National income accounting

Gross domestic product, GDP

References
 Froyen R. T. (2005), “Macroeconomics:
Theories and Policies” , Pearson
Education, Inc.
 CSO (2012), “National Accounts Statistics
Sources and Methods, 2012,”
http://mospi.nic.in/Mospi_New/upload/so
urces_method_2012.pdf
 Economic Survey 2012-13,
http://indiabudget.nic.in/survey.asp
 The Circular-Flow Diagram: is a model that
represents the transactions in an economy by flows
around a circle
 Circular-Flow of Economic
Activities

A household is a person or a group of people that share their

income.

A firm is an organization that produces goods and services for

sale.

Firmssell goods and services that they produce to households

in markets for goods and services.

Firmsbuy the resources they need to produce—factors of

production—in factor markets.
 The Circular Flow

Wages, rents,
interest, profits

Factor services

Goods
Household t Firms
n n
me (production)
v er
Taxes Government Go ending
Savin Sp tm e nt
gs Financial markets Inves
Imp
orts Personal consumption rt s
Ex po
Other countries

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Gross Domestic Product
 Expenditure approach
 Market value of all final goods and
services produced in an economy in a
particular period of time
 Income approach
 Payments to owners of resources used
to produce aggregate output
Market value
 Find total expenditure on each good
and service as Price x Quantity sold
 Sum all of these
 Note: only includes goods and
services exchanged in a market.
Does not include household
production, e.g. garden veggies,
home haircuts
 Final goods

 Only includes value of final goods and services

sold, i.e. sold to the final consumer
 Does not include value of intermediary goods
or services, those that are processed further
and sold again, e.g. what goes into a T-shirt
that you buy i.e. cotton, cloth made from
cotton, plain white T-shirt made from the cloth
 The value added by intermediary goods is
included in the price of the final good, i.e. the
price of your T-shirt includes the value of the
cotton and other intermediary goods that went
into its production
 If intermediary goods were included we would
be double counting their value!
Produced goods and service
 Only includes the value of goods
and services produced during the
given period of time.
 Goods produced but not yet sold are
accounted for as changes in
business inventories
 Sales of previously produced goods
are not counted
Expenditure approach to GDP
 GDP is divided into four aggregates
 Personal consumption, C
 Investment, I
 Government purchases, G
 Net exports, X - M

 GDP = C + I + G + (X-M)
Gross Domestic Product, 2004
 Gross domestic product (in Rs
Core) = 5603321
 C = 3334900
 I = 1,928.1
 G = 634559
 X-M = 1379225 – 1877196 =- 497972
Personal consumption, C
 Personal consumption expenditures
 Durable goods
 Nondurable goods
 Services
 Investment, gross private domestic
 Gross private domestic investment
 Fixed investment
 Change in business inventories
Government purchases

 Government consumption expenditures and

gross investment
 Central
 State and local
Net exports
Net exports of goods and services
Exports
Imports
Net Domestic Product
Net Domestic Product, NDP = GDP – depreciation

Depreciation = if a thing is going out of expiry date

then no one will buy that one.

Depreciation is value of the capital stock “used up” each

year, i.e. worn out and/or obsolete.

Net Investment = Gross investment – depreciation

Example:

GDP = 5603321
Depreciation = 624772
NDP = 4978548
Net investment = 1507066
Green GDP
 Accounts for depletion of natural and
environmental resources, in addition to
depreciation of physical capital
 Green GDP = GDP – depreciation of fixed
capital – depletion of natural and
environmental resources
 Evaluation of depletion is difficult because
many of these are public goods or unowned
and therefore are not marketed, do not have a
market price
Disposable income
 Disposable income, DI is income
available to households after paying
taxes and receiving transfer
payments
 Net taxes, NT = taxes - transfers

_____
Disposable income
 DI = GDP – (taxes – transfers) =
GDP – NT
 = 5603321 – (605506-217709)
Nominal versus Real GDP
 Changes in prices affect GDP
overtime
 As prices increase, nominal GDP will
increase even if aggregate output
has not
 Gives appearance of economic
growth when there is none
Nominal versus Real GDP
We will from now on distinguish between
nominal GDP and real GDP:
 Nominal GDP - GDP based on prices
prevailing at the time of the transaction;
also known as current-dollar GDP
 Real GDP - The economy's aggregate
output measured in dollars of constant
purchasing power, i.e. adjusted for
changes in prices
Nominal versus Real GDP
 Nominal GDP is converted to Real
GDP using a price index
 Price index - A number that shows
the average price of a market
basket of goods
Nominal versus Real GDP
 Price index is created by comparing
the price of the basket in each year
to the price of the basket in a base
year
 Base year - The year with which
other years are compared when
constructing an index; the index
equals 100 in the base year
Nominal versus Real GDP
 Using the price index to “deflate”
nominal GDP values:

 Real GDP = Nominal GDP/(price

index/100)
Comparing real GDP- adjusting for
differing populations

 Economies with larger populations

naturally tend to have higher GDPs,
e.g. China, India, Brazil
 The standard of living depends not
upon how much stuff but on how
much stuff there is per person
Real GDP per capita
 Per capita = per person
 Real GDP per capita = real
GDP/population
 if real GDP = 12 trillion and population =
300 million,
 then Real GDP per capita = 12 trillion/300

million = 40,000
Comparing real GDP
 To compare real GDP among
different economies, the values for
GDP must be in a common unit of
account
 The US $ is most frequently used as
a common unit of account
Comparing real GDP- adjusting for
differing populations

 Economies with larger populations

naturally tend to have higher GDPs,
e.g. China, India, Brazil
 The standard of living depends not
upon how much stuff but on how
much stuff there is per person
Summary
1. Nominal GDP = C + I + G + (X-M)
2. NDP = GDP – depreciation
3. Green GDP = GDP – depreciation of fixed
capital – depletion of natural and
environmental resources
4. Net taxes = taxes – transfers
5. DI = GDP – Net taxes
6. Real GDP = Nominal GDP/(GDP
deflator/100)
7. Real GDP per capita = real
GDP/population