TOPIC 8:

MEASURING NATIONAL OUTPUT &

8.1 GDP and GNP
NATIONAL INCOME
8.2 Calculating GDP

8.3 GNP & Personal Income

8.4 Nominal and Real GDP

8.5 Limitations of the GDP Concept

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8.1 GDP l Goods and services produced during a given period fall
into 2 categories:
l The gross domestic product (GDP) is the most
important economic indicator. - intermediate goods and services

- final goods and services

l It m eas ur e of ec on om ic ac t iv it y an d t he
l Intermediate goods and services are those inputs to be
direction of overall aggregate economic activity.
resold and used in further stages of production.

l Gross Domestic Product (GDP) is the total
market value of all final goods & services
produced within a country in a given time
period.
l Final goods and services are those that are purchased for
final use and ready for consumption and not for resale or
further processing or manufacturing.

l In computing GDP, the sale of final goods Example

is included while the sale of intermediate
The apples that are produced and then used to make apple juice
goods is excluded.
l
= _________in GDP

Apple juice purchased by households for home consumption

l This is because the value of intermediate l

= _________ in GDP
goods already included in the transaction
to produce final goods. l Wholesale distributor sells glass to an automaker to be used in
the production of cars
= ___________in GDP
l Therefore, adding up value of
intermediate goods involves double l Customer buys a new car from the car dealer
counting. = ___________in GDP

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 Gross Domestic Product &
Value Added: Gross National Product
• The difference between the value of goods as they leave
a stage of production and the cost of the goods as they l Gross Domestic Product (GDP) is the total market
entered that stage. value of all final goods & services produced within a
• Double counting can also be avoided by counting only the country in a given time period (local labor + foreign labor)
value added to a product by each firm in its production l Gross National Product GNP is defined as the total
process. market value of all final goods and services produced
Table: Value added in the Production of a Gasoline by nationals whether there are located in the country or
Stage of Production Value of Product Value Added overseas. (citizens)
(RM) (RM)
(1) Oil drilling 1.00 1.00
(2) Refining 1.30 0.30
GNP = GDP + net factor income from abroad
(3) Shipping 1.60 0.30
(4) Retail sale 2.00 0.40 (+) factor income received from abroad
Total value added 2.00 (–) factor income paid abroad

8.2 CALCULATING GDP (1) The Expenditure Approach

Definition:
l There are two (2) approaches
l A m e th o d o f c o m p u ti n g GD P t h a t
available for measuring GDP. measures the amount spent on all final
goods during a given period.
l Formula:
(1) The expenditure approach
(2) The income approach GDP = C + I + G + NX

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Consumption expenditures (C) GDP = C + I + G + NX

l household spending on consumer goods (Durable goods + Non-
durable goods + Services).
Consumption of durable goods + Non-durable
Investment expenditures (I) goods + Services (C)
l the purchases made by industry in new productive facilities, or,
the process of "buying new capital and putting it to use. (+) Non-residential fixed investment + residential
l Non-residential fixed investment + residential investment + investment + inventories investment (I)
inventories investment
l E.g. buying a new truck, building a new factory, or purchasing (+) Federal + State + Local (G)
new software.
Government purchases (G) (+) (Export – Import) (NX)
l expenditures by federal, state, and local governments for final
goods and services.
Gross Domestic Product (GDP)
Net exports (X – M)
l purchase of domestically goods by foreigners (exports) minus
the domestic purchase of foreign goods (imports).
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Consumption Expenditures (C):
• Durables – last for a long time such as
cars and TV
• Non-durable – last for a short time such
as food and clothing.
• Services - such as educational services,
health services and legal services.
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Investment Expenditures (I):
l Non-residential investment includes
expenditures for machines, tools, new
truck.
l Residential investment includes
expenditures for new houses.
l Inventories investment (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. 14

Government Purchases (G): Net Export (X-M):

l (G) counts expenditures by federal, state & local
governments for final goods & services. l Net exports (NX) is the difference
l Transfer payments are not included in government between exports & imports;
purchases. l Exports (X) purchase of domestically
Transfer payments is a payment of money from a
l
government to an individual for which no good or
goods by foreigners
service is required in return (does not go to l Imports (IM) domestic purchase of
purchase newly produces goods or services). foreign goods
l E.g. pensions and public support for students,
including scholarships. l NX = Exports - Imports.

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GDP using Expenditure Method (RM Billions)

l Consumption (C)
(2) The Income Approach:
Durable goods RM 1027
Nondurable goods RM 2564
Services RM 5155
l Investment (I)
Non- residential Investment RM 1086
Definition:
Residential Investment RM 1000
Inventories investment RM 19 l The total income earned by
l Government Purchase (G)
Federal
State and Local
RM 878
RM 1485
the factors of production
l Net Export (NX)
Export (X) RM 1301
owned by a country’s
Import (M) (RM 2028)
citizens.
GDP RM 12487 billions

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 Calculating GDP by using Income
Approach: Compensation to employees
(+) Proprietor's income
National income (+) Corporate profits
(+) Indirect taxes (+) Net interest
(-) Subsidies (+) Rental income
(+) Payments to rest of world National Income
(-) Payment received from rest
of world
GDP

l Compensation to employees: Calculate GDP using Income Approach:

Ø The wages and salaries paid to households.
RM billions
l Proprietors’ income: Compensation of employees 6,010
Ø The income ear ned by th e ow ner- ope rator of a
(+) Proprietors’ income National 743
business.
(+) Corporate profits Income 748
l Corporate profits: (+) Net interest 554
Ø The income of corporations. (+) Rental income 2,712
(+) Indirect taxes 2,300
l Net interest:
(-) (Subsidies) (1,350)
Ø The interest paid by businesses.
(+) Payments to rest of world 3,540
l Rental income: (-) (Payment received from rest of world) (2,770)
Ø The income received by property owners in the form of
rent. GDP RM12487 billion

8.3 GNP & PERSONAL INCOME Personal Income:

Gross National Product (GNP): Personal Income:

l the market value of total final goods and
l The total income of households before paying
personal income tax.
services produced by nationals whether
there are located in the country or
National income (NI)
overseas. (citizens)
(-) retained earnings
(-) corporate taxes
GNP = GDP + payment received from the
(+) transfer payments
rest of the world + payment to the rest of
Personal Income
the world.
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 Disposable Personal Income: GDP, GNP, National Income, Personal Income, and Disposable Personal
Income
DOLLARS
(BILLIONS)
Ø Is part of personal income that is available for GDP 10,205.6
Plus: receipts of factor income from the rest of the world + 342.1
spending or savings after de duction of Less: payments of factor income to the rest of the world - 353.2
personal income taxes. Equals: GNP 10,194.5
Less: depreciation - 1,351.3
Less: indirect taxes minus subsidies plus other - 643.3
Equals: national income 8,199.9
Disposable Personal Income: Less: retained earnings - 332.6
Less: corporate taxes - 731.2
= Personal income – personal income taxes Plus: transfer payments +1,587.8
Equals: personal income 8,723.9
Less: personal taxes - 1,306.2
Equals: disposable personal income 7,417.7

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8.4 NOMINAL VERSUS REAL GDP

Exercise
l Nominal GDP is monetary (e.g. dollar) value of
GDP in a particular year measured in prices of Year Price Quantity Nominal Real GDP
that same year. GDP

= current price x current quantity 1 (base) ? ?

10 200

l Real GDP is monetary (e.g. dollar) value of GDP ? ?

in a particular year measured in base year prices. 2 12 220

= base year price x current quantity

? ?
3 14 240

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GDP Deflator: Exercise

Year Price Quantity Nominal Real GDP GDP Deflator
l Measure of the change in prices of all new GDP
do mes ti ca lly p ro du c ed , f in al g oo d s an d
services in an economy. 1 (base) 2000 2000 ?
10 200

Nominal GDP 2640 2200 ?

X 100 2 12 220
Real GDP
3360 2400 ?
3 14 240

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8.5 LIMITATIONS OF GDP CONCEPT

l Ignore certain non-market goods and

services.
l Sale of used goods

l Underground activities

l Value of leisure

l Government transfer payments

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