Topic 13: Measuring the National Output and National Income

1.The System of National Income Accounting

2.The GDP and methods of its measuring
3. GDP sisters
4. Nominal GDP ersus !eal GDP. The GDP deflator
". GDP and economic #ell$%eing
National Income Accounting
The measuring National &ut'ut and National Income is indis'ensa%le for macroeconomic
theory and 'olicy.
National Income accounting hae %een designed to measure the oerall 'roduction
'erformance of trhe economy.
(y (rue and )c*onnell a System of National Income Accounting allo#s us to +ee' a finger
on the economic 'ulse of the nation.
Peo'le do not lie %y %read alone not does society lie on GDP alone.
The SNA system is the international standard of measuring of macroeconomic indicators as
National out'ut and National Income.
It 'roides the 'ossi%ility to understand the interconnections %et#een macroeconomic
transactions and to com'are macroeconomic indicators %et#een countries.
The creator of the SNA #as an American economist S. ,u-nets. The SNA deelo'ed in the
.SA in 1/40. In 1//3 some changes in SNA #ere introduced. In )oldoa the SNA is
deelo'ed from 1//1.
What Are These Accounting Measures?
G!&SS D&)2STI* P!&D.*T
G!&SS NATI&NA3 P!&D.*T 4 5A3.2 6
N2T D&)2STI* P!&D.*T
N2T NATI&NA3 P!&D.*T
NATI&NA3 IN*&)2
P2!S&NA3 IN*&)2
DISP&SA(32 IN*&)2
G!&SS D&)2STI* P!&D.*T
GDP is the total market value of all final goods and services produced within a Country in
a given period of time (year)
GD is the total mar!et "alue # # #$ Output is "alued at mar!et prices#
# # # o% all %inal # # #$It records onl& the "alue o% %inal goods' not intermediate goods (the
"alue is counted onl& once)#
# # # goods and ser"ices # # # It includes *oth tangi*le goods (%ood' clothing' cars) and
intangi*le ser"ices (haircuts' house cleaning' doctor "isits)#
# # # produced # # #$ It includes goods and ser"ices currentl& produced' not transactions
in"ol"ing goods produced in the past#
# # # +ithin a ,ountr& # # #$ It measures the "alue o% production +ithin the geographic
con%ines o% a countr&#
# # #in a gi"en period o% time#$ It measures the "alue o% production in a speci%ic inter"al
o% time' usuall& a &ear#
GD includes all items produced in the econom& and sold legally in mar!ets#
What Is Not ,ounted in GD?
-.cludes Nonproduction Transactions# GD e.cludes most items that are produced
and consumed at home and that ne"er enter the mar!etplace#
-.cludes items produced and sold illicitl&' such as illegal drugs#
-.cludes %inancial Transactions:
7 u*lic Trans%er a&ments
7 ri"ate Trans%er a&ments
7 /toc! Mar!et Transactions#
7 -.cludes secondhand sales
0ecause e"er& transaction has a *u&er and a seller' the total e.penditure in the
econom& must e1ual the total income in the econom&#
0u&ing (spending mone&) and selling (recei"ing mone&) are t+o aspects o% the same
tran2actioins
Gross Domestic roduct (GD) measures an econom&3s total e.penditure on ne+l&
produced goods and ser"ices and the total income earned %rom the production o% these
goods and ser"ices#
Me can "ie+ GD loo!ing to e.penditures approach or income approach#
-4-NDIT56-/ A6OA,7:
1#ersonal ,onsumption -.penditures ( , ) are the spending *& households on goods
and ser"ices' +ith the e.ception o% purchases o% ne+ housing and include the
e.penditures %or:
7 Dura*le ,onsumer Goods
7 Nondura*le ,onsumer Goods
7 /er"ices
8#Gross ri"ate Domestic In"estment ( I
g
) means the spending o% %irms on:
7 Machiner&' -1uipment' and Tools
7 All ,onstruction
7 In"entories
7 Ne+ housing
7
7 Gross "s# Net In"estment
Gross ri"ate Domestic In"estment 9 Depreciation :
Net ri"ate Domestic In"estment
3#Go"ernment urchases (G) include:
; the spending on goods and ser"ices *& local and central go"ernments
; the +ages o% o%%icials (+or!ers in the pu*lic sector)
; pu*lic in"estments (spending %or in"estment *oons)
Does not include trans%er pa&ments *ecause the& are not made in e.change %or currentl&
produced goods or ser"ices#

<# Net -.ports (4n) means +hat the %oreign sector spent on domesticall& produced goods
:
(the "alue o% -.ports minus the "alue o% imports)
Net -.ports (X
n
) : -.ports (-.) 9 Imports (Im)
utting it all together:
GD : , = I
g
= G = 4
n
T7- IN,OM- A6OA,7:
7 GD loo!ing to income approach includes:
7 ,ompensation o% emplo&ees or +ages
7 6ents are income pa&ments recei"ed *& o+ners o% propert& resources (land' house'
appartment)
7 Interest means the income pa&ments to the suppliers o% mone& capital
7 roprietors3 Incomes (incomes recei"ed proprietorships and partnerships as pri"ate
*usiness %irms)
7 ,orporate ro%its (corporate income taxes dividends undistri!uted corporate profits)are
the earnings of owners of corporations
7 Nonincome charges or allocations' including:
7 ; Depreciation
7 ; Indirect *usiness ta.es
Product
market
Factor
market
VALUE OF INCOME
Wages
Profits
Interest
Rent
VALUE DE OUPU
Consumer
s!ending
In"estment
s!ending
#o"ernment
s!ending
Net e$!orts
%a&es ta$es
De!reciation
The "alue;added method o% calculating o% GD
The /NA includes the measuring o% the "alue;added created *& each %irm in order to a"oid
dou*le counting#
The "alue;added is the mar!et "alue o% a %irm3s output less the "alue o% the inputs the %irm has
*ought %rom others# The "alue;added is the sum o% all incomes created *& the %irms (Wages'
6ent' Interest' ro%it)
GD sisters:
GNI (GN) is the mar!et "alue o% total output produced *& a nation3s residents (citi2ens o%
this countr&) on the *ase o% resources located in this countr& or a*road# It di%%ers %rom GD
*& including income that our citi2ens earn a*road and e.cluding income that %oreigners earn
in a countr&#
GNI : GD ; Net %oreign %actor income earned in this countr& or GD = Net %oreign %actor
income earned a*road#
ND : GD ; depreciation (a part o% output needed to replace the capital goods consumed in
producing that GD)#
ND is GD ad>usted %or depreciation# It is a *etter measure o% the production' a"aila*le %or
consumption than is gross output#
NI (NNI) means all income earned *& o+ners o% economic resources in this countr&#
NI : ND 9 Net %oreign %actor income earned in this countr&(; indirect *usiness ta.es) or ND
= Net %oreign %actor income earned a*road (; indirect *usiness ta.es)#
I is income recei"ed +hether earned or unearned *& indi"iduals (+el%are compensation'
pensions)#
I : NI ; (corporate income ta.es = social securit& contri*utions = undistri*uted corporate
pro%it = indirect ta.es) = trans%er pa&ments = interest income that households recei"e %rom
their holding o% go"ernment de*t (N)#
D" (#d) means an income that is allocated *& indi"idual %or consumption and sa"ing# It is the
income that indi"iduals ha"e le%t a%ter satis%&ing all their o*ligations to the go"ernment#
#d $ P" % personal taxes #d $ Consumption & 'aving
5#/# GD' ND' NI' I' ? DI' 8@@8
Gross Domestic roduct (GD) A1@'<<B
,onsumption o% %i.ed capital ;1'3C3
Net Domestic roduct (ND) AC'@D3
Net %oreign %actor income earned in the 5#/#
; 1@
Indirect *usiness ta.es ;BCD
National Income (NI) AE'3<E
/ocial securit& contri*utions ;F<E
,orporate income ta.es ;813
5ndistri*uted corporate pro%its ;1<1
Trans%er pa&ments =1'BE3
ersonal Income (I) AE'C8C
ersonal Ta.es ;1'113
Disposa*le Income (DI) AF'E1B
Nominal GD ; is the amount o% %inal goods and ser"ices produced in a gi"en &ear "alued at
the current prices#
Nominal GD re%lects *oth the price le"el and output produced#
6eal GD ; is the amount o% %inal goods and ser"ices produced in a gi"en &ear "alued at prices
o% *asic &ear (re%erence &ear)#
6eal GD re%lects onl& the output produced#
otential GD(GH) is the "alue o% %inal goods and ser"ices produced in conditions o% %ull
emplo&ment o% a"aila*le economic resources#
GDP Data for ()*(year and ()*+ year
Item
2012 year 2013year
Q
1
P
1
Q x P Q
2
P
2
Q x P
Balls
Bats
100
20
$ 1,00
$ 5,00
$ 100
$ 100
160
22
$ 0,50
$ 22,5
$ 80
$ 495
Nominal
GDP
$ 200 $ 575

()*( , is the !ase year
-ase , year prices value of real GDP for ()*+ year
Item Q2 P
1
Q x P
Balls
Bats
160
22
$ 1,00
$ 5,00
$ 160
$ 110
Real
GDP
$ 270
GD De%lactor: Nominal GD I 6eal GD 4 1@@J
The GDP deflator is a measure o% the price le"el calculated as the ratio o% nominal GD to
real GD times 1@@#

It tells us the rise in nominal GD that is attri*uta*le to a rise in prices rather than a rise in
the 1uantities produced#
Year
Nominal
GDP
Real GDP
GDP
Deflator
2012
2013
$ 200
$ 575
$ 200
$ 270
100
230
Measuring o% GD De%lator is signi%icant
%or t+o reasons:
1# Measuring in%lation or de%lation
8# ,omparing GD#
In terms o% nominal GD' the top %i"e countries are:
5nited /tates o% America
,hina
Kapan
German&
Lrance
I% there is high in%lation in a countr&' there ma& *e rapid gro+th in nominal GD *ut not
much gro+th in real GD# All countries ha"e di%%erent rates o% in%lation# There%ore' +hen
comparing GD gro+th rates in di%%erent countries' real GD is used# 6eal GD gro+th
paints a more accurate picture and allo+s economists to compare economic
gro+th in di%%erent countries#
The top %i"e countries in terms o% real GD gro+th rate %or 8@@C +ere:
Macau
Matar
A2er*ai>an
,hina
-thiopia
GD and economic +ell;*eing
GD is a measure o% economic +ell;*eing o% a societ& *ecause people pre%er higher to lo+er
incomes# It is a good measure o% mar!et;oriented acti"it&
GD per person tells us the mean income and e.penditure o% the people in the
econom&#
7igher GD per person indicates a higher standard o% li"ing# There should *e a strong
positi"e correlation *et+een real GD and social +el%are#
GD and GD per capita as indicators o% +ell;*eing ha"e some disad"antages:
A"erage measuring ( one person has 8 cars' other 9 not : 1 car a"erage per person)
Not anal&sis o% 1ualitati"e aspects o% +el%are ( 8 countries +ith the same le"el o% GD'
*ut +ith di%%ering le"els o% literac& o% population' rate o% death##)
No in%ormation a*out di%%ering purchasing po+er o% A 1
No e%%ects o% ecological pro*lems on National production
/ome things that contri*ute to +ell;*eing are not included in GD' such as
The "alue o% leisure#
The "alue o% a clean en"ironment#
The happiness or 1ualit& o% li%e#
The "alue o% almost all acti"it& that ta!es place outside o% mar!ets' such as the "alue o%
the time parents spend +ith their children and the "alue o% "olunteer +or!#
,onclusion: GD is not a per%ect measure o% +ell;*eing *ecause some things' such as
leisure time and a clean en"ironment' aren3t measured *& GD#
Alternati"e concepts :
O-,D Gour 0etter Ni%e Inde.
11 su*indicators com*ined (7ousing' Income' Ko*s' ,ommunit&' -ducation'
-n"ironment' Go"ernance' 7ealth' Ni%e /atis%action' /a%et&)
http:IIoecd*etterli%einde.#orgI
5ND 7uman De"elopment Inde.
< su*indicators com*ined (li%e e.pectanc& at *irth' mean &ears o% schooling' e.pected
&ears o% schooling' gross national income per capita)
http:IIhdr#undp#orgIenIstatisticsIhdi I
Net -conomic +el%are *& K# To*in and W# Nordhaus (1CF8): GD="alue o%
goods$'e.cluded %rom GD(leisure time) ;"alue o% *ads$(pollution)