NATIONAL INCOME ACCOUNTING

What is the difference between GDP (Gross Domestic Product) and GNP
(Gross National Product)? Final goods and services: Final
GDP is the market value of all final goods and services that are sold and bought goods and services are those
goods and services which are
in a given country in a given period of time. GDP is achieved domestically. GDP not sold to other firms.
does not account net foreign factor income, where net foreign factor income =
factor incomes from abroad – factor incomes to abroad.

GNP is the market value of all final goods and services that are sold and bought
in a given nation in a given period of time. GNP is achieved nationally. GNP
accounts net foreign factor income. So-
GNP = GDP + Net foreign factor income.

Suppose,
Table-1

Bangladesh The US

1 2 3 4
Earnings of Earnings of Earnings of Earnings of
Bangladeshi American American Bangladeshi
entrepreneur entrepreneur entrepreneur entrepreneur
Earnings of Earnings of Earnings of Earnings of
Bangladeshi American American Bangladeshi
worker worker worker worker
Earnings of Earnings of Earnings of Earnings of
Bangladeshi American American Bangladeshi
capitalist capitalist capitalist capitalist
(5) Earnings of Bangladeshi land lord (6) Earnings of American land lord

The GDP of Bangladesh will account both 1 and 2. The GDP of the US will
account both 3 and 4. Here, 1 and 2 both domestically earned in Bangladesh.
And, 3 and 4 both domestically earned in the US. So-
GDPBangladesh = 1 + 2 + 5
GDPUS = 3 + 4 + 6

For Bangladesh, 4 is considered as factor income from the US and 2 is

considered as factor income to the US. So-
GNPBangladesh = GDPBangladesh + 4 – 2 = 1 + 2 + 5 + 4 – 2 = 1 + 5 + 4.

For the US, 2 is considered as factor income from abroad and 4 is considered as
factor income to Bangladesh. So-
GNPUS = GDPUS + 2 – 4 = 3 + 4 + 6 + 2 – 4 = 3 + 6 + 2
What are the approaches to account national income?
There are three approaches to account national income-
1) Income approach
2) Value added approach
3) Expenditure approach

1. Income approach:

Gross Domestic Product (GDP) = Compensation of employees + Corporate

retained earnings + Net interest + Rental
income + Indirect business taxes +
depreciation

Compensation of employees is the wage and benefit earned by workers.

Corporate retained earnings are enjoyed by corporations after meeting up all the
costs of production.

Net interest = Interest paid by domestic businesses – Interest received by

domestic businesses.

Rental income is the income earned by landlords or homeowners. Homeowners

do not provide rents but they enjoy home services. To calculate these services in
GDP, it is assumed that homeowners pay rents to themselves.

Indirect business taxes are the taxes paid on sales, property and production by
businesses. These taxes are indirect because consumers indirectly pay these taxes
when they buy goods and services.

Depreciation is the value of the amount of used capital in producing output at a

given period of time. For example a machine costs Tk.1000. Each year Tk.5 of
this machine is used up in producing output. In this case Tk.5 is the depreciation
cost.

GNP = GDP + Net foreign factor income ; [net foreign factor income = foreign
factor income from abroad – foreign
factor income to abroad]

NDP = GDP – Depreciation ; [NDP = Net Domestic Product]

NNP = GNP – Depreciation ; [NNP = Net National Product]

National income = NNP – Indirect business tax

Personal income = National income – Corporate retained earnings – Net interest

+ Transfer payments
Disposable personal income = Personal income – Indirect business taxes

2. Value added approach:

By definition,
Value added of a product = Revenue received from the sales of that product –
Purchase of intermediate good from other firms in
order to produce that product

Suppose there are three products in an economy- Intermediate good: Intermediate

good is the good which is sold to
 Wheat produced by farmers by using no intermediate good other firms.
 Flour produced by millers by using wheat as intermediate good.
 Bread produced by grocers by using flour as intermediate good.
F: 10
Suppose, we find- M: W(10)+F(5) = 15
Product Producer Purchase of Revenue Value added G: W(10)+F(5) + B(5) = 20
intermediate received
good from from the Double counting problem: In
other firms sales of GDP calculation when the value
in order to product of a product is counted double
produce that then double counting problem
product occurs.
Wheat Farmers 0 10 10
Flour Millers 10 15 5
Bread Grocers 15 20 5
Sum of value added 20

Followed by the above table some of the wheat is bought by consumers and is
not sold in the market farther. So in this case this wheat is final product. No
intermediate good is required to produce wheat. So in this case ‘Purchase of
intermediate good from other firms in order to produce that product’ is Tk.0. So
here value added is Tk.10.

Some of the wheat is used to produce flour and this flour is bought at Tk.10 by
consumers and is sold at Tk15. In this case this flour is final product. So here
value added is Tk.5.

Some of the flour is used to produce bread and this bread is bought at Tk.15 by
consumers and is sold at Tk.20. In this case this bread is final product. So here
value added is Tk.5.

GDP of the economy = Sum of the value added = 10 + 5 + 5 = 20 Tk.

If we did the sum of ‘Revenue received from the sales of product’ to calculate
GDP, then we would face-
GDP = 10 + 15 + 20 = Tk.45. In this case flour is counted twice in GDP
calculation. This is a double counting problem. Wheat is counted thrice in GDP
calculation, which is a triple counting problem. In the real world facing many
products in GDP calculation, there may be multiple counting problem.

3. Expenditure approach:
We know that-
GDP = Expenditure of an open economy
= C + I + G + Nx ; where C = Consumption, I = Investment, G = Government
spending on goods and services, and Nx = Net export = Export – Import.

Consumption (C): There are two types of consumption- 1) consumption of

goods, and 2) consumption of services. Consumption of goods can be divided
also into two categories- 1) consumption of durable goods: TV, cars and so on;
and 2) consumption of nondurable goods: food, cloth and so on. When
consumption increases, then aggregate demand increases, then production of
output increases and thus GDP increases. Alternatively, when consumption
decreases, then GDP decreases.

Investment (I): Addition to capital is called as investment. Investment is

comprised with three categories: 1) business fixed investment: it occurs when
there is a purchase of new plants and equipments by firms, 2) residential fixed
investment: it occurs when there is a purchase of new housing by landlords and
homeowners, and 3) inventory investment: it occurs when there is a stock of
goods available to be sold in the next period. When investment increases, then
aggregate demand increases, then output production increases and thus GDP
increases. Alternatively, when investment decreases, then GDP decreases.

Government spending on goods and services (G): When government takes

expansionary fiscal policy by spending more on military tank, roads, railways,
public services or by reducing taxes and as a result their willingness to buy
goods and services increases (or, in other words then aggregate demand
increases) and thus output increases. Alternatively, when government takes
contractionary fiscal policy by spending less on military tank, roads, railways,
public services or by increasing taxes and as a result their willingness to buy
goods and services decreases (or, in other words then aggregate demand
decreases) and thus output as well as GDP decreases.

Net export (Nx): When net export increases, then aggregate demand increases,
then output increases, thus GDP increases. Likewise, when net export decreases,
then GDP decreases.

References?
1) Economics by Paul A. Samuelson and William D. Nordhaus.
2) Principles of Economics by N. Gregory Mankiw.