Macroeconomic Analysis and Policy

National Income Measurement

Session 3

Ranjan Kumar Mohanty

National Income Measurement
look for the answers to these questions
What is Gross Domestic Product (GDP)?
What are the components of GDP?
How is GDP corrected for inflation?

How to Measure GDP?

Does GDP measure society’s well-being?

GDP at 2011-12 base: Indian scenario

 What is Gross Domestic Product (GDP)?
• GDP is the market value of all final goods and services produced
within a country in a given period of time.

① “GDP is the market value…”

• Output is valued at market prices.
• All goods measured in the same units (e.g., Rs. in India.)
• Things that don’t have a market value are excluded, e.g., housework you do for
yourself.

② “. . . of all final . . .”
• It records only the value of final goods, not intermediate goods (the value is counted
only once).

③ “. . . goods and services . . . “

• It includes both tangible goods (food, clothing, cars, bikes, beer) and intangible
services (haircuts, house cleaning, concerts, cell phone service ).
 What is GDP?
GDP is the market value of all final goods and services produced within a
country in a given period of time.

④ “. . . produced . . .”
• includes currently produced goods, not goods produced in the past..

⑤ “ . . . within a country . . .”
• GDP measures the value of production that occurs within a country’s borders,
whether done by its own citizens or by foreigners located there.

⑥ “. . . in a given period of time.”

• It measures the value of production that takes place within a specific interval of
time, usually a year or a quarter (three months).
 What is Gross National Product (GNP)
• Is the total value of outputs produced and income received by the
nationals of a country in a year (geographical Vs national citizenship)
• ..is the total income earned by a nation’s permanent residents
(called nationals).
• GNP = Market value of domestically produced goods and services plus
incomes earned by the residents of a country in foreign countries minus
incomes earned by the foreigners in the country.
• GNP= GDP+Net factor income from abroad
• GDP=GNP (for a closed economy) but >/< for open economy
• South Korea's Hyundai & Kia Motors in Chennai, the income earned by the
car factory counted as Indian GDP, not South Korea’s GDP. But the car
company’s profit sends to South Korea will be added to their GNP.
What is Net Domestic Product (NDP) & Net
National Product (NNP)?
• Depreciation
• GNP includes the output of both final consumer and capital goods. However,
a part of capital good is used up or consumed in the process of production of
these goods. This is called depreciation or capital consumption.
• .. is the wear and tear on the economy’s stock of equipment and
structures, such as lorries rusting and computers becoming obsolete.
• Both GDP & GNP is gross of deprecation.
• NDP = GDP – Depreciation or capital consumption
• NNP = GNP – Depreciation or capital consumption
 Practice Questions
1. GDP differs from GNP because
a. GNP= GDP-net factor payment from abroad
b. GDP= GNP- capital consumption allowances
c. GDP= GNP-net factor payment from abroad
d. GNP= GDP- capital consumption allowances

2. Net national product equals

a. Gross national product- indirect business taxes
b. Gross national product- depreciation
c. National income- indirect business taxes
d. National income+ depreciation
 GDP at Market Price and Factor Cost
• Indirect Taxes:
• are government revenues that are not received directly from the earned
incomes of households, business etc. (sales tax, customs, highway tolls, excise
tax, GST etc.); ( direct taxes are extracted from earned incomes).
• Subsidies:
• Government expenses that are generally extended to business firms, farmers
among other groups to defray their production costs or to reduce prices for
consumers.
• One type of negative taxes as they impose expenses on government budgets
instead of contributing revenues.
 GDPmc & GDPfc continued…
• The market value of goods and services includes the indirect taxes
levied by the government on goods and services.
• Similarly, the price paid by the consumer will not include any subsidy
which government pays to the producer.
• Hence, the market value of final expenditure would exceed the total
obtained at factor cost by the amount of indirect taxes reduced by the
value of subsidies.
• Gross domestic or national product can, therefore, be measured
either at market prices or at factor cost, one differing from the other
by the amount of net indirect taxes (indirect taxes less subsidies)
• GDPfc= GDPmc −𝑖𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑡𝑎𝑥𝑒𝑠 + 𝑆𝑢𝑏𝑠𝑖𝑑𝑖𝑒𝑠
• GNPfc= GNPmc −𝑖𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑡𝑎𝑥𝑒𝑠 + 𝑆𝑢𝑏𝑠𝑖𝑑𝑖𝑒𝑠
 Some Accounting Relationships..
• 𝑁𝑁𝑃𝐹𝐶 = 𝑁𝑁𝑃𝑀𝑃 − 𝑖𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑡𝑎𝑥𝑒𝑠 + 𝑆𝑢𝑏𝑠𝑖𝑑𝑖𝑒𝑠
• It is otherwise known as National income and refers to the payment
to all factors of production consisting of wages, rent, interest and
profit.
• Percapita (GDP, GNP, NDP, NNP etc..): divide population
 NI, Personal income & Disposable income
• NI measures the income individuals receive for doing productive work.
• Personal Income measures all income actually received by individuals.
• Individual receive other income that they do not directly earn- welfare
payments, food stamps, interest earned from government and other private
individuals etc..
• In National income measures, individuals are attributed income that they
donot actually receive- undistributed corporate profits, employee’s
contribution to social security.
• PI is national income plus transfer payments from government minus
amounts attributed but not received.
• 𝐷𝑖𝑠𝑝𝑜𝑠𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 = 𝑃𝑒𝑟𝑠𝑜𝑛𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝑃𝑒𝑟𝑠𝑜𝑛𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥𝑒𝑠.
GDP to Disposable Income
▪ Gross Domestic Product, PLUS
▪ Net foreign factor income, EQUALS
▪ Gross National Product, LESS
▪ Depreciation, EQUALS
▪ Net national product, LESS
▪ Indirect business taxes and statistical discrepancy, EQUALS
▪ National income, LESS
▪ Social Security Taxes-Corporate Profits Taxes-Undistributed Corporate Profits,PLUS
▪ Unemployment Compensation Payments + Welfare Payments and net interestpaid,
EQUALS
▪ Personal Income, LESS
▪ Income taxes, EQUALS
Disposable income.
The Components of GDP
• Recall: GDP is total spending.
• Four components:
• Consumption (C)
• Investment (I)
• Government Purchases (G)
• Net Exports (NX)
• These components add up to GDP (denoted Y):

Y = C + I + G + NX
The Components of GDP continued…
• Consumption (C): is total spending by households on g&s.
• Investment (I) : is total spending on goods that will be used in the future to
produce more goods
• includes spending on
• capital equipment (e.g., machines, tools)
• structures (factories, office buildings, houses)
• inventories (goods produced but not yet sold)
Note: Investment is spending on new capital.
Example: (assuming no depreciation)
➢on 31/03/2021: Economy has Rs.10 Trillion worth of capital
➢During 2021: investment = Rs.1 Trillion
➢31/03/2022: economy will have Rs.11 Trillion worth of capital.
The Components of GDP continued…
• Government Purchases (G): is all spending on the g&s purchased by
govt at the federal, state, and local levels.
• G excludes transfer payments, such as Social Security or unemployment
insurance benefits. These payments represent transfers of income, not
purchases of g&s.
• Net Exports (NX) = exports – imports
• Exports represent foreign spending on the economy’s g&s.
• Imports are the portions of C, I, and G that are spent on g&s produced
abroad.
• Adding up all the components of GDP gives:

Y = C + I + G + NX
 Example: How GDP is affected….
In each of the following cases, determine how much
GDP and each of its components is affected (if at
all).
A. Debbie spends $300 to buy her husband dinner
at the finest restaurant in Boston.
Consumption and GDP rise by $300.

B. Sarah spends $1200 on a new laptop to use in her

publishing business. The laptop was built in China.
Investment rises by $1200, net exports fall
by $1200, GDP is unchanged.
Example: How GDP is affected continued….
C. Jane spends $800 on a computer to use in her editing
business. She got last year’s model on sale for a
great price from a local manufacturer.
Current GDP and investment do not change, because
the computer was built last year.

D. General Motors builds $500 million worth of cars, but

consumers only buy $470 million of them.
Consumption rises by $470 million,
inventory investment rises by $30 million,
and GDP rises by $500 million.
 How Will the following Events Affect GDP and Why?
a.A flood destroys part of Odisha.
b.You sell your old laptop to another student.
c.You sell your holdings of SBI stock.
d. A retired worker gets an increase in Pension
benefits.
Thank You