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Chapter 2.2: MEASURING OUTPUT

Measuring output using GDP
USING GDP
• GDP can be measured using the expenditure
approach;
• GDP can be determined by summing up national
income and adjusting for depreciation, taxes and
subsidies.
• GDP can be determined in two ways, both of which,
in principle, give the same result.

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The expenditures approach

GDP = C + I + G + X – M

• C: Consumption
S: Saving
S = Yd – C
Yd: Disposable Income

The amount of money that an individual or household

has to spend or save after income taxes have been
deducted.

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The expenditures approach

• I: Investment • G: Government expenditure: Government spending on
• De: Depreciation
• Net Investment = Gross Investment – Depreciation
goods and servives (G) and Transfer Payments (Tr)
I = In + De ó In = I – De
Government spending (G) is the sum of government
• Economic Investment includes: expenditures on final goods and services. It includes salaries
• 1) all final purchases of machinery, equipment, and tools by businesses of public servants, purchase of weapons for the military, and
2) all construction (including homes)
3) changes in inventories (To include items produced one year but sold the any investment expenditure by a government. (Cg, Ig)
next. If businesses are able to sell more than they currently produce, this It does not include any transfer payments, such as social
entry will be a negative number. )
security or unemployment benefits.

• NX: net export: NX = X - M

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• In an economy: households receive wages

• Then they use to purchase final goods and services.

• Since wages eventually are used in consumption (C), the

expenditure approach to calculating GDP focuses on the
end consumption expenditure to avoid double counting.

• The income approach, alternatively, would focus on the

income made by households as one of its components to
derive GDP.

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The income approach

• GDP = De + W + R + i + Pr + Ti • 2. Retained earnings
• W: Wages (Labor Income ) • 3. Dividents
• R: Rent
• i: Interest
• Pr: Profit
• Tax including: Ti (Indirect Taxes: VAT, sales tax, custom duties, excise
tax) and Td (Direct Taxes: Income tax, corporation tax, property tax,
inheritance tax, gift tax)
Tx = Ti + Td
• Personal Income Taxes?
• Indirect Business Taxes?

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The output approach (net product/value

added approach)
• Income tax
• Corporation tax thue doanh nghiep •GDP = AVA + IVA + SVA
• Property tax
thue tai san (thue bds)
• Inheritance tax
thue thua ke • Value added from each of the main economic sectors:
• Gift tax
Agriculture, Industry, Services
• Sales
• Value-added tax VAT: thue gtri gia tang
• EXCISE TAX
thue tieu thu dac biet: vang ma, hang ma, ruou bia, thuoc la, bai, xang

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GDPfc. = GDPmp - Ti •PI (Personal Income) = NI - Pr*+ Tr

• NDP (Net Domestic Product) = GDP - De
• NNP (Net National Product) = GNP – De
• NI (National Income) = NNPmp – Ti.
•PI (Personal Income) = NI - Pr*+ Tr
(Pr*: the profit retained (Retained earnings) and paid to the government.
Retained earnings are used to set up funds such as production development
fund, welfare and reward fund, reserve fund, ...
Profits paid to the government include corporate income tax and other
required deductions.
Corporate profits (which equals the sum of corporate taxes, dividends, and
retained earnings)
DI (Disposable Income):
DI = PI - personal income tax

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• Personal Income = National Income

− Indirect Business Taxes
− Corporate Profits GNP = GDP + NIA
− Social Insurance Contributions
− Net Interest
+ Dividends
+ Government Transfers to Individuals + Personal Interest Income. • NIA: Net income from Abroad
• Next, if we subtract personal tax payments and certain nontax
payments to the government (such as parking tickets), we obtain
disposable personal income:
• Disposable Personal Income
= Personal Income − Personal Tax and Nontax Payments.

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Problems with using GDP to Measure the Standard of Living:

GDP and Economic Well-Being
1. non-market transactions are not included in GDP: GDP does not measure
binh quan dau nguoi total output or total utility
• GDP per capita is often used to measure a country's well being or GDP doesn’t measure some very useful output because it is unpaid
standard of living. (homemakers’ services, parental child care, volunteer efforts, home
• The higher the GDP per capita for a country the better off the country improvement projects). Called non-market transactions
is. 2. leisure increases the standard of living but it isn't counted
• But there are some problems with using GDP per capita to measure a GDP doesn’t measure improved living conditions as a result of more leisure.
country's standard of living. 3. the underground economy produces goods and services but they are not
included in GDP
• GDP does not include output from the Underground Economy. Illegal activities
are not counted in GDP (estimated to be around 8% of U.S. GDP).
• Legal economic activity may also be part of the “underground,” usually in an
effort to avoid taxation.

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Conclusion
• Even though GDP does not measure all output, it still allows
economists to assess the state of the economy, providing a
solid foundation to predict its future course and to measure
the results of public policies.

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