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Measures of National Income and Output

Measures of National Income and Output

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Published by Mohammed Yunus

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Published by: Mohammed Yunus on Jan 02, 2011
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Defination:The income earned by a country’speople, including labour and capitalinvestment.Measures of national income and output
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(October 2009)
A variety of 
measures of national income and output
are used ineconomicsto estimate totaleconomic activity in a country or region, includinggross domestic product (
), gross national product (
). All are specially concerned with counting thetotal amount of goods and services produced within some "boundary". The boundary may bedefined geographically, or by citizenship; and limits on the type of activity also form part of theconceptual boundary; for instance, these measures are for the most part limited to counting goodsand services that are exchanged for money: production not for sale but for barter, for one's own personal use, or for one's family, is largely left out of these measures, although some attempts aremade to include some of those kinds of production by
monetary values to them.
National accounts
Main article: National accounts
Arriving at a figure for the total production of goods and services in a large region like a countryentails a large amount of data-collection and calculation. Although some attempts were made toestimate national incomes as long ago as the 17th century,
the systematic keeping of nationalaccounts, of which these figures are a part, only began in the 1930s, in the United States andsome European countries. The impetus for that major statistical effort was theGreat Depression and the rise of Keynesian economics,which prescribed a greater role for the government in managing an economy, and made it necessary for governments to obtain accurate information sothat their interventions into the economy could proceed as much as possible from a basis of fact.
Market value
Main article:Market value
In order to count a good or service it is necessary to assign some value to it. The value that themeasures of national income and output assign to a good or service is its market value – the priceit fetches when bought or sold. The actual usefulness of a product (its use-value) is not measured – assuming the use-value to be any different from its market value.Three strategies have been used to obtain the market values of all the goods and services produced: the product (or output) method, the expenditure method, and the income method. The
 product method looks at the economy on an industry-by-industry basis. The total output of theeconomy is the sum of the outputs of every industry. However, since an output of one industrymay be used by another industry and become part of the output of that second industry, to avoidcounting the item twice we use, not the value output by each industry, but the value-added; thatis, the difference between the value of what it puts out and what it takes in. The total value produced by the economy is the sum of the values-added by every industry.The expenditure method is based on the idea that all products are bought by somebody or someorganisation. Therefore we sum up the total amount of money people and organisations spend in buying things. This amount must equal the value of everything produced. Usually expenditures by private individuals, expenditures by businesses, and expenditures by government arecalculated separately and then summed to give the total expenditure. Also, a correction termmust be introduced to account for imports and exports outside the boundary.The income method works by summing the incomes of all producers within the boundary. Sincewhat they are paid is just the market value of their product, their total income must be the totalvalue of the product. Wages, proprieter's incomes, and corporate profits are the major subdivisions of income.
The output approach
The output approach focuses on finding the total output of a nation by directly finding the totalvalue of all goods and services a nation produces.Because of the complication of the multiple stages in the production of a good or service, onlythe final value of a good or service is included in total output. This avoids an issue often called'double counting', wherein the total value of a good is included several times in national output,  by counting it repeatedly in several stages of production. In the example of meat production, thevalue of the good from the farm may be $10, then $30 from the butchers, and then $60 from thesupermarket. The value that should be included in final national output should be $60, not thesum of all those numbers, $100. Thevalues addedat each stage of production over the previousstage are respectively $10, $20, and $30. Their sum gives an alternative way of calculating thevalue of final output.Formulae:GDP(gross domestic product) at market price = value of output in an economy in a particular year - intermediate consumption NNP at factor cost = GDP at market price - depreciation + NFIA
(net factor income fromabroad)
- net indirect taxes
The income approach
The income approach focuses on finding the total output of a nation by finding the total incomereceived by the factors of production owned by that nation.The main types of income that are included in this approach are rent (the money paid to ownersof land), salaries and wages (the money paid to workers who are involved in the production process, and those who provide the natural resources), interest (the money paid for the use of man-made resources, such as machines used in production), and profit (the money gained by theentrepreneur - the businessman who combines these resources to produce a good or service).Formulae:
 NDP at factor cost = compensation of employee + operating surplus + mixed income of self employee National income = NDP at factor cost + NFIA (net factor income from abroad) - Depreciation
The expenditure approach
The expenditure approach is basically an output accounting method. It focuses on finding thetotal output of a nation by finding the total amount of money spent. This is acceptable, becauselike income, the total value of all goods is equal to the total amount of money spent on goods.The basic formula for domestic output combines all the different areas in which money is spentwithin the region, and then combining them to find the total output.
+ (
= household consumption expenditures / personal consumption expenditures
= government consumption and gross investment expenditures
= gross exports of goods and services
= gross imports of goods and services Note: (
) is often written as
, which stands for "net exports"
The names of the measures consist of one of the words "Gross" or "Net", followed by one of thewords "National" or "Domestic", followed by one of the words "Product", "Income", or "Expenditure". All of these terms can be explained separately."Gross" means total product, regardless of the use to which it is subsequently put."Net" means "Gross" minus the amount that must be used to offset depreciation – ie.,wear-and-tear or obsolescence of the nation's fixed capital assets. "Net" gives anindication of how much product is actually available for consumption or new investment."Domestic" means the boundary is geographical: we are counting all goods and services produced within the country's borders, regardless of by whom."National" means the boundary is defined by citizenship (nationality). We count all goodsand services produced by the nationals of the country (or businesses owned by them)regardless of where that production physically takes place.The output of a French-owned cotton factory in Senegal counts as part of the Domesticfigures for Senegal, but the National figures of France."Product", "Income", and "Expenditure" refer to the three counting methodologiesexplained earlier: the product, income, and expenditure approaches. However the termsare used loosely."Product" is the general term, often used when any of the three approaches was actuallyused. Sometimes the word "Product" is used and then some additional symbol or phraseto indicate the methodology; so, for instance, we get "Gross Domestic Product byincome", "GDP (income)", "GDP(I)", and similar constructions."Income" specifically means that the income approach was used."Expenditure" specifically means that the expenditure approach was used.

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