Measuring A Nation's Income

Measuring a Nation’s Income
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
GVA in 2018-19 (Rupees in Crore)
Sector
Constant share Current share
prices (%) prices (%)
1 Primary Sector 2,228,008 17.39 % 3,149,734 18.57 %

1.1 Agriculture,forestry & fishing 1,842,873 14.39 % 2,692,433 15.87 %
1.2 Mining & quarrying 385,135 3.01 % 457,301 2.70 %
2 Secondary Sector 3,644,647 28.45 % 4,585,286 27.03 %
2.1 Manufacturing 2,346,216 18.32 % 2,853,986 16.83 %
Electricity, gas, water supply &
2.2 287,109 2.24 % 452,683 2.67 %
other utility services
2.3 Construction 1,011,322 7.90 % 1,278,617 7.54 %
3 Tertiary Sector 6,936,122 54.15 % 9,226,346 54.40 %
Trade, hotels, transport,
3.1 communication and services 2,467,622 19.27 % 3,157,709 18.62 %
related to broadcasting
Financial, real estate & prof
3.2 2,775,970 21.67 % 3,555,780 20.96 %
servs
Public Administration, defence
3.3 1,692,530 13.21 % 2,512,857 14.82 %
and other services
GVA at basic prices 12,808,778 100.00 % 16,961,365 100.00 %

 $2.972 trillion (nominal; 2019 est.)[3]
GDP  $11.468 trillion (PPP; 2019 est.)[3]
GDP rank  7th (nominal; 2018)

 3rd (PPP; 2018)
 6.8% (FY 2019)[4]
GDP growth  7.1% (16/17) 6.7% (17/18)
 7.3% (18/19e) 7.5% (19/20f)[5]
GDP per capita  $2,199 (nominal; 2019 est.)[3]

 $8,484 (PPP; 2019 est.)[3]
GDP per capita rank  142nd (nominal; 2018)

 119th (PPP; 2018)
Macroeconomics
 is the study of the economy as a whole.
 Its goal is to explain the economic changes that
affect many households, firms, and markets at
once.
 answers questions like the following:
 Why is average income high in some countries
and low in others?
 Why do prices rise rapidly in some time periods
while they are more stable in others?
 Why do production and employment expand in
some years and contract in others?
Macroeconomic Concerns
 Three of the major concerns of

macroeconomics are:
 Inflation
 Unemployment
 Output growth
Output Growth:
Short Run and Long Run
 The business cycle is the cycle of short-term

ups and downs in the economy.
 The main measure of how an economy is
doing is aggregate output:
 Aggregate output is the total quantity of goods
and services produced in an economy in a given
period (GDP).
Output Growth: Short Run and Long Run
 A recession is a period during which aggregate output declines. Two

consecutive quarters of decrease in output signal a recession.
 A prolonged and deep recession becomes a depression.
 Policy makers attempt not only to smooth fluctuations in output
during a business cycle but also to increase the growth rate of output
in the long-run.
The Economy’s
Income and Expenditure
When judging whether the economy is

doing well or poorly, it is natural to
look at the total income that everyone
in the economy is earning.
The Economy’s
Income and Expenditure
 For an economy as a whole, income must
equal expenditure because:
 Every transaction has a buyer and a
seller.
 Every dollar of spending by some buyer is
a dollar of income for some seller.

 The equality of income and expenditure can be
illustrated with the circular-flow diagram.
The Circular-Flow Diagram
Revenue Spending
Market for
Goods
Goods & Goods &
Services sold and Services
Services
bought
Firms
Households
Inputs for Labor, land,

production Market for and capital
Factors
Wages, rent, of Production Income
and profit
The Circular Flow of Income and
Expenditure
X-M
X-M
consumption
consumption(C)
(C)
Investment
Investment(I)
(I)
Financial
markets
SS Gov’t C+I+G+X-M
Gov’t(G)
(G)
transfer
transferpayments
payments aggregate
aggregateincome
income
taxes ==GDP
GDP
Disposable taxes
Disposableincome
income
An Overview of National Income and
Product Accounting (NIPA)
 Detailed calculations were first worked out by
Simon Kuznets during the Great Depression
 Large quantities of data collected and organized
from a variety of sources around the country
 These data are summarized, assembled into a
coherent framework, and reported by the
government
 Gross domestic product (GDP) is a measure of the
income and expenditures of an economy.
Gross domestic product
 GDP is the market value of all final goods and
services produced within a country in a given
period of time.
 GDP = C + I + G + (X- M)
where: C = Consumption expenditure G = government
expenditure I = investment expenditure X = exports M =
imports
Net domestic product is the GDP minus losses
from depreciation.
NDP = GDP – D
Depreciation is the wear and tear on the economy’s
stock of equipment and structures.
Categories of Expenditures
 Consumption (C)
 All household purchases - Durable goods, Nondurable goods,
Services
 Investment (I)
 Total investment by the private sector is called gross private
domestic investment. Purchases not used for current consumption -
purchase of new housing, plants, equipment, and inventory by the
private sector.
 Government Purchases (G)
 Government consumption and gross investment (G) counts
expenditures by center, state, and local govt. for final goods
and services.
 Examples include missile systems and paper clips
 Net Exports (X - M)
 Net exports = exports (X) - imports (M)
The Measurement of GDP
 Output is valued at market prices.
 It records only the value of final goods, not intermediate
goods (the value is counted only once).
 It includes both tangible goods (food, clothing, cars) and
intangible services (haircuts, housecleaning, doctor visits).
 It includes goods and services currently produced, not
transactions involving goods produced in the past.
 It measures the value of production within the geographic
confines of a country.
 It measures the value of production that takes place within
a specific interval of time, usually a year or a quarter
(three months).
What Is Counted in GDP? GDP includes
all items produced in the economy and
sold legally in markets.
What Is Not Counted in GDP? GDP

excludes most items that are produced
and consumed at home and that never
enter the marketplace.
It excludes items produced and sold
illicitly, such as illegal drugs.
Other Measures of Income
 Gross National Product (GNP)

 Net National Product (NNP)
 National Income
 Personal Income
 Disposable Personal Income
Gross National Product
 Gross national product (GNP) is the total
income earned by a nation’s permanent
residents (called nationals).
GNP = C + I + G + (X- M) + (R-P)
 It differs from GDP by including income that
our citizens earn abroad and excluding income
that foreigners earn here.
Net National Product (NNP)
 Net National Product (NNP) is the total
income of the nation’s residents (GNP)
minus losses from depreciation.
NNP = GNP - D
 Depreciation is the wear and tear on
the economy’s stock of equipment and
structures.
National Income
 National Income is the total income earned by
a nation’s residents in the production of goods
and services.
 It differs from NNP by excluding indirect
business taxes (such as sales taxes) and
including business subsidies.
 NI= NDP – IT + S +NFIA
Personal Income
 Personal income is the income that
households and noncorporate businesses
receive.
 Unlike national income, it excludes retained
earnings, which is income that corporations
have earned but have not paid out to their
owners.
 In addition, it includes household’s interest
income and government transfers.
Personal Income
 Personal income (PI): Income received

by households before payment of
personal taxes
PI  NI  indirect business taxes  corporate profits
interest and misc payments
 Social Security taxes
transfer payments  capital income
Disposable Personal Income
 Disposable personal income is the income that
household and noncorporate businesses have left after
satisfying all their obligations to the government. It
equals personal income minus personal taxes and
certain nontax payments.
DI  personal income – personal taxes

Saving: That part of disposable income not spent on
current consumption; disposable income less consumption
All disposable income is either consumed or saved
DI  consumption  saving
Output = Income
Value of Output Value of Income
Consumer spending Wages
Investment spending Rent

Prod
Government spending
uct Interest
Net exports mar Profits
ket
Real versus Nominal GDP
 Nominal GDP values the production of

goods and services at current prices.
 Real GDP values the production of
goods and services at constant prices.
Measuring Economic Growth
 We use real GDP to calculate the economic
growth rate.
 The economic growth rate is the percentage
change in the quantity of goods and services
produced from one year to the next.
 We measure economic growth so we can make:
 Economic welfare comparisons
 International welfare comparisons
 Business cycle forecasts - Real GDP is used to
measure business cycle fluctuations.
Real versus Nominal GDP
 Nominal GDP values the production of

goods and services at current prices.
 Real GDP values the production of
goods and services at constant prices.
Computing Real GDP
 Inflation: An increase in the average level

of prices of goods and services
 Inflation tends to obscure actual declines in
real output
 Base year: The year used for
comparative analysis; the basis for
indexing price changes
Real GDP and the Price Level
Deflating the GDP Balloon
Nominal GDP increases because production—real GDP–
increases.
 Nominal GDP also increases because prices rise.
 Deflating the GDP Balloon
 We use the GDP Deflator to take the air out of

Nominal GDP.
Computing Real GDP
2005 2006
1. Nominal GDP (in billions)
$12,456 $13,245
2. Change in nominal GDP
+ $789
3. Change in the price level, 2005 to 2006
3.30%
4. Real GDP in 2005 dollars
$12,456 $12,822  $13,245
103.3
100
5. Change in real GDP
+ $366
Real GDP is the inflation-adjusted value of nominal GDP.
Changes in GDP: Nominal Versus
Real
Increases in
nominal GDP
reflect higher
prices as well as
more output.
Increases in real
GDP reflect more
output only.
GDP Deflator
 An accurate view of the economy requires
adjusting nominal to real GDP by using the
GDP deflator.
 The GDP deflator measures the current level
of prices relative to the level of prices in the
base year.
 It tells us the rise in nominal GDP that is
attributable to a rise in prices rather than a
rise in the quantities produced.
The GDP deflator is calculated as follows:
Nominal GDP
GDP deflator =  100
Real GDP
Nominal GDP is converted to real GDP as follows:
(Nominal GDP20xx )
Real GDP20xx = X 100
(GDP deflator20xx )
Real and Nominal GDP
Price of Quantity of Price of Quantity of
Year Hot dogs Hot dogs Hamburgers Hamburgers
2001 $1 100 $2 50
2002 $2 150 $3 100
2003 $3 200 $4 150
Calculating Nominal GDP:

2001 ($1 per hot dog x 100 hot dogs) + ($2 per hamburger x 50 hamburgers) = $200
Calculating Real GDP (base year 2001):

Real and Nominal GDP
Calculating the GDP Deflator:

2001 ($200/$200) x 100 = 100
2002 ($600/$350) x 100 = 171
2003 ($1200/$500) x 100 = 240
GDP Deflator in India increased to 134.80 Index Points in
2019 from 129.70 Index Points in 2018. GDP Deflator in
India averaged 119.53 Index Points from 2005 until 2019,
reaching an all time high of 146.50 Index Points in 2011 and
a record low of 100 Index Points in 2005
GDP and Economic Well-Being
 GDP is the best single measure of the economic well-being of a society.
 GDP per person tells us the income and expenditure of the average person in the economy.
 Higher GDP per person indicates a higher standard of living.
 GDP is not a perfect measure of the happiness or quality of life, however.
 Some things that contribute to well-being are not included in GDP.
 The value of leisure.
 The value of a clean environment.
 The value of almost all activity that takes place outside of markets, such
as the value of the time parents spend with their children and the value
of volunteer work.
GDP, Life Expectancy, and Literacy
Country Real GDP per Life Adult
Person (1997) Expectancy Literacy
United States $29,010 77 years 99%
Japan 24,070 80 99
Germany 21,260 77 99
Mexico 8,370 72 90
Brazil 6,480 67 84
Russia 4,370 67 99
Indonesia 3,490 65 85
China 3,130 70 83
India 1,670 63 53
Pakistan 1,560 64 41
Bangladesh 1,050 58 39
Nigeria 920 50 59

Measuring A Nation's Income

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Measuring a Nation’s Income

1 Primary Sector 2,228,008 17.39 % 3,149,734 18.57 %

GVA at basic prices 12,808,778 100.00 % 16,961,365 100.00 %

GDP rank  7th (nominal; 2018)

GDP per capita  $2,199 (nominal; 2019 est.)[3]

GDP per capita rank  142nd (nominal; 2018)

 Three of the major concerns of

 The business cycle is the cycle of short-term

 A recession is a period during which aggregate output declines. Two

When judging whether the economy is

a dollar of income for some seller.

Inputs for Labor, land,

What Is Not Counted in GDP? GDP

 Gross National Product (GNP)

 Personal income (PI): Income received

DI  personal income – personal taxes

Investment spending Rent

Net exports mar Profits

 Nominal GDP values the production of

 Nominal GDP values the production of

 Inflation: An increase in the average level

 Deflating the GDP Balloon

 We use the GDP Deflator to take the air out of

Real GDP is the inflation-adjusted value of nominal GDP.

Nominal GDP is converted to real GDP as follows:

Calculating Nominal GDP:

Calculating Real GDP (base year 2001):

Calculating the GDP Deflator:

 The value of a clean environment.

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