National Income Accounting_Pt 3

• Other measures of Income

– GNP, NNP, National Income, Personal
Income, Disposable income
• Nominal and real GDP
– Calculations
• Limitations of the national income
concept

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 Other measures of Income

• More complete picture Largest to Smallest

– Gross National Product (GNP)

– Net National Product (NNP)
– National Income
– Personal Income
– Disposable Personal Income

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 Other measures of Income:
Gross National Product
• Gross National Product (GNP)
– Total output of goods and services
produced by nationals
• Excludes production by foreigners within
domestic economy; includes production by
nationals in foreign country.

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 Other measures of income:
Gross National Product
• Net Factor income from abroad
= Output by nationals abroad - Output by
foreigners
• Ghana GNP = Ghana GDP + Net factor
income from abroad
• Question (True/False)
– When a Nigerian businessman builds a
factory in Ghana; his production is part of
Ghana’s GDP, but not Ghana’s GNP. Why?
• Under what circumstance could a country’s
GDP be equal to its GNP?
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 Other measures of Income:
Net National Product
• Net National Product (NNP)
– Total production by a nation’s residents
minus losses from depreciation
• Depreciation
– The decrease in the value of a capital
good over time
– Wear and tear on economy’s stock of
capital
– Examples?
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 GDP vs. NDP

• Gross Domestic Product (GDP)

– Total output produced within a country
• Net Domestic Product (NDP)
– Total output produced within a country,
minus depreciation
• Question
– Difference between NDP and NNP?

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 Other measures of Income:
National Income
• National Income
– Total income earned by a nation’s residents
in the production of goods and services.
– Differs from NNP by excluding indirect
business taxes (sales tax); including
business subsidies
– Differs from NNP by statistical discrepancy
from problems in data collection
• Statistical discrepancy is difference in
calculating total income from expenditure vs.
income approach
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 Other measures of Income:
Personal Income
• Personal Income
– Income received by households and businesses
• Excludes:
– retained earnings
• Incomes that businesses have earned but have not
paid out to owners
– Corporate income taxes and excludes
contributions for social security
• Includes
– interest income that households receive from
their holdings of government debt
– income from Transfer payments
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 Other measures of Income:
Disposable Income
• Disposable Personal Income
– Income that households and businesses
have left over after paying taxes
= Personal income- personal taxes

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 Relationship between
various measures of income

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 Real versus Nominal GDP

• Total spending rises from one year to the

next
– Economy - producing a larger output of
goods and services
– Or goods and services are being sold at
higher prices
– Or both

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 Real versus Nominal GDP

• Nominal GDP
– Production of goods and services
– Valued at current prices
• Real GDP
– Production of goods and services
– Not affected by changes in prices

• From nominal GDP to real GDP….

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 Real vs Nominal GDP
• Numerical example

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 GDP Deflator
• A measure of the price level calculated
as the ratio of nominal to real GDP
• GDP Deflator= Nominal/ Real X 100
• Reflects the prices of goods and
services, but not the quantities produced
– Quantities of goods and services in a
country rise over time but prices remain
the same
• Effect on nominal and real GDP?
– Effect on GDP deflator?
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 GDP Deflator
• A measure of the price level calculated as the
ratio of nominal to real GDP
• GDP Deflator= Nominal/ Real X 100
• Reflects the prices of goods and services, but
not the quantities produced
– Quantities of goods and services in a country
rise over time but prices remain the same
• Both nominal and real GDP rise together
– GDP deflator is constant
– Prices rise over time but quantities stay the
same
• Effect on Nominal and real GDP?
– Effect on GDP deflator?
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 GDP Deflator
• A measure of the price level calculated as the ratio of
nominal to real GDP
• GDP Deflator= Nominal/ Real X 100
• Reflects the prices of goods and services, but not the
quantities produced
– Quantities of goods and services in a country rise
over time but prices remain the same
• Both nominal and real GDP rise together
– GDP deflator is constant
– Prices rise over time but quantities stay the same
• Nominal GDP and real GDP stays the same
– GDP deflator rises
• GDP deflator reflects what is happening to prices, not
quantities
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 GDP Deflator
• Numerical Example contd.

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Real and Nominal GDP

What is true
about real GDP
and nominal
GDP in the base
year?

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 Real vs. Nominal GDP

• Nominal GDP uses current prices to

place a value on economy’s output
• Real GDP uses base-year prices to
place a value on economy’s output

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 Real vs. Nominal GDP

• True/False
– If Nominal GDP is rising, real GDP must
also be rising. Why?

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 GDP as a measure of
Economic well-being
• GDP – “the best single measure of the
economic well-being of a society”
– Economy’s total income
– Economy’s total expenditure
• What are some limitations of use of GDP
as measure of individuals’ well-being in a
country?

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 GDP as a measure of
Economic well-being
• Doesn’t include
– Leisure
– Value of almost all activity that takes
place outside markets
• Chef, child care-taker, etc
– Quality of the environment
– Nothing about distribution of income

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 GDP as a measure of
Economic well-being
“GDP does not allow for the health of our children,
the quality of their education, or the joy of their play.
It does not include the beauty of our poetry or the
strength of our marriages, the intelligence of our
public debate or the integrity of our public officials.
It measures neither our courage, nor our devotion
to our country. It measures everything, in short,
except that which makes life worthwhile…..”
(Senator Robert Kennedy, 1968)

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 GDP as a measure of
Economic well-being
• A large GDP can help us to lead a good life!
• GDP does not measure the health of our children
– …But nations with large GDP can afford better health
care for their children!
• GDP does not measure the quality of our education
– …But nations with larger GDP can afford better education
systems!
• GDP does not measure the beauty of our poetry
– …But nations with larger GDP can afford to teach more of
their citizens to read and enjoy poetry!
• GDP does not take into account our intelligence,
integrity, courage, wisdom or devotion to country
– …But these laudable attributes easier to foster when
people less concerned about affording basic necessities
of life
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 GDP as a measure of
Economic well-being
• GDP does not directly measure those
things that make life worthwhile
– Measures our ability to obtain the inputs
into a worthwhile life!

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GDP and the Quality of Life

The table shows GDP per person and three other measures of the quality of
life for twelve major countries.
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 International differences:
GDP & quality of life
• Rich countries - higher GDP per person
– Better
• Life expectancy
• Literacy
• Internet usage
• Poor countries - lower GDP per person
– Worse
• Life expectancy
• Literacy
• Internet usage
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 International differences:
GDP & quality of life
• Low GDP per person
– More infants with low birth weight
– Higher rates of infant mortality
– Higher rates of maternal mortality
– Higher rates of child malnutrition
– Less common access to safe drinking
water
– Fewer school-age children are actually in
school
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 International differences:
GDP & quality of life
• Low GDP per person
– Fewer teachers per student
– Fewer televisions
– Fewer telephones
– Fewer paved roads
– Fewer households with electricity

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 “Take-home” Question 1

1. What is nominal GDP for 2005 and 2010?

2. Calculate real GDP for 2005 and 2010, using 2005 as the base
year. 30
 “Take-home” Question 2
• Consider an economy that produces only
chocolate bars. In year 1, the quantity produced
is 3 bars and the price is Ghc4. In year 2, the
quantity produced is 4 bars and the price is
Ghc5. In year 3, the quantity produced is 5 bars
and the price is Ghc6. Year 1 is the base year.
– What is the nominal GDP for each of these years
– What is the real GDP for each of these years?
– What is the % growth rate of real GDP from year
1 to year 2?

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 “Take-Home” Question 3
• One day, Barry the Barber collects $400 for haircuts.
Over this day, his equipment deteriorates in value by
$50. Of the remaining $350, Barry sends $30 to the
government in sales taxes, takes home $220 in
wages, and retains $100 in his business to add new
equipment in the future. From the $220 that Barry
takes home, he pays $70 in income taxes. Based on
this information, compute Barry’s contribution to the
following measures of income:
– Gross domestic product
– Net national product
– National income
– Personal income
– Disposable personal income
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 Announcements
• Last class for this section of Semester
• Subsequent 4 lectures
– Mrs. Hellen Seshie-Nasser
• Measurement of other macroeconomic
variables
– Inflation, unemployment
• Economic growth
• IA held after second session
– Date to be announced
• OH- Thursdays: 12.30- 1.30pm
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