can grow because of three reasons:
Output (q) rises and prices remain unchanged
Prices (p) rise and output remains unchanged
Both output and prices rise

In order to control for price changes GDP can be

calculated using a base set of prices. The real measures can
then be obtained by deflating GDP by a relevant price
index.

What
Increased?

Three Key Price Indexes

Consumer Price Index (CPI)

Producer Price Index (PPI)

GDP Deflator (GDP Price Index or GDPPI)

Composition of CPI

The Expenditure approach is important for

highlighting linkages between macroeconomic
indicators .

Component parts of expenditure based GDP

UK GDP (Y), 2003 estimated (billion) = 1,099.4

a) Consumption expenditure (C)
= 951.4
(on durables, non-durables, services)

b) Investment (I)

= 175.8

(stock-building, capital formation, housing)

c) Government expenditure (G)

= 231.7

(roads, health, education, but not transfer payments)

d) Exports of goods and services (X)

e) Imports of goods and services (M)

= 276.0
= 308.4

(C, I,G have import component, thus M needs to be subtracted from

economic activity)

National Accounts Identity

(1)

Y=C+I+G+X-M

Gross domestic product

or grossly deceptive product?
Non-market transactions
The care economy (underestimation of housewives/husbands work)
Subsistence agriculture

Distribution, nature and quality of goods produced

Leisure time
The hidden economy
Illegal activities
Informal sector

Economic bads
No distinction between green and polluting industries

 This list of omissions suggests that GDP figures

are a dubious guide to the quality of life in
different countries
Nevertheless GDP per capita is used as a broad
indicator of living standards
Examples of alternative measures:
HDI (weighted average of life expectancy,
education and income)

Other national accounts

GDP + Net Factor Income (NFI) = GNP
Net National Product (NNP) = GNP - Depreciation
(depreciation: estimate of the capital worn out by producing GDP)

National Income: total income earned by the owners of

resources, including wages, rents, interest and profits
NI = NNP - indirect taxes [taxes on goods sold, e.g. VAT]
Personal Income: total income received by households that is
available for consumption, saving and the payment of personal
taxes
Personal disposable Income (PDI): Personal Income minus
personal income taxes plus transfer payments received by
individuals
PDI = PI income taxes + transfers

CDS: Current Daily Status

CWS: current Weekly Status
UPSS: Usual Principal and Subsidiary Status

Employment and Unemployment in

India

Growth versus Development

Economic growth may be one aspect of economic
development but is not the same
Economic growth:
A measure of the value of output of goods and services
within a time period

Economic Development:
A measure of the welfare of humans in a society

Development
Development incorporates the notion of a
measure/measures of human welfare
As such it is a normative concept open to
interpretation and subjectivity
What should it include?

Development
Levels of poverty
Absolute poverty
Relative poverty

Inequality
Progress what
constitutes progress?
Our definitions of progress may be highly subjective. What
has progress brought to native tribes people across the
globe?
Title: Navajos refuse casino riches. Copyright: Getty Images, available from
http://edina.ac.uk/eig

Poverty in India

Poverty Line in India

As per the Tendulkar Committee Report, the national
poverty line at 2004-5 prices was a monthly per
capita consumption expenditure of:
Rupees 446.68 in rural areas, and
Rupees 578.80 in urban areas in 2004-5

Economic Growth vs. Development

Income Inequality

This might be a common

picture

But this could be just around the

corner!

Copyright: unseenob, http://www.sxc.hu

Copyright: chinagrove, http://www.sxc.hu

Using measures of
economic growth can
give distorted pictures of
the level of income in a
country the income
distribution is not taken
into account.
A small proportion of the
population can own a
large amount of the
wealth in a country. The
level of human welfare
for the majority could
therefore be very limited.

Income Inequality: Gini Index

According to HDR 2011, inequality in India for
the period 2000-11 in terms of the income Gini
coefficient was 36.8.
Indias Gini index was more favourable than those
of comparable countries like South Africa (57.8),
Brazil (53.9), Thailand (53.6), Turkey (39.7),
China (41.5), Sri Lanka (40.3), Malaysia (46.2),
Vietnam (37.6), and even the USA (40.8), Hong
Kong (43.4) and Argentina (45.8).

Human Development Index (HDI)

HDI: A socio-economic measure
Focuses on three dimensions of human welfare:
Longevity Life expectancy
Knowledge Access to education, literacy rates
Standard of living GDP per capita: Purchasing
Power Parity (PPP)

Other Measures?