Measuring National Output and National Income: Prepared By: Fernando Quijano and Yvonn Quijano

CHAPTER 6
Measuring National Output

and National Income
Prepared by: Fernando Quijano

and Yvonn Quijano
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
Gross Domestic Product (GDP)
C H A P T E R 6: Measuring National Output and National Income
• Is the most important concept in

macroeconomics, because it measure the total
value of goods and services produced in the
country.
• GDP is part of the national income and
product accounts or national account.
• GDP is useful in determining whether the
economy is expanding or contracting. GDP
give an overall picture of the state of the
economy.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 2 of 38
Gross Domestic Product
• What is the GDP?
• (GDP) is the total market value of all final

goods and services produced within a nation
during a given year, by factors of production
located within a country.
• Therefore GDP is very important in

measuring the overall performance of the
economy.
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 U.S. Department of Commerce is

responsible for producing and maintaining
the “National Income and Product
Accounts” that keep track of GDP.
Tow measures of national product
How do economist measure GDP?

GDP can be measured in two entirely

independent ways.
• The expenditure approach: A method of
computing GDP that measures the total
amount spent on all final goods during a given
period.
• National accountants use market prices as
weights in valuing different commodities
because market prices reflect the relative
economic of diverse goods and services.
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 the four
components of spending. In
equation form:
G D P  C  I  G  ( E X  IM )
Components of GDP, 1999:
Components of GDP, 2002: The Expenditure Approach

BILLIONS OF PERCENTAGE
DOLLARS OF GDP
Personal consumption expenditures (C) 7303.7 69.9
Durable goods 871.9 8.3
Nondurable goods 2115.0 20.2
Services 4316.8 41.3
Gross private domestic investment (l) 1543.2 14.8
Nonresidential 1117.4 10.7
Residential 471.9 4.5
Change in business inventories 3.9 0
Government consumption and gross investment (G) 1972.9 18.9
Federal 693.7 6.6
State and local 1279.2 12.2
Net exports (EX – IM)  423.6  4.1
Exports (EX) 1014.9 9.8
Imports (IM) 1438.5 13.8
Total gross domestic product (GDP) 10446.2 100.0
Note: Numbers may not add exactly because of rounding.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
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
appliances.
• Nondurable goods: Goods that are used
up fairly quickly, such as food and clothing.
• Services: Things that do not involve the
production of physical things, such as legal
services, medical services, and education.
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 sector.
• 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.
• Remember that GDP is not the market value of

total sales during a period—it is the market
value of total production.
• Change in business inventories is the amount by

which firms’ inventories change during a period.
• Inventories are the goods that firms produce now but

intend to sell later
GDP = Final sales + change in business inventories
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
asset’s value falls in a given period.
• Net investment equals gross investment
minus depreciation.
capitalend of period = capitalbeginning of period + net investment
Gross Investment
• Positive net investment means that the

amount of new capital produced exceed the
amount that wears out (depreciated)
• Negative net investment means that the
amount of new capital produced less than the
amount that wears out (depreciated)
• GDP includes newly produced capital goods but
doesn’t take account the depreciation of the
assets
Gross Investment
• If the net investment was positive this

means the capital stock has increased
• If the net investment was negative this

means the capital stock has decreased
Capital Stock end of period = capital Stock beginning of period + net investment
Net investment = Capital Stock end of period - capital Stock beginning of period
Government Consumption
and Gross Investment
• Government consumption and gross investment (G)

counts expenditures by federal, state, and local
governments for final goods and services.
• Sometimes the government expenditures are calculated

as a consumption and sometimes as a gross investment
Government Consumption
and Gross Investment
• Government transfers like (Social security, benefits, veterans

disability, …etc) are not included in the (G) because these transfers are
not purchased to of anything currently produced.
• The interest payments on the government debts are also counted

as transfers, so they will be excluded from the GDP because they
aren’t paid for producing current goods or services.
Net Exports
• Net exports (EX – IM) is the difference

between exports and imports. The figure can
be positive or negative.
are sales to foreigners of U.S.-
• Exports (EX)
produced goods and services.
• Imports (IM) are U.S. purchases of goods
and services from abroad).
The Income or cost Approach
•The income approach: is a method of

computing GDP that measures the income—
wages, rents, interest, and profits—received by
all factors of production in producing final
goods.
•National income is the total income earned by

factors of production owned by a country's
citizens.
The income approach to GDP break down GDP

into five main components:
1.National income
2.Depreciation
3.Indirect taxes minus subsidies
4.Net factors payments to the rest of the world
5.others
GDP = national income +

depreciation + (indirect taxes –
subsidies) + net factor payments to
the rest of the world + other
•National income: is sum of the following five

items:
1.Compensation of employees
2.Proprietors income
3.Corporate profits
4.Net interests
5.Rental income
•Compensation of employees: is the largest one

of the five items where it includes the following:
1.Wages
2.Salaries paid to households by firms and
government
3.Contributions that employers make to social
insurance and private pensions funds.
•Proprietors’ income: is the income of

unincorporated business. (‫لفردية‬--‫لا‬--‫ألعما‬--‫لكينل‬--‫لما‬--‫)دخلا‬
•Corporate profits: are the income of corporate

business (‫لتجارية‬--‫لشركاتا‬--‫)دخلا‬
•Net interest: is the interest paid by business.

(interests paid by the government and households
isn’t counted in GDP because it’s not assumed to
flow from the production of goods and services.
•Rental’ income: is the income received by the

property owners in the forms of rent
•Depreciation : it occurs when the capital assets

wear out, they decline in value. That decreased in
the value is called a depreciation.
•This depreciation is part of GDP in the income
approach.
•Indirect taxes and subsidies
The indirect taxes like:

1.Sales taxes
2.Costumes taxes
3.License fees
•The subsidies: are payments made by the

government for which it received no goods or
services in return.
•These subsidies are (subtracted )from National

Income to get GDP
•Example for subsidies:
Farmers/ receive subsidies from the government

s. these subsidies payment to farmers are income
to farmers and thus part of the national income,
but they don’t come from the sale of agricultural
products. So, they aren’t part of the GDP.
•Net factor payments to the rest of the world
= (The payments of factors income to the rest of

the world ) ‫ ( ـــــــ‬receipts of factors income from
the rest of the world)
Others: It includes business

transfer payments.
Who Gets the Income?
• The income that flows to the private sector is the national income
• National Income = ( Net National Product ‫ ــــــــ‬indirect taxes)
• To measure national income, economists must make three

adjustments to gross domestic product (GDP).
• The three adjustments to GDP are as follows:
GNP = GDP + Receipts of factor income from the rest of the world - payments of
factor income to the rest of the world
Net National Product (NNP) = GNP - Depreciation
National Income (NI) = NNP – Indirect taxes
GDP = National Income + Depreciation + Indirect

taxes – subsidies + Net factor payments to the
rest of the world + Others
The Income Approach
Components of GDP, 2002: The Income Approach

BILLIONS OF PERCENTAGE
DOLLARS OF GDP
National income 8,199.9 80.3
Compensation of employees 6,010.0 58.9
Proprietors’ income ‫لصغيرة‬--‫لا‬--‫ألعما‬--‫صحابا‬-‫دخلأ‬ 943.5 7.3
Corporate profits 748.9 7.3
Net interest 554.8 5.4
Rental income 142.7 1.4
+ Depreciation 1,351.3 13.2
+Indirect taxes minus subsidies 739.4 7.2
+Net factor payments to the rest of the world 11.1 0.1
+Other  96.1  0.9
Gross domestic product 10,205.6 100.0
Source: See Table 18.2.
Final Goods and Services
• A final product is one that is sold for consumption purposes

or is an investment good. The point here is that the product
is not changed or modified and sold again to someone else.
• The product has reached its final stage and is now being
used either as a consumption good or a piece of capital
equipment.
• A final products : Either the final goods for consumption

purpose or a piece of capital equipment
Intermediate goods
• Intermediate goods are goods produced by one firm

for use in further processing by another firm.
• Intermediate goods are not added separately in

order to avoid double counting. Double counting can
also be avoided by adding up national income using
the value added approach.
Value Added
• Value added :
• Value added is the difference between a firm’s total

revenue and what it pays other firms for intermediate
goods.
Value Added = Total revenues – payments to other

firms for intermediate goods.
• Value added includes wages and salaries, rent,

interest, and profits.
Value Added
• Value added during some stage of production is: the different between
the value of goods of production in this stage and the value of goods of
production in the next stage
• Value added : 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.
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 ‫حفر‬ $ .50 $ .50

(2) Refining ‫نقية‬---‫ت‬ .65 .15
(3) Shipping‫حن‬--‫ش‬ .80 .15
(4) Retail sale -‫لبيع‬--‫ا‬ 1.00 .20
‫لتجزئة‬--‫ا‬---‫ب‬
Total value added $1.00
Exclusions of Used Goods
and Paper Transactions
• Old output and used goods are not

counted in current GDP because it was
already counted back at the time it was
produced. It would be double counting to
count sales of used goods in current GDP.
Exclusions of Used Goods
and Paper Transactions
• Examples:
• The old used car: If someone sales you a used car it doesn’t calculated in the
GDP because there were no new production produced. It’s similar to sales of
an old house.
• Old house: The building of new house is only calculated in the GDP but the
old houses are not calculated.
Paper Transactions
Sales of stocks and bonds are not counted in GDP.

These sales are exchanges of paper assets and
do not correspond to current production.
However, what if I sell the stock or bond for more

than I originally paid for it?
Paper Transactions
Profits from the stock or bond market

have nothing to do with current
production, so they are not counted in
GDP. What about stock market dealers?
Paper Transactions
But if I pay a fee to a broker (‫مسار‬--‫و س‬-‫ أ‬-‫هم‬-‫س‬-‫ل أ‬-‫)وكي‬

for selling a stock for mine to someone else,
this fee is counted in GDP because the
broker is performing the service for me and
this service is part of current production
Exclusion of Output Produced Abroad
by Domestically Owned Factors of Production
• GDP is the value of output produced by factors

of production located within a country. Output
produced by a country’s citizens, regardless of
where the output is produced, is measured by
gross national product (GNP).
• GNP is related to nationality regardless the place
• GDP is related to the place of production

regardless the nationality of producer
• The outputs produced out of the country by its

citizens regardless the place of production is
calculated in the GNP not in GDP
• Profits earned in the country by foreign-owned

companies are calculated in the GDP
• GNP =GDP + Net Factor Income From Abroad
From GDP to Disposable Personal Income
• NNP = GNP - Depreciation
• Personal income is the income received by

households after paying social insurance
taxes but before paying personal income
taxes.
From GDP to Disposable Personal Income
GDP, GNP, NNP, National Income, Personal Income, and Disposable Personal Income, 2002
DOLLARS
(BILLIONS)
GDP 10,205.6
Plus: receipts of factor income from the rest of the world + 342.1
Less: payments of factor income to the rest of the world  353.2
Equals: GNP 10,194.5
Less: depreciation  1,351.3
Equals: net national product (NNP) 8,843.2
Less: indirect taxes minus subsidies plus other  643.3
Equals: national income 8,199.9
Less: corporate profits minus dividends  332.6
Less: social insurance payments  731.2
Plus: personal interest income received from the government and consumers + 439.1
Plus: transfer payments to persons +1,148.7
Equals: personal income 8,723.9
Less: personal taxes  1,306.2
Equals: disposable personal income 7,417.7
Disposable Personal Income and
Personal Saving
• Personnel income: the total income of

households before paying personnel income tax
• disposable personal income is the amount of
income that households can spend or save.
Disposable Personal Income and
Personal Saving
• personal saving The amount of disposable

income that is left after total personal spending in a
given period.
• The personal saving rate is the percentage of
disposable personal income that is saved, this is
an important indicator of household behavior.
• If the personal saving rate is low, households are
spending a large amount relative to their incomes;
if it is high, households are spending carefully.
Disposable Personal
Income and Personal Saving
Disposable Personal Income and Personal Saving, 2002
DOLLARS
(BILLIONS)
Disposable personal income 7,417.7
Less:
Personal consumption expenditures  7063.5
Interest paid by consumers to business  204.3
Personal transfer payments to foreigners  31.3
Equals: personal saving 118.6
Personal savings as a percentage of disposable personal income: 1.6%

Real and Nominal GDP
• To understand the different between the nominal

GDP and real GDP let’s suppose that we have 1
good produced in the economy (PIZZA).
1. In each year 1 and 2 (100) slices of pizza produced.
2. Suppose the price of per slice increased from 5 $ to

7$
3. The nominal GDP in 1 is 500$ and nominal GDP in

2 is 700$
• The nominal GDP explains that there is a

growth with 200 $ but the real growth is fixed
because the quantity produced of pizza is
fixed
• The main thing occurs is the increasing in the

prices levels of pizza. (inflation)
• If the production of pizza slices increased

from 100 to 105 we can say the growth
increased by 5%.
Real versus Nominal GDP
• We can measure GDP for a particular year using the

actual market prices of that year, this gives us the
Nominal GDP, or GDP at Current prices.
• but we are usually more interested in determining

what has happened to the Real GDP.
• Real GDP is calculated by tracking the volume

or quantity of production after removing the rate
of inflation.
• Nominal GDP is calculated using changing

prices, while Real GDP represent the change in
the volume of total output after price changes
are removed.
• In general the nominal GDP is bigger than real

GDP because the prices increase
Nominal and Real GDP
• Suppose, for example, that prices increase from one year to

the next, and output decreases .In fact, this economy has a
couple of new problems. Prices are higher, so there is an
increase in inflation. Output is lower, so there is probably an
increase in unemployment, too.
• Increasing of prices = inflation
• Decreasing of outputs = Unemployment
Nominal and Real GDP
For example:
• In the year 1 the prices were 100 $ and the outputs were 50
the nominal GDP will be 5000$
• In 2 if the prices increased to 200 $ and outputs decreased to
30 the nominal GDP will be 6000$
• In the first look we feel that the economy is improved but in
the actual the problems increased where the inflation
increased and unemployment rate increased as well .
• When both inflation and unemployment increase

together, economists refer to this situation as
stagflation. (The economy slows down or
stagnates at the same time that prices increase.)
Calculating Real GDP
• In order to accurately assess the real growth of the

economy over time, we need to measure output with a
constant set of prices. One year is chosen as the base
year and then every year’s output is evaluated in terms
of the prices in the base year.
• 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.
Calculate the following:

1. Nominal GDP in the year 1 and 2 ?
2. Real GDP when the year 1 is a base year and price 1 is weight ?
3. Real GDP when the year 2 is a base year and price 2 is weight ?
4. Calculate the CPI and inflation
5. Calculate the GDP deflator when year 1 is base?
6. Calculate the GDP deflator when year 2 is base?
Calculate the nominal GDP in the year 1 and 2

Production Price per unit Nominal GDP
Year 1 Year 1 Year 2 Year 2 Year 1 Year 2
Goods
Price 1 Q1 Price 2 Q2 P1 x q1 P2 x q2
Apple 1 2 1.5 2 4 6
Banana 2 3 2.5 4 6 10
Total 8
The nominal GDP increased from 8 to 16 by 100% 16
CPI = ( nominal GDP in year 2 / nominal GDP in year 1) /

100 = (16 / 8 ) x 100 = 200 %
Inflation = ( 200 – 100 ) x 100 = 100 %
Calculate Real GDP when the price of year 1 is the weight ?
Production Price per unit Real GDP

Goods
Apple 1 2 1.5 4 2 4
Banana 2 3 2.5 4 6 8
Total 8 12
The real GDP increased from 8 to 12 by 50%
GDP deflator when using the year 1 as a weight

= (Nominal GDP / Real GDP) x 100
Year 1 Year 2
Nominal GDP 8 16
Real GDP 8 12
GDP in year 1 = (8 / 8) x 100 = 100

GDP in year 2 = (16 / 12 ) / 100 = 133.3
Changes of GDP deflator = rate of inflation = 33.3%
Calculate Real GDP when the price of year 2 is the weight ?
Production Price per unit Real GDP

Goods
Apple 1 2 1.5 4 3 6
Banana 2 3 2.5 4 7.5 10
Total 10.5 16
The real GDP increased from 10.5 to 16 by 52.3%
GDP deflator when using the year 1 as a weight

= (Nominal GDP / Real GDP) x 100
Year 1 Year 2
Nominal GDP 8 16
Real GDP 10.5 16
GDP in year 1 = (8 / 10.5) x 100 = 76.2

GDP in year 2 = (16 / 16) / 100 = 100
Changes of GDP deflator = rate of inflation = 100 – 76.2
= 23.8 %
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 P2 x Q1 P2 X Q2
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 Nominal
GDP GDP
in year 1 in year 2
Calculating the CPI,GDP Deflator and PPI
• The most widely used measure of inflation is the

consumer price index ( CPI).
• CPI is a measure of the average change over time
in the prices paid by consumes for a market basket
of consumer goods and services.
• GDP Deflator = (Nominal GDP / Real GDP) x 100
• PPI measures the level of prices at the wholesale
or producer stage.
Calculating GDP Deflator
We now switch gears from the real GDP ( a quantity measure ) to the
GDP deflator ( a price measure ).
CPI : is how much would you like to pay to get the same good you
purchased in the last year at this year prices.
• The difference between CPI and GDP deflator:

 GDP Deflator = (Nominal GDP/Real GDP) x 100

 GDP Deflator reflects prices of all goods and services produced within the
country,
 CPI reflects the prices of a representative basket of goods and services
purchased by the consumers.
 CPI uses a fixed basket of goods and services whereas the GDP deflator
compared the price of currently produced goods relative to price of goods
in the base year
 CPI considers imported goods because they are still considered as consumer goods while
GDP deflator only contains prices of domestic goods.
 GDP deflator frequently changes weights while CPI is revised very infrequently
Comprehensive
GDP deflator is more comprehensive
The difference between CPI and GDP deflator
 CPI uses fixed basket of goods

The new product in the next year (the new produced machines) don’t calculated through the CPI.
Only the goods available in the basket are calculated
The difference between CPI and GDP deflator
 CPI doesn’t consider the changes in quality and

new products
 Substitution effect of goods is ignored

The CPI suppose that when the price of some good increases the quantity
of this good decreased but without making a substitution of this good.
(The consumer will purchase the same good with higher or lower
prices). But the actual not.
Limitations of GDP concepts
The following things are not calculated in the
GDP. So, it’s decreased.

1. The underground Economy (tax evasion and drugs)
2. The improvement of health
3. Environmental issues like cleaning air
4. The quality of goods
5. Crimes and its effects on the economy
6. Housewives works in their homes (cleaning, cooking ..etc)
7. The distribution of income
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.‫ت‬-‫لمخدرا‬--‫نتاج ا‬-‫ إل‬--‫مثا‬
• Tax evasion is usually thought to be the

major incentive for people to participate in
the underground economy
Gross National Income per Capita
• To make comparisons of GNP between countries,

currency exchange rates must be taken into account.
• Gross National Income (GNI) is a measure used to

make international comparisons of output. GNI is GNP
converted into dollars using an average of currency
exchange rates over several years adjusted for rates of
inflation.
• GNI divided by population equals gross national

income per capita.
Gross National Income per Capita
Per Capita Gross National Income for Selected Countries, 2002

COUNTRY U.S. DOLLARS COUNTRY U.S. DOLLARS
Switzerland 36,970 Portugal 10,670
Japan 35,990 South Korea 9,400
Norway 35,530 Argentina 6,860
United States 34,870 Mexico 5,540
Denmark 31,090 Czech Republic 5,270
Ireland 28,880 Brazil 3,060
Sweden 25,400 South Africa 2,900
United Kingdom 24,230 Turkey 2,540
Netherlands 24,040 Colombia 1,910
Austria 23,940 Jordan 1,750
Finland 23,840 Romania 1,710
Germany 23,700 Philippines 1,050
Belgium 23,340 China 890
France 22,640 Indonesia 680
Canada 21,340 India 460
Australia 18,770 Pakistan 420
Italy 18,470 Nepal 250
Spain 14,860 Rwanda 220
Greece 11,780 Ethiopia 100
Source: The World Bank Atlas, 2002.
Review Terms and Concepts
base year government consumption and gross invest

ment (
change in business inventories G)
compensation of employees gross domestic product (GDP)
corporate profits gross investment
current dollars gross national income (GNI)
depreciation gross national product (GNP)
disposable personal income, or after-tax i gross private domestic investment (I)
ncome
income approach
durable goods
indirect taxes
expenditure approach
intermediate goods
final goods and services
national income
fixed-weight procedure
national income and product accounts
Review Terms and Concepts
net exports (EX – IM) personal saving

net factor payments to the rest of the personal saving rate
world
proprietors’ income
net interest
rental income
net investment
residential investment
net national product (NNP)
services
nominal GDP
subsidies
nondurable goods
underground economy
nonresidential investment
value added
personal consumption expenditures (C)
weight
personal income

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CHAPTER 6

Measuring National Output

Prepared by: Fernando Quijano

• Is the most important concept in

• What is the GDP?

• (GDP) is the total market value of all final

• Therefore GDP is very important in

are data collected and published by the

• The U.S. Department of Commerce is

How do economist measure GDP?

GDP can be measured in two entirely

• Gross private domestic

• The expenditure approach calculates

Components of GDP, 2002: The Expenditure Approach

expenditures by consumers on the following:

• Investment refers to the purchase of new

• Total investment by the private sector is

expenditures by firms for machines, tools,

• Residential investment includes expenditures

• Remember that GDP is not the market value of

• Change in business inventories is the amount by

• Inventories are the goods that firms produce now but

GDP = Final sales + change in business inventories

• Gross investment is the total value of all

capitalend of period = capitalbeginning of period + net investment

• Positive net investment means that the

• If the net investment was positive this

• If the net investment was negative this

• Government consumption and gross investment (G)

• Sometimes the government expenditures are calculated

• Government transfers like (Social security, benefits, veterans

• The interest payments on the government debts are also counted

• Net exports (EX – IM) is the difference

•The income approach: is a method of

•National income is the total income earned by

The income approach to GDP break down GDP

GDP = national income +

•National income: is sum of the following five

•Compensation of employees: is the largest one

•Proprietors’ income: is the income of

•Corporate profits: are the income of corporate

•Net interest: is the interest paid by business.

•Rental’ income: is the income received by the

•Depreciation : it occurs when the capital assets

•Indirect taxes and subsidies

The indirect taxes like:

•The subsidies: are payments made by the

•These subsidies are (subtracted )from National

•Example for subsidies:

Farmers/ receive subsidies from the government

•Net factor payments to the rest of the world

= (The payments of factors income to the rest of

Others: It includes business

• National Income = ( Net National Product ‫ ــــــــ‬indirect taxes)

• To measure national income, economists must make three

Net National Product (NNP) = GNP - Depreciation

National Income (NI) = NNP – Indirect taxes

GDP = National Income + Depreciation + Indirect

Components of GDP, 2002: The Income Approach

• A final product is one that is sold for consumption purposes

• A final products : Either the final goods for consumption

• Intermediate goods are goods produced by one firm

• Intermediate goods are not added separately in