Measuring National
Income
Macroeconomics 3.1
Macroeconomics studies the economy as a whole. The focus is on the
larger picture of the economy composed of collections of many
consumers, firms, resource owners and markets.
It is the study of the general price level of the economy, the total
demand for goods and services, the total output produced in the
economy, total employment, total investment, total exports and
imports, which in economics is called aggregates.
The study of macroeconomics is prompted by
some very important economic objectives:
Achieve economic growth
Achieve full employment
Achieve a stable or a gently rising price level
Achieve an equitable distribution of income
Achieve external balance (stable exchange
rate and avoid balance of payments
problems)
3.1 Measuring national
income
Circular flow of income
Methods of measurement
income, expenditure and output
Distinction between:
gross and net
national and domestic
nominal and real
total and per capita
The Circular Flow
Diagram
Circular flow of income
There is a Flash movie explaining
the Circular flow of income
Click on the link below
http://www.fgn.unisg.ch/eurmacro
/tutor/circularflow.html
GDP
http://www.youtube.com/watch?v=yUiU_xRPwMc&lis
t=PLF2A3693D8481F442&index=19&feature=plpp_vid
eo
Gross Domestic Product
GDP is the market value of all final
goods & services produced within a
country in a given time period
GDP is the market value
You cant compare apples with oranges
Market prices measure the amount people are willing to pay
for different goods, they reflect the value of those goods
Of all
Includes all items produced in the economy & sold legally
Final
Value of intermediate goods is already included in the
prices of the final goods
Problem of double counting
Goods & services
Tangible goods & intangible services
Produced
G & S currently produced
Does not include transactions involving items produced in
the past value of a used car sold on the market not included
in GDP
Within a country
GDP measures the value of production within
geographical confines, regardless of the nationality of
the producer
In a given period of time
a year or a quarter (3 months)
How GDP Is Measured?
Income (wages, salary, rent, interest, profits)
Firms
Households
Expenditures by Consumers, Investors, Government, and Net Exports
How GDP Is Measured?
Income (wages, salary, rent, interest, profits)
Firms
Same As
Households
Expenditures by Consumers, Investors, Government, and Net Exports
How GDP Is Measured?
Income (wages, salary, rent, interest, profits)
Value of what is
produced
Firms
Same As
Households
Value of what is
spent
Expenditures by Consumers, Investors, Government, and Net Exports
How GDP Is Measured?
Income (wages, salary, rent, interest, profits)
Flow of Income
Approach
Firms
Expenditures
Approach
Value of what is
produced
Same As
Households
Value of what is
spent
Expenditures by Consumers, Investors, Government, and Net Exports
How GDP Is Measured?
Income (wages, salary, rent, interest, profits)
Flow of Income
Approach
Value of what is
produced
Same As
Firms
Expenditures
Approach
Households
Value of what is
spent
Expenditures by Consumers, Investors, Government, and Net Exports
(GDP = C + I + G + Xn )
Methods of
Measurement
Factor Income
Adding up total payments for use of
factors of production
Interest imputed (estimated)
When the public sector utilises
wholly owned buildings, it is freely
using capital which would have
been paid for in the private sector
GDP (factor) income method of accounting
Factor Income
Amount (millions of
)
Employment Income (wages)
47,090
Self - employment income (wages +
profit)
10,903
Rental Income
Interest (imputed consumption of
non-trading capital)
6181
26,290
Total domestic income
less stock appreciation
218
statistical discrepancy
569
GDP at factor cost
102,869
Stock changes in 2 ways:
1. in physical amount
2. by value due to price inflation
If value of stocks increases
arbitrarily due to inflation, the
price increase or appreciation of
stock has to be deducted
GDP Expenditure method of Accounting
Expenditure type
Amount (millions of
)
Household consumption ( C )
55,202
Total private Expenditure on capital
(plus physical change in stocks) ( I )
27,461
Government Expenditure
15,413
Exports ( X )
imports ( - M )
112,938
95,702
GDP at market prices
less taxes on expenditure
plus subsidies
statistical discrepancy
GDP at factor cost
-14,572
2,697
-569
102,869
1. Using the expenditure approach, calculate the GDP of Canada in
2009
using the data below:
(millions CAD$)
Consumer expenditure on
goods & services
Business investment
1,527,258
Government expenditure
333,942
Exports
438,553
Imports
464,722
269,394
2. What percentage of GDP is made up by each of the four sectors
of
the economy?
3. Why dont economists simply ignore the imports figure, instead
of
actually deducting it, when calculating the GDP?
Expenditure Method
Investment : circulating capital
(unsold stocks), work in progress
Output method
Value added approach
All output generates rewards to
factor inputs
The Value-added Approach
to Measuring GDP
Production
Generated
Added
$100
$100
Farmer
harvest wheat
Miller
makes into flour
200
100
Baker
makes into bread
300
100
$600
$300
GDP counts only the $ value of the final
good
This is the same as the value-added.
GDP Output method of Accounting
Output type
Amount (millions of
)
Agriculture, forestry, fishing
4,003
Electricity, gas, water
1,329
Construction
8,085
Manufacturing
32,715
Transport, communication
6,014
Wholesale & retail trade
8,728
Banking, finance, insurance
8,478
Other services
22,789
Public administration, defence
4,032
Health care, education
9,991
Total
less adjustment for
financal services
statistical discrepancy
-3,863
569
Calculating nominal GDP using
the expenditure approach
Components
Consumer spending
Billion MNL
11.3
Investment spending
3.2
Government spending
3.5
Exports of goods & services
2.5
Imports of goods &
services
2.1
Using the information, calculate the nominal GDP for
Mountainland.
GDP: Domestic &
GNP: National
Net property income from abroad
National income is adjusted for income
accruing to foreign owners of property.
A foreign company will send interest,
rent and profit payments back to
shareholders.
These income payments have been
earned by citizens of another nation.
(UK )
Property income from abroad
55,526
Property income paid abroad
(-) 49907
Net property income from abroad
5,916
Gross Domestic Product
394,787
Net property income from
abroad
(+) 5,916
Gross National Product
400,703
Calculate
Mountainlands GNP
Components
Consumer
spending
Billion MNL
11.3
Investment
spending
3.2
Government
spending
3.5
Exports of
goods &
services
2.5
Imports of
goods &
services
2.1
GNP = GDP + income from
abroad income sent
abroad.
Income earned abroad =
2.7 bn. MNL
Income sent abroad = 4.7
bn. MNL
Domestic & National
Net property income from abroad =
Property income from abroad property
payments abroad
If the focus is economic welfare, then
national income is the better measure.
If focus was in employment, then
domestic income would be a more
relevant measure.
Real vs Nominal GDP
If total spending rises from one year
to the next:
1. The economy is producing a larger
amount of goods & services
2. Goods & services are being sold at
higher prices.
This distorts the true value of the GDP
Therefore economists use a measure
called REAL GDP
Table 2 Real and Nominal GDP
Consider an economy manufacturing only two goods: Hot
Dogs and Hamburgers
Table 2 Real and Nominal GDP
Table 2 Real and Nominal GDP
Nominal GDP uses current year prices
to place a value on the economys
production of goods & services
Real GDP uses constant base-year
prices to place a value on the
economys production of goods &
services
We deflate the nominal value by
removing the inflationary element
GDP deflator
The basis for deflating nominal
values to real values is an index
showing price change.
Consumer Price Index
GDP Deflator
GDP Deflator
Measures the current level of
prices relative to prices in the
base year.
GDP deflator = nominal GDP x
100
Real GDP
Total & per capita
Per capita income = National
Income
Population
National Income
Accounting
Money value of aggregate output
= GDP
Adjust for use of foreign factors of
production = GNP
Subtract depreciation of capital =
NNP
(to show net addition to GNP)
Gross & Net
Depreciation
Wearing out of capital goods
Gross investment includes all investment
irrespective of whether it adds new
capital stock or replaces capital which
is worn out.
NNP gives a true picture of the increase
in the productive capacity of the
economy.
NNP = GNP - depreciation
Depreciation
Each machine has a life span
Assume a machine has a life span
of 4 years, one fourth of any new
machine will wear out depreciate
during a year.
economists refer to NNP when
gauging a countrys future progress
in terms of future output capability.
Year
Event in firm
gross investment
machine # 1
machine # 2
= 100,000
= 200,000
100,000
200,000
25,000
25,000
depreciation # 2 (1/4 of
100,000 per year
50,000
depreciation # 3 - 5 (1/4 of
100,000 per year
25,000
75,000
2 mn
2.5
400,000
300,000
2.4 mn
2.8 mn
-25,000
-75,000
2.375 mn
2.725 mn
depreciation # 1(1/4 of
100,000 per year
total depreciation
total output (GDP)
net property income
GNP
less depreciation
NNP
Resoures
Mankiw G. ; Principles of
Economics; 3rd edition Pg 499
518
http://www.cr1.dircon.co.uk/TB/3/c
flow.htm
GDP Calculation, Nominal and Real Interest Rate, and
Central Banker Money Supply Control:
http://www.youtube.com/watch?v=XoIqVLO4Smg
