Chapter 2 Measuring National Income and Output

CHAPTER
2
MEASURING NATIONAL INCOME AND
OUTPUT
LEARNING OUTCOMES
At the end of this chapter, you should be able to:

 Identify the concepts of measuring national income
 Measure national income by using the three approaches
 Distinguish between personal income and disposable
income
 Distinguish between nominal income, real income, per
capita income, and growth rate
 Describe the uses of national income statistics
 Elaborate on the problems in measuring national income
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COMPONENTS OF
MACROECONOMICS

Sectors in the economy
 Household -private sector

 Business/Firm -private sector
 Government -public sector
 Foreign -international sector

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Sectors in the economy (cont’d)
1. Households sector
 The main sector in the economy .

 Own factors of production
 Buy goods and services
 Will affect the level of output in the
economy

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2. Firms sector
Production and productive sector
Utilize factor of production.
Offer or sell goods and services
The level of investment affects economic activities
Increase in investment increases in output,
therefore increase total income.

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3.Government sector
 Consumes and also produces goods
and services
 Influences in stabilizing the economy
through policy, rules, regulation,
political intervention, etc.
 Collect taxes.
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4. Foreign sector
Other countries in the world.
Having economic relationship with
them means the nation has an open
economy.
Activities involve exports and imports
of goods and services.
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CONCEPTS OF NATIONAL INCOME

CONCEPTS OF NATIONAL INCOME
(cont.)
Market Price Factor Cost

 Market price refers to the  Factor cost is the price of
current price in the output that is valued
market through the forces based on the cost of
of demand and supply. factors of production.
 Market prices are the  Therefore, factor cost is
actual price paid by the known as actual price
consumers. earned by producers or
sellers.

METHODS OF MEASURING INCOME
 The accurate meaning of national income is commonly

referred to as the concepts of gross domestic product
(GDP).
 GDP is the total market value of all final goods and
services produced within a given period of time by
factors of production located within a country.
 The GDP can be computed in three ways:
• Income approach
• Expenditure approach
• Product or Output approach
(cont.)
 Since the income approach, expenditure approach

and product approach are the three methods of
measuring the same thing, they must thus be
identical.
 This can be expressed as accounting identity:

(cont.)
Expenditure Approach
Expenditure approach measures national income by looking
at the GDP from the perspectives of total spending on the
final goods and services.

(cont.)

(cont.)
Output Approach
Under Output or Product or Value Added Approach, national
income is measured by adding up the net value of all the
goods and services produced in the country, sector by sector
during a year.

Examples of Output/Product
Approach

NOMINAL INCOME VS REAL
INCOME
Nominal Income Real Income

 Nominal income is the  Real income refers to the
national income that is national income that is
measured in the current measured at a constant
price or in a base year.
price level.  By comparing the value
 Any change in nominal of production in the two
income reflects the years at the same prices,
combined effects of the changes in real
income reflects only the
change in quantity and changes in real output.
change in price level.

Formula:
 Real Income = CPI base year x Nominal Income

CPI current year
 Real GDP = CPI base year x Nominal GDP

CPI current year
 Real GNP = CPI base year x Nominal GNP

CPI current year

NOMINAL INCOME VS REAL
INCOME (cont.)
Growth Rate
Growth rate is the percentage change in quantity of
goods and services produced from one to another.

USES OF NATIONAL INCOME
(1) Standard of living indicators

Standard of living reflects the individuals’ welfare because
it shows how much goods and services can be consumed by
each individual in a country. It can be measured by GDP per
capita.
(2) Government planning and policies

The available statistics of national income can guide the
policy makers in planning for the future. From the national
income data, the government can view the historical trends
and performance of economic sectors.

USES OF NATIONAL INCOME (cont.)
(3) Sectoral contributions

An economy consists of various economic activities. Hence,
with the available statistics of national income data, the study of
the economic sectors can tell us the relative importance of
various parts of the economy and whether these change with
time relatively. It is also useful in the context of the analysis of
specific problems of an economy.
(4) International comparisons

With the national income statistics, we not only can compare
the absolute size of one economy relative to another, but
compare how well-off the average individual is in each country.

PROBLEMS OF MEASURING
NATIONAL INCOME
(1) Problems of non-monetized sector

The existence of a large number of non-monetized activities
in these countries, especially in the agricultural sector makes
the computation of the national income more difficult.
(2) Underground economy

Official GDP estimates may not take into account the
underground economy, in which transactions contributing to
production, such as illegal trade and tax-avoiding activities,
are unreported, causing GDP to be underestimated.

PROBLEMS OF MEASURING
NATIONAL INCOME (cont.)
(3) Non-market transactions
There are many productive works done in the economy but they are
not paid. Food grown in backyard plots, home repairs, clothes made
at home, and any other do-it-yourself goods and services that people
make or do for themselves, their families or their friends are not
counted in GDP.
(4) Problems of expertise and modern machinery

The lack of professionals such as statisticians, researchers,
programmers and analysts is a major problem in third world countries.
(5) Problems of double counting

Double counting in national income will appear when both values of
final goods and intermediate goods are included.


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CHAPTER

At the end of this chapter, you should be able to:

Fundamentals of Economics All Rights Reserved

Fundamentals of Economics All Rights Reserved

 Household -private sector

Fundamentals of Economics All Rights Reserved

 The main sector in the economy .

Fundamentals of Economics All Rights Reserved

Fundamentals of Economics All Rights Reserved

Fundamentals of Economics All Rights Reserved

Market Price Factor Cost

Fundamentals of Economics All Rights Reserved

 The accurate meaning of national income is commonly

 Since the income approach, expenditure approach

Fundamentals of Economics All Rights Reserved

Fundamentals of Economics All Rights Reserved

Fundamentals of Economics All Rights Reserved

Fundamentals of Economics All Rights Reserved

Fundamentals of Economics All Rights Reserved

Nominal Income Real Income

Fundamentals of Economics All Rights Reserved

 Real Income = CPI base year x Nominal Income

 Real GDP = CPI base year x Nominal GDP

 Real GNP = CPI base year x Nominal GNP

Fundamentals of Economics All Rights Reserved

Fundamentals of Economics All Rights Reserved

(1) Standard of living indicators

(2) Government planning and policies

Fundamentals of Economics All Rights Reserved

(3) Sectoral contributions

(4) International comparisons

Fundamentals of Economics All Rights Reserved

(1) Problems of non-monetized sector

(2) Underground economy

Fundamentals of Economics All Rights Reserved

(4) Problems of expertise and modern machinery

(5) Problems of double counting

Fundamentals of Economics All Rights Reserved

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