Macroeconomic Variables

Dr. Muhammad Shahadat Hossain Siddiquee

Professor, Department of Economics
University of Dhaka
Email: shahadat.siddiquee@du.ac.bd
National Income
• National Income – Defining a Country’s Richness
• To simply understand what National Income is, it can be represented as -
National Income defines a country's wealth.
• This income depicts the value of goods and services which are produced
by an economy.
• This gives effect to the net result of all the economic activities
performed in the country.
• Imagine how you would define a country’s wealth without any economic
term?
In that case, there would be no accountability and responsibility linked
with the production in the country. The resources would go uncalculated
and there would be a vague economic atmosphere. Thus, let us indulge in
this study which talks about National Income.
Understanding National Income
• National income is the sum total of the value of all the goods and services
manufactured by the residents of the country, in a year, within its domestic
boundaries or outside. It is the net amount of income of the citizens by
production in a year.
• To be more precise, national income is the accumulated money value of all
final goods and services produced in a country during one financial year.
• Computation of National Income is very vital as it indicates the overall
health of our economy for that particular year. The aggregate economic
performance of a nation is calculated with the help of National income data.
• The basic purpose of national income is to throw light on aggregate output
and income and provide a basis for the government to formulate its policy,
programs, to maximize the national welfare of the people. Bangladesh
Bureau of Statistics (BBS) calculates the national income in Bangladesh.
Definition of National Income
• The definition of National Income is of two types: Traditional
Definition and Modern Definition of National Income.
• Traditional Definition of National Income: According to Marshall
“The labor and capital of a country acting on its natural resources
produce annually a certain net aggregate of commodities, material
and immaterial including services of all kinds. This is the true net
annual income or revenue of the country or national dividend.”
• Modern Definition: This definition has two subparts: GDP & GNP
Gross Domestic Product
• Gross Domestic Product, abbreviated as GDP, is the aggregate value of
goods and services produced in a country. GDP is calculated over
regular time intervals, such as a quarter or a year.
• GDP as an economic indicator is used worldwide to measure the
growth of countries economy. Goods are valued at their market
prices. So, all goods measured in the same units (e.g., BDT in
Bangladesh, USD for international standard). Things without exact
market value are excluded.
• Constituents of GDP: Wages and salaries, Rent, Interest, Undistributed
profits, Mixed-income, Direct taxes, Dividend, Depreciation.
• The Formula for Calculation of GDP: GDP = consumption + investment
+ government spending + exports - imports.
Gross National Product
• Gross National Product (GNP) is an estimated value of all goods and
services produced by a country’s residents and businesses. GNP does
not include the services used to produce manufactured goods
because its value is included in the price of the finished product. It
also includes net income arising in a country from abroad.
• Components of GNP: Consumer goods and services, Gross private,
domestic income, Goods produced or services rendered, Income
arising from abroad.
• Formula to Calculate GNP: GNP = GDP + NR (Net income from assets
abroad or Net Income Receipts) - NP (Net payment outflow to foreign
assets).
Importance of National Income
• Setting Economic Policy: National Income indicates the status of the
economy and can give a clear picture of the country’s economic
growth. National Income statistics can help economists in formulating
economic policies for economic development.
• Inflation and Deflationary Gaps: For timely anti-inflationary and
deflationary policies, we need aggregate data of national income. If
expenditure increases from the total output, it shows inflationary
gaps and vice versa.
• Budget Preparation: The budget of the country is highly dependent
on the net national income and its concepts. The Government
formulates the yearly budget with the help of national income
statistics in order to avoid any cynical policies.
Importance of National Income…
• Standard of Living: National income data assists the government in
comparing the standard of living amongst countries and people living
in the same country at different times.
• Defense and Development: National income estimates help us to
bifurcate the national product between defense and development
purposes of the country. From such figures, we can easily know, how
much can be set aside for the defense budget.
• Sets of methods for measuring National Income: There are four
methods of measuring national income. The type of method to be
used depends on the availability of data in a country and the purpose
which is attempted for.
Importance of National Income…
• Income Method: In this method, we add net income payments received by all citizens of
a country in a particular year. Net incomes that result in all the factors of production like
net rents, wages, interest, and profits are all added together, but income received in the
form of transfer payments are omitted.

• Product Method: According to this method, the aggregate value of final goods and
services produced in a country during a financial year is computed at market prices. To
find out GNP, the data of all the productive activities-agricultural products, Minerals,
Industrial products, the contributions to production made by transport, insurance,
communication, lawyers, doctors, teachers. Etc are accumulated and assessed.

• Expenditure Method: The total expenditure by the society in a financial year is summed
up together and includes personal consumption expenditure, net domestic investment,
government expenditure on goods and services, and net foreign investment. This concept
is backed by the assumption that national income is equal to national expenditure.
Importance of National Income…
• Value Added Method: The distinction between the value of material outputs
and material inputs at every stage of production is Value added.

• GDP Vs GNP: The Gross Domestic Product and the Gross National Product
are the two most widely used measures in a country’s calculation of
aggregate economic unit.
GDP is the measure of the value of goods and services that are being
produced within a country's borders, by the citizens and the non-citizens.
While GNP determines the value of goods and services that are being
produced by the country's citizens in the domestic and abroad spectrum. GDP
is popularly used by the global economies at large. While, the United States
eliminated the use of GNP in the year 1991, thereby adopting GDP as the
measure to compare their economy with other economies.