Macroeconomic Aggregates

National Income Measures

 Gross Domestic Product
• GDP is the total final output produced
within the country over a given period (12-
month).
• Production of domestic firms in abroad is
not calculated in GDP.
• Production of foreign firms in India is not
subtracted from GDP
It is an alternative measure of national
output. 4
 Real and Nominal GDP

• Real GDP is calculated in constant or

invariant prices.
• Nominal GDP is measured at current market
prices.

GDP deflator= Nominal GDP /Real GDP

IPDGDP = ∑Q1 P1 / ∑Q1 P0
Implicit price deflator

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 Total GDP and GDP per-capita
• Total GDP is a measure of a country's overall
economic output (economic power).
• GDP per head equals to the country's GDP
divided by the total number of people in the
country.
• In order to compare living standards of
different countries GDP has to be expressed
per capita (per head).

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 The Circular-Flow Diagram
Market for
Goods
Goods & and Services Goods &
Services sold Services
bought

Households
Firms

Inputs for Market for Labour, land,

production and capital
Factors
of Production
Wages, rent, Income
and interest 7
 The Three Ways of Measuring GDP
• The Expenditure Method: a system for
calculating GDP that combines
consumption, investment, government
spending, and net exports.
• The Income Method: this measures the
total income that is earned by all the
workers and businesses that produced
goods and services.
• The Product Method: this measures the
total of all the goods and services as they
are produced. 8
 The Expenditure Method

• Total spending in the economy is divided

into four categories.
• GDP= C + I + G + X

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 GDP = C + I + G + X
C = Personal consumption expenditure

Purchases of final goods and services by

households and by non-profit institutions serving
households.

The market prices are used as weights in valuing

different commodities, because in a well-
functioning market economy prices reflect the
relative satisfactions that consumers receive from
each good.
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 GDP = C + I + G + X

• Investment includes:
– Investment in capital (new machines,
factories and other tools that businesses use
to produce goods and services).

– Inventory investment is defined as the change

in inventories (+ increase, - decrease in
inventories).
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 GDP = C + I + G + X
• Gross investment represents additions to the
stock of durable capital goods (buildings,
equipment, inventories) during a year that
increase production possibilities in the future.
• Gross investment is not adjusted for
depreciation.
• Depreciation measures the amount of capital
that has been used up in a year.
• Net investment = gross investment -
depreciation
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 GDP = C + I + G + X

• Government expenditures include

purchases of good and services and all the
government payroll expenditures on its
employees.
• GDP excludes spending on transfer
payments.
• Transfer payments are government
payments to individuals that are not made
in exchange for goods or services supplied.

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 GDP = C + I + G + X

• Net exports is the difference between

exports and imports of goods and services.
(trade deficit/trade surplus)
• Exports: the total value of the goods and
services that people in one country sell to
people in other countries.
• Imports: the total value of the goods and
services that people in one country buy
from people in other countries.

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 Income Method
• Income method includes the incomes
earned by those involved in the production
process (wages, interest, rents and profits)
that are the costs of producing society's
final products.
• GDP = W (wages)
+ R (rents)
+ i (interest)
+ P (profit)
+ Indirect business taxes
+ Depreciation
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 GDP = W + R+i+P
+ Indirect business taxes
+ Depreciation
• Wages, salaries and other employee
supplements include all take-home pay,
fringe benefits.

• Economists classify wages, salaries, and

fringe benefits paid to workers as labour
income.

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 GDP = W + R+i+P
+ Indirect business taxes
+ Depreciation

• Rental payments are income to persons who

own buildings and rent them out. The rents
they receive from their tenants are rental
payments.

• Land rent is paid to landlords by tenants.

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 GDP = W + R+i+P
+ Indirect business taxes
+ Depreciation

• Interest payments are incomes received

from lending.
• Because many economic agents pay interest
as well as they receive interest, interest
payments are defined as the difference
between receipts and payments (net
interest).

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 GDP = W + R+i+P
+ Indirect business taxes
+ Depreciation
• Gross profits include the profits of large
corporations and also of small businesses and
firms.

• There are two kinds of profits:

Profit of corporations

Profit of unincorporated enterprises

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 GDP = W + R+i+P
+ Indirect business taxes
+ Depreciation

• Economists classify rental payments,

interest payments, and gross profits as
capital income

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 GDP = W + R+i+P
+ Indirect business taxes
+ Depreciation
Indirect business taxes must be included as a
separate item in the income method
Capital and labour income do not include indirect
business taxes paid by the businesses to
government.
But those taxes are part of the income generated
in producing GDP.
Therefore we have to add those taxes to capital
and labour income.
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 GDP = W + R+i+P
+ Indirect business taxes
+ Depreciation
• Depreciation on capital goods that were
used up must appear as an expense in GDP,
like other costs.

• The difference between investment, the

purchases of final goods by firms, and
depreciation is called net investment.
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 The Product Method
• The third measure of GDP adds up the
production of each firm or industry in the
economy.

• Using this method we must avoid “double

counting”. Thus when we measure GDP by
production, it is necessary to count only
value added by each manufacturer.
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 Intermediate goods
• Intermediate goods are part of final goods.

• Final goods are goods that undergo no

further processing.

• Intermediate goods are not included in the

GDP in order to avoid distortions resulting
from double counting.

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 Gross National Product
The gross national product (GNP) is the most
comprehensive measure of a nation's total
output of goods and services.

GNP is the total value of all finished goods and

services produced by a country's citizens in a
given financial year, irrespective of their location.
GNP= C+I+G+X+(R-P)
 NNP and NDP

• Net national product = GNP – depreciation

• Net domestic product = GDP – depreciation

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 National Income

• NI represents the total factor income

received by labour, capital and land.

NI equals total wages, profits, rents and

interest.

• NI = GNP – depreciation – indirect taxes

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 Disposable Income
• Personal income = NI - corporate
undistributed profits
- taxes paid by firms
- social insurance
payments
+ benefits (transfer
payments)

• Disposable income represents incomes received by

households. It measures the income that people have
available for spending or saving.
DI = PI – personal taxes
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