Measuring National Output and National Income

CHAPTER 17
Measuring National Output

and National Income
Prepared by: Fernando

Quijano and Yvonn Quijano
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
National Income
and Product Accounts
National income and product

accounts are data collected and
published by the government describing
the various components of national
income and output in the economy.
The Department of Commerce is

responsible for producing and
maintaining the National Income and
Product Accounts that keep track of
GDP.
Gross Domestic Product
Gross domestic product (GDP) is

the total market value of all final
goods and services produced within
a given period by factors of
production located within a country.
Final Goods and Services
The term final goods and services

refers to goods and services
produced for final use.
Intermediate goods are goods

produced by one firm for use in
further processing by another firm.
Value Added
Value added is the difference

between the value of goods as they
leave a stage of production and the
cost of the goods as they entered that
stage.
In calculating GDP, we can either sum up
the value added at each stage of
production, or we can take the value of
final sales. We do not use the value of
total sales in an economy to measure
how much output has been produced.
Value Added
Value Added in the Production of a Gallon of Gasoline

(Hypothetical Numbers)
STAGE OF PRODUCTION VALUE OF SALES VALUE ADDED
(1) Oil drilling $ .50 $ .50
(2) Refining .65 .15
(3) Shipping .80 .15
(4) Retail sale 1.00 .20
Total value added $ 1.00
Exclusions from GDP
GDP ignores all transactions in

which money or goods change
hands but in which no new goods
and services are produced.
GDP Versus GNP
GDP is the value of output produced by

factors of production located within a
country. Output produced by a
countrys citizens, regardless of where
the output is produced, is measured by
gross national product (GNP).
Calculating GDP
GDP can be computed in two ways:

The expenditure approach: A
method of computing GDP that
measures the amount spent on all
final goods during a given period.
The income approach: A method of
computing GDP that measures the
incomewages, rents, interest, and
profitsreceived by all factors of
production in producing final goods.
The Expenditure Approach
Expenditure categories:
Personal consumption expenditures
(C)household spending on consumer
goods.
Gross private domestic investment (I)
spending by firms and households on
new capital: plant, equipment, inventory,
and new residential structures.
Expenditure categories:
Government consumption and

gross investment (G)
Net exports (EX IM)net

spending by the rest of the world, or
exports (EX) minus imports (IM)
The expenditure approach calculates

GDP by adding together these four
components of spending. In equation
form:
G D P C I G (X M )
Personal Consumption Expenditures
Personal consumption expenditures (C)

are expenditures by consumers on the
following:
Durable goods: Goods that last a relatively
long time, such as cars and household
appliances.
Nondurable goods: Goods that are used up
fairly quickly, such as food and clothing.
Services: The things that we buy that do not
involve the production of physical things, such
as legal and medical services and education.
Components of GDP, 1999:
Components of GDP, 1999: The Expenditure Approach
BILLIONS OF PERCENTAGE
DOLLARS OF GDP
Total gross domestic product 9,299.2 100.0
Personal consumption expenditures (C) 6,268.7 67.4
Durable goods 761.3 8.2
Nondurable goods 1,845.5 19.8
Services 3,661.9 39.4
Gross private domestic investment (l) 1,650.1 17.7
Nonresidential 1,203.1 12.9
Residential 403.8 4.3
Change in business inventories 43.3 0.5
Government consumption and gross investment (G) 1,634.4 17.6
Federal 568.6 6.1
State and local 1,065.8 11.5
Net exports (EX IM) 254.0 2.7
Exports (EX) 990.2 10.6
Imports (IM) 1,244.2 13.4
Note: Numbers may not add exactly because of rounding.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
Gross Private Domestic Investment
Investment refers to the purchase of

new capital.
Total investment by the private

sector is called gross private
domestic investment. It includes
the purchase of new housing, plants,
equipment, and inventory by the
private (or non-government) sector.
Gross Private Domestic Investment
Nonresidential investment includes

expenditures by firms for machines, tools,
plants, and so on.
Residential investment includes

expenditures by households and firms on
new houses and apartment buildings.
Change in inventories computes the

amount by which firms inventories change
during a given period. Inventories are the
goods that firms produce now but intend to
sell later.
Gross Investment versus
Net Investment
Gross investment is the total value

of all newly produced capital goods
(plant, equipment, housing, and
inventory) produced in a given period.
Depreciation is the amount by which
an assets value falls in a given
period.
Net investment equals gross
investment minus depreciation.
capitalend of period = capitalbeginning of period + net investment
Government Consumption and
Gross Investment
Government consumption and

gross investment (G) counts
expenditures by federal, state,
and local governments for final
goods and services.
Net Exports
Net exports (EX IM) is the difference

between exports (sales to foreigners of
U.S.-produced goods and services) and
imports (U.S. purchases of goods and
services from abroad). The figure can be
positive or negative.
The Income Approach
National income is the total income

earned by the factors of production
owned by a countrys citizens.
The income approach to GDP breaks
down GDP into four components:
GDP = national income + depreciation + (indirect taxes

subsidies) + net factor payments to the rest of the world
+ other
The Income Approach
Components of GDP, 1999: The Income Approach

BILLIONS OF PERCENTAGE
DOLLARS OF GDP
Gross domestic product 9,299.2 100.0
National income 7,469.7 80.3
Compensation of employees 5,299.8 57.0
Proprietors income 663.5 7.1
Corporate profits 856.0 9.2
Net interest 507.1 5.5
Rental income 143.4 1.5
Depreciation 1,161.0 12.5
Indirect taxes minus subsidies 689.7 7.4
Net factor payments to the rest of the world 11.0 0.1
Other 32.2 0.3
Source: See Table 17.2.
From GDP to Disposable Income
GDP, GNP, NNP, National Income, Personal Income, and Disposable Personal Income,
1999
DOLLARS
(BILLIONS)
GDP 9,299.2
Plus: receipts of factor income from the rest of the world + 305.9
Less: payments of factor income to the rest of the world 316.9
Equals: GNP 9,288.2
Less: depreciation 1,161.0
Equals: net national product (NNP) 8,127.1
Less: indirect taxes minus subsidies plus other 675.5
Equals: national income 7,469.7
Less: corporate profits minus dividends 485.7
Less: social insurance payments 662.1
Plus: personal interest income received from the government and consumers + 456.6
Plus: transfer payments to persons +1,011.0
Equals: personal income 7,789.6
Less: personal taxes 1,152.0
Equals: disposable personal income 6,637.7
Net national product equals gross

national product minus depreciation;
a nations total product minus what is
required to maintain the value of its
capital stock.
Personal income is the total income

of households. Equals (national
income) minus (corporate profits
minus dividends) minus (social
insurance payments) plus (interest
income received from the government
and households).
Personal income is the income
received by households after paying
social insurance taxes but before
paying personal income taxes.
Disposable Personal Income and
Personal Saving
Disposable Personal Income and Personal Saving, 1999
DOLLARS
(BILLIONS)
Disposable personal income 6,637.7
Less:
Personal consumption expenditures 6,268.7
Interest paid by consumers to business 194.8
Personal transfer payments to foreigners 26.6
Equals: personal saving 147.6
Personal savings as a percentage of disposable personal income: 2.2%
Disposable Personal Income and
Personal Saving
The personal saving rate is the

percentage of disposable personal
income that is saved. If the personal
saving rate is low, households are
spending a large amount relative to
their incomes; if it is high,
households are spending cautiously.
Nominal versus Real GDP
Nominal GDP is GDP measured in

current dollars, or the current prices
we pay for things. Nominal GDP
includes all the components of GDP
valued at their current prices.
When a variable is measured in

current dollars, it is described in
nominal terms.
Calculating Real GDP
A weight is the importance attached

to an item within a group of items.
A base year is the year chosen for

the weights in a fixed-weight
procedure.
A fixed-weight procedure uses

weights from a given base year.
Calculating Real GDP
A Three-Good Economy
(1) (2) (3) (4) (5) (6) (7) (8)
GDP IN GDP IN GDP IN GDP IN
YEAR 1 YEAR 2 YEAR 1 YEAR 2
IN IN IN IN
PRODUCTION PRICE PER UNIT YEAR 1 YEAR 1 YEAR 2 YEAR 2
YEAR 1 YEAR 2 YEAR 1 YEAR 2 PRICES PRICES PRICES PRICES
Q1 Q2 P1 P2 P1 x Q1 P1 x Q2 P 2 x Q1 P2 X Q 2
Good A 6 11 $.50 $ .40 $3.00 $5.50 $2.40 $4.40
Good B 7 4 .30 1.00 2.10 1.20 7.00 4.00
Good C 10 12 .70 .90 7.00 8.40 9.00 10.80
Total $12.10 $15.10 $18.40 $19.20
Nominal GDP Nominal GDP
in year 1 in year 2
Calculating the GDP Price Index
The GDP price index is one measure of the

overall price level.
The old procedure used by the Bureau of
Economic Analysis (BEA) to estimate
changes in the overall price level used the
quantities produced in a chosen year (the
base year) as weights. But overall price
increases are sensitive to the choice of the
base year. The new procedure, known as
the chained price index, avoids the
problems associated with the use of fixed
weights.
The Problems of Fixed Weights
The use of fixed price weights to

estimate real GDP leads to problems
because it ignores:
1. Structural changes in the economy.
2. Supply shifts, which cause large

decreases in price and large increases in
quantity supplied.
3. The substitution effect of price increases.
Limitations of the GDP Concept
Society is better off when crime

decreases, but a decrease in crime
is not reflected in GDP.
An increase in leisure is an increase

in social welfare, not counted in
GDP.
Nonmarket and domestic activities

are not counted even though they
amount to real production.
Limitations of the GDP Concept
GDP accounting rules do not adjust

for production that pollutes the
environment.
GDP has nothing to say about the

distribution of output. Redistributive
income policies have no direct
impact on GDP.
GDP is neutral to the kinds of goods

an economy produces.
The Underground Economy
The underground economy is the

part of an economy in which
transactions take place and in which
income is generated that is
unreported and therefore not
counted in GDP.
Per Capita GDP/GNP
Per capita GDP or GNP measures a

countrys GDP or GNP divided by its
population.
Per capita GDP is a better measure

of well-being for the average person
that its total GDP or GNP.
Per Capita GDP/GNP
Per Capita GNP for Selected Countries, 1998
COUNTRY U.S. DOLLARS COUNTRY U.S. DOLLARS
Switzerland 40,080 Portugal 10,690
Norway 34,330 Argentina 8,970
Denmark 33,260 South Korea 7,970
Japan 32,380 Czech Republic 5,040
United States 29,340 Brazil 4,570
Austria 26,850 Mexico 3,970
Germany 25,850 Turkey 3,160
Sweden 25,620 South Africa 2,880
Belgium 25,380 Colombia 2,600
France 24,940 Jordan 1,520
Netherlands 24,760 Romania 1,390
Finland 24,110 Philippines 1,050
United Kingdom 21,400 China 750
Australia 20,300 Indonesia 680
Italy 20,250 Pakistan 480
Canada 20,020 India 430
Ireland 18,340 Rwanda 230
Israel 15,940 Nepal 210
Spain 14,080 Ethiopia 100
Greece 11,650
Source: The World Bank Atlas, 2000.

Measuring National Output and National Income

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CHAPTER 17

Measuring National Output

Prepared by: Fernando

National income and product

The Department of Commerce is

Gross domestic product (GDP) is

The term final goods and services

Intermediate goods are goods

Value added is the difference

Value Added in the Production of a Gallon of Gasoline

GDP ignores all transactions in

GDP is the value of output produced by

GDP can be computed in two ways:

Government consumption and

Net exports (EX IM)net

The expenditure approach calculates

Personal consumption expenditures (C)

Investment refers to the purchase of

Total investment by the private

Nonresidential investment includes

Residential investment includes

Change in inventories computes the

Gross investment is the total value

Government consumption and

Net exports (EX IM) is the difference

National income is the total income

GDP = national income + depreciation + (indirect taxes

Components of GDP, 1999: The Income Approach

Net national product equals gross

Personal income is the total income

The personal saving rate is the

Nominal GDP is GDP measured in

When a variable is measured in

A weight is the importance attached

A base year is the year chosen for

A fixed-weight procedure uses

The GDP price index is one measure of the

The use of fixed price weights to

2. Supply shifts, which cause large

3. The substitution effect of price increases.

Society is better off when crime

An increase in leisure is an increase

Nonmarket and domestic activities

GDP accounting rules do not adjust

GDP has nothing to say about the

GDP is neutral to the kinds of goods

The underground economy is the

Per capita GDP or GNP measures a

Per capita GDP is a better measure

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