GDP: National Income Framework

GDP & GNP

GDP : is the sum of value of all final goods and services

produced in an economy at current market prices, during one

year using domestic resources.

GNP : GDP -Net factor income (inflow or outflow).

Y =C + I +G+( X −M )

Or

Y =C + I +G+ NX( Net exp orts )

Where Y is real GDP, C is private consumption, I stands for

private investment, G is direct government expenditure, X

stands for exports and M is imports.

↑ C=C(Y )↑
d
Private consumption directly depends on

disposable income. Where Y d =Y −Taxes+Transfers( subsidies)

↓ I =I (r) ↑, Private investment inversely depends on interest

rate.

G :government taxes(income tax),government transfers ,and direct Ḡ :

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Government plays three roles in national economy’s

working.

1. Impose and collects taxes (direct, indirect, corporate etc).

2. Provide subsidies or transfers in the form of pensions,

scholarships, etc.

3. Directly build some public sector project for example,

construct roads/highways, railways, dam, schools hospitals

or parks etc.

X =X (Y , X p , M p , ER ) : Exports depend on real GDP, export

prices in international markets, import prices in international

markets and exchange rate of local currency with

international currencies.

M=M (Y , X p , M p , ER ) : Imports depend on real GDP, export

prices in international markets, import prices in international

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 markets and exchange rate of local currency with

international currencies.

Y =C + I +G Closed economy model (GDP concept).

Y =C + I +G+( X −M ) Open economy model (GNP concept).

Income side of GDP=Real GDP=Expenditure side of GDP

C+ S +G+( X −M )=Y =C+ I +G+( X−M )

To have above equality S=I must hold.

So the logically there are three sides of GDP and three methods

to calculate GDP:

1. Real GDP, output method, commonly known as value added

method.

2. Expenditure side, expenditure method.

3. Income side, income method.

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Relevant question: Why business managers should have

knowledge about national economy (macro) and implications of

different policies on their business organization.