Measuring National Output and National Income

CHAPTER 18
CHAPTER 21
Measuring National Output
and National Income
Prepared by: Fernando Quijano

and Yvonn Quijano
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
Gross Domestic Product
C H A P T E R 18: Measuring National Output and National Income
• Gross domestic product

(GDP) is the total market value
of all final goods and services
produced within a given period
by factors of production located
within a country.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 2 of 38
Final Goods and Services
• The term final goods and

services in GDP 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.
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.
Value Added
Value Added in the Production of a Gallon of Gasoline

(Hypothetical Numbers)
STAGE OF PRODUCTION VALUE OF SALES VALUE ADDED
(1) Oil drilling $ .50 $ .50
(2) Refining .65 .15
(3) Shipping .80 .15
(4) Retail sale 1.00 .20
Total value added $1.00
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.
Exclusion of Output Produced Abroad
by Domestically Owned Factors of Production
• GDP is the value of output produced

by factors of production located
within a country. Output produced
by a country’s citizens, regardless of
where the output is produced, is
measured by gross national
product (GNP).
Calculating GDP
GDP can be computed in two ways:

• The expenditure approach: A method of
computing GDP that measures the total
amount spent on all final goods during a
given period.
• The income approach: A method of
computing GDP that measures the
income—wages, rents, interest, and
profits—received by all factors of
production in producing final goods.
The Expenditure Approach
Expenditure categories:
• Personal consumption
expenditures (C)—household
spending on consumer goods.
• Gross private domestic
investment (I)—spending by firms
and households on new capital:
plant, equipment, inventory, and new
residential structures.
Expenditure categories:
• Government consumption and
gross investment (G)
• Net exports (EX – IM)—net
spending by the rest of the world, or
exports (EX) minus imports (IM)
• The expenditure approach calculates

GDP by adding together the four
components of spending. In
equation form:
GDP  C  I  G  ( EX  IM )
Components of GDP, 1999:
Components of GDP, 2002: The Expenditure Approach

BILLIONS OF PERCENTAGE
DOLLARS OF GDP
Personal consumption expenditures (C) 7303.7 69.9
Durable goods 871.9 8.3
Nondurable goods 2115.0 20.2
Services 4316.8 41.3
Gross private domestic investment (l) 1543.2 14.8
Nonresidential 1117.4 10.7
Residential 471.9 4.5
Change in business inventories 3.9 0
Government consumption and gross investment (G) 1972.9 18.9
Federal 693.7 6.6
State and local 1279.2 12.2
Net exports (EX – IM)  423.6  4.1
Exports (EX) 1014.9 9.8
Imports (IM) 1438.5 13.8
Total gross domestic product (GDP) 10446.2 100.0
Note: Numbers may not add exactly because of rounding.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
Personal Consumption Expenditures
• 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
• 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.
• 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.
• Remember that GDP is not the

market value of total sales during a
period—it 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
• 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
asset’s 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
• 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
domestic goods and services.
• Imports (IM) are purchases of goods
and services from abroad).
The Income Approach
• National income is the total income

earned by the factors of production
owned by a country’s citizens.
• The income approach to GDP
breaks down GDP into four
components:
GDP = national income + depreciation + (indirect
taxes – subsidies) + net factor payments to the rest
of the world + other
The Income Approach
TABLE 21.3 National Income, 2007
Billions of Percentage of National

Dollars Income
National Income 12,221.1 100.0
Compensation of employees 7,874.2 64.4
Proprietors’ income 1,042.6 8.5
Rental income 65.4 0.5
Corporate profits 1,598.2 13.1
Net interest 602.6 4.9
Indirect taxes minus subsidies 961.4 7.9
Net business transfer payments 94.2 0.8
Surplus of government enterprises 14.5 0.1
Source: See Table 6.2.
From GDP to National Income
TABLE 21.4 GDP, GNP, NNP and National Income, 2007
Dollars
(Billions)
GDP 13,841.3
Plus: Receipts of factor income from the rest of the world + 817.5
Less: Payments of factor income to the rest of the world  721.8
Equals: GNP 13,937.1
Less: Depreciation  1,686.6
Equals: Net national product (NNP) 12,250.5
Less: Statistical discrepancy  29.4
Equals: National income 12,221.1
From GDP to Disposable Personal Income
• Net national product equals gross

national product minus depreciation;
a nation’s total product minus what is
required to maintain the value of its
capital stock.
• Personal income is the income

received by households after paying
social insurance taxes but before
paying personal income taxes.
Disposable Personal
Income and Personal Saving
TABLE 21.5 National Income, Personal Income, Disposable Personal Income, and
Personal Saving, 2007
Dollars
(Billions)
National income 12,221.1
Less: Amount of national income not going to households  561.6
Equals: Personal income 11,659.5
Less: Personal income taxes  1,482.5
Equals: Disposable personal income 10,177.0
Less: Personal consumption expenditures  9,734.2
Personal interest payments 262.8
Transfer payments made by households 137.1
Equals: Personal saving 42.9
Personal saving as a percentage of disposable personal income: 0.4%
Nominal Versus Real GDP
• Nominal GDP is GDP measured in

current dollars, or the current prices
we pay for things. Nominal GDP
includes all the components of GDP
valued at their current prices.
• When a variable is measured in

current dollars, it is described in
nominal terms.
Calculating Real GDP
• A weight is the importance attached

to an item within a group of items.
• A base year is the year chosen for

the weights in a fixed-weight
procedure.
• A fixed-weight procedure uses

weights from a given base year.
Calculating Real GDP
A Three-Good Economy
(1) (2) (3) (4) (5) (6) (7) (8)
GDP IN GDP IN GDP IN GDP IN
YEAR 1 YEAR 2 YEAR 1 YEAR 2
IN IN IN IN
PRODUCTION PRICE PER UNIT YEAR 1 YEAR 1 YEAR 2 YEAR 2
YEAR 1 YEAR 2 YEAR 1 YEAR 2 PRICES PRICES PRICES PRICES
Q1 Q2 P1 P2 P 1 x Q1 P 1 x Q2 P 2 x Q1 P 2 X Q2
Good A 6 11 $.50 $ .40 $3.00 $5.50 $2.40 $4.40
Good B 7 4 .30 1.00 2.10 1.20 7.00 4.00
Good C 10 12 .70 .90 7.00 8.40 9.00 10.80
Total $12.10 $15.10 $18.40 $19.20
Nominal Nominal
GDP GDP
in year 1 in year 2
GDP Deflator
• The GDP deflator is one measure of

the overall price level.
• Overall price increases can be

sensitive to the choice of the base
year. For this reason, using fixed-
price weights to compute real GDP
has some problems.
The Problems of Fixed Weights
The use of fixed-price weights to estimate

real GDP leads to problems because it
ignores:
• Structural changes in the economy.
• Supply shifts, which cause large decreases

in price and large increases in quantity
supplied.
• The substitution effect of price increases.
GDP and Social Welfare
• Society is better off when crime

decreases, however, a decrease in
crime is not reflected in GDP.
• An increase in leisure is an increase

in social welfare, but not counted in
GDP.
• Nonmarket and household activities

are not counted in GDP even though
they amount to real production.
GDP and Social Welfare
• GDP accounting rules do not adjust

for production that pollutes the
environment.
• GDP has nothing to say about the

distribution of output. Redistributive
income policies have no direct
impact on GDP.
• GDP is neutral to the kinds of goods

an economy produces.
The Underground Economy
• 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.
The Underground Economy
FIGURE 21.1 Per Capita Gross National Income for Selected

Countries, 2006
Gross National Income per Capita
• To make comparisons of GNP between

countries, currency exchange rates must
be taken into account.
• Gross National Income (GNI) is a

measure used to make international
comparisons of output. GNI is GNP
converted into dollars using an average of
currency exchange rates over several
years adjusted for rates of inflation.
• GNI divided by population equals gross

national income per capita.

Measuring National Output and National Income

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Measuring National Output and National Income

Uploaded by

Copyright:

Available Formats

CHAPTER 18

Prepared by: Fernando Quijano

• Gross domestic product

• The term final goods and

• Intermediate goods are

• Value added is the difference

Value Added in the Production of a Gallon of Gasoline

• GDP ignores all transactions in

• GDP is the value of output produced

GDP can be computed in two ways:

• The expenditure approach calculates

Components of GDP, 2002: The Expenditure Approach

• Personal consumption expenditures (C)

• Investment refers to the purchase of

• Total investment by the private

• Nonresidential investment includes

• Residential investment includes

• Change in inventories computes the

• Remember that GDP is not the

• The relationship between total

GDP = final sales + change in business inventories

• Gross investment is the total value of all

capitalend of period = capitalbeginning of period + net investment

• Net exports (EX – IM) is the

• National income is the total income

TABLE 21.3 National Income, 2007

Billions of Percentage of National

TABLE 21.4 GDP, GNP, NNP and National Income, 2007

• Net national product equals gross

• Personal income is the income

• Nominal GDP is GDP measured in

• When a variable is measured in

• A weight is the importance attached

• A base year is the year chosen for

• A fixed-weight procedure uses

• The GDP deflator is one measure of

• Overall price increases can be

The use of fixed-price weights to estimate

• Structural changes in the economy.

• Supply shifts, which cause large decreases

• The substitution effect of price increases.

• Society is better off when crime

• An increase in leisure is an increase

• Nonmarket and household activities

• GDP accounting rules do not adjust

• GDP has nothing to say about the

• GDP is neutral to the kinds of goods

• The underground economy is

FIGURE 21.1 Per Capita Gross National Income for Selected

• To make comparisons of GNP between

• Gross National Income (GNI) is a

• GNI divided by population equals gross

You might also like