Download Measuring National Output and National Income

CHAPTER
18
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
C H A P T E R 18: Measuring National Output and National Income
National Income
and Product Accounts
• National income and product accounts NIPA are
data collected and published by the government
describing the various components of national income
and output in the economy.
• In Palestine NIPA are collected and summarized by
the Palestinian Central Bureau of Statistics (PCBS).
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C H A P T E R 18: Measuring National Output and National Income
• What Is GDP?
• 1. Gross Domestic Product (GDP) is the most
basic measure of how an economy is performing.
• 2. Gross Domestic Product is the total market
value of a country’s output. It is the market value
of all final goods and services produced in a
country during a calendar year by factors of
production located within that country.
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C H A P T E R 18: Measuring National Output and National Income
Final Goods and Services
• The term final goods and services in
GDP refers to goods and services
produced for final use.
• Intermediate goods are goods
produced by one firm for use in further
processing by another firm.
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C H A P T E R 18: Measuring National Output and National Income
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 in the Production of a Gallon of Gasoline
(Hypothetical Numbers)
STAGE OF PRODUCTION
VALUE OF SALES
VALUE ADDED
$ .50
$ .50
(2) Refining
.65
.15
(3) Shipping
.80
.15
1.00
.20
(1) Oil drilling
(4) Retail sale
Total value added
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C H A P T E R 18: Measuring National Output and National Income
Value Added
• Value added is the difference between the value
of goods as they leave a stage of production and
the cost of the goods as they entered that stage.
• Value added is the difference between a firm’s
total revenue and what it pays other firms for
intermediate goods. Value added includes
wages and salaries, rent, interest, and profits.
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C H A P T E R 18: Measuring National Output and National Income
Exclusions of Used Goods
and Paper Transactions
• Exclusion of Used Goods and Paper Transactions:
NIPA exclude purchases and sales of previously
owned goods and paper asset transactions because
GDP includes only newly produced goods and
services.
• 1. Previously owned goods were counted when they
were first produced.
• 2. Paper asset transactions (bonds and stocks) are
not counted because they are not new goods or
services.
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C H A P T E R 18: Measuring National Output and National Income
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.
• Gross National Product (GNP): Output
produced by a country’s citizens, regardless of
where the output is produced,
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C H A P T E R 18: Measuring National Output and National Income
Calculating GDP
GDP can be computed in two ways:
• The expenditure approach: A method of computing
GDP that measures the total amount spent on all final
goods during a given period.
• The income approach: A method of computing GDP
that measures the income—wages, rents, interest, and
profits—received by all factors of production in
producing final goods.
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C H A P T E R 18: Measuring National Output and National Income
The Expenditure Approach
• The expenditure approach calculates
GDP by adding together the four
components of spending. In
equation form:
GDP  C  I  G  ( EX  IM )
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C H A P T E R 18: Measuring National Output and National Income
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.
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C H A P T E R 18: Measuring National Output and National Income
The Expenditure Approach
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)
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C H A P T E R 18: Measuring National Output and National Income
Components of GDP, 1999:
The Expenditure Approach
Components of GDP, 2002: The Expenditure Approach
Personal consumption expenditures (C)
Durable goods
Nondurable goods
Services
Gross private domestic investment (l)
Nonresidential
Residential
Change in business inventories
Government consumption and gross investment (G)
Federal
State and local
Net exports (EX – IM)
Exports (EX)
Imports (IM)
Total gross domestic product (GDP)
BILLIONS OF
DOLLARS
PERCENTAGE
OF GDP
7303.7
871.9
2115.0
4316.8
1543.2
1117.4
471.9
3.9
1972.9
693.7
1279.2
 423.6
1014.9
1438.5
10446.2
69.9
8.3
20.2
41.3
14.8
10.7
4.5
0
18.9
6.6
12.2
 4.1
9.8
13.8
100.0
Note: Numbers may not add exactly because of rounding.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
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C H A P T E R 18: Measuring National Output and National Income
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.
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C H A P T E R 18: Measuring National Output and National Income
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.
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C H A P T E R 18: Measuring National Output and National Income
Gross Private Domestic Investment
• 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.
• Change in inventories computes the amount by which
firms’ inventories change during a given period.
• Inventories includes: raw materials, intermediate goods,
spare-parts for machines, and over-production of final goods.
• Inventories are the goods that firms produce now but intend to
sell later.
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C H A P T E R 18: Measuring National Output and National Income
Gross Private Domestic Investment
• Remember that GDP is not the market value
of total sales during a period—it is the market
value of total production.
• The relationship between total production and
total sales is:
GDP = final sales + change in business inventories
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C H A P T E R 18: Measuring National Output and National Income
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
depreciation.
equals
gross
investment
minus
capitalend of period = capitalbeginning of period + net investment
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C H A P T E R 18: Measuring National Output and National Income
Government Consumption
and Gross Investment
• Government consumption and gross
investment (G) counts expenditures by
federal, state, and local governments for
final goods and services.
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C H A P T E R 18: Measuring National Output and National Income
Net Exports
• Net exports (EX – IM) is the difference
between exports and imports. The figure can
be positive or negative.
• Exports (EX) are sales to foreigners of U.S.-
produced goods and services.
• Imports (IM) are U.S. purchases of goods and
services from abroad).
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C H A P T E R 18: Measuring National Output and National Income
The Income Approach
• National income is the total income earned by
the factors of production owned by a country’s
citizens.
• The income approach to GDP breaks down
GDP into four components:
GDP = national income + depreciation + (indirect
taxes – subsidies) + net factor payments to the rest
of the world + other
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C H A P T E R 18: Measuring National Output and National Income
The Income Approach
• National income is the total income earned by
the factors of production owned by a country’s
citizens.
National Income =
Compensation of employees such as wages and salaries
+ Proprietors’ income
+ Net interests
+ corporate profits
+ rental income
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C H A P T E R 18: Measuring National Output and National Income
The Income Approach
Components of GDP, 2002: The Income Approach
BILLIONS OF
DOLLARS
PERCENTAGE
OF GDP
8,199.9
80.3
6,010.0
58.9
Proprietors’ income
943.5
7.3
Corporate profits
748.9
7.3
Net interest
554.8
5.4
Rental income
142.7
1.4
National income
Compensation of employees
Depreciation
Indirect taxes minus subsidies
Net factor payments to the rest of the world
Other
Gross domestic product
1,351.3
739.4
11.1
 96.1
10,205.6
13.2
7.2
0.1
 0.9
100.0
Source: See Table 18.2.
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C H A P T E R 18: Measuring National Output and National Income
The Income Approach
GNP = GDP + receipts of factor income from the rest of the
world - payments of factor income to the rest of the world
NNP = GNP - depreciation
NI = NNP - Indirect Taxes + Subsidies
PI = Wages Received + Interest Received + Rent Received
+ Dividends + Proprietors' Income + Transfer Payments by
government
PI = NI - Income Earned But Not Received + Income Received
But Not Earned
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C H A P T E R 18: Measuring National Output and National Income
The Income Approach
PI =
NI
‫ ـــ‬Social Security taxes
‫ ـــ‬corporate profits taxes
‫ ـــ‬undistributed corporate profits
‫ ـــ‬Pension premiums
+ Social Security payments to the households
+ Unemployment compensation payments
+ Welfare payments
+ interest on public bond
+ personal interest income received from the government and
consumers
+ dividends
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C H A P T E R 18: Measuring National Output and National Income
The Income Approach
DPI (Disposable personal income) = PI – Personal tax
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C H A P T E R 18: Measuring National Output and National Income
From GDP to Disposable Personal Income
GDP, GNP, NNP, National Income, Personal Income, and Disposable Personal Income, 2002
GDP
Plus: receipts of factor income from the rest of the world
Less: payments of factor income to the rest of the world
Equals: GNP
Less: depreciation
Equals: net national product (NNP)
Less: indirect taxes minus subsidies plus other
Equals: national income
Less:
Less:
Plus:
Plus:
corporate profits tax minus dividends
social insurance payments
personal interest income received from the government and consumers
transfer payments to persons
Equals: personal income
Less: personal taxes
Equals: disposable personal income
DOLLARS
(BILLIONS)
10,205.6
+ 342.1
 353.2
10,194.5
 1,351.3
8,843.2
 643.3
8,199.9
 332.6
 731.2
+ 439.1
+1,148.7
8,723.9
 1,306.2
7,417.7
Source: See Table 18.2.
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C H A P T E R 18: Measuring National Output and National Income
From GDP to Disposable Personal Income
• Net national product equals gross
national product minus depreciation;
a nation’s total product minus what is
required to maintain the value of its
capital stock.
• Personal income is the income
received by households after paying
social insurance taxes but before
paying personal income taxes.
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C H A P T E R 18: Measuring National Output and National Income
Disposable Personal
Income and Personal Saving
Disposable Personal Income and Personal Saving, 2002
DOLLARS
(BILLIONS)
Disposable personal income
Less:
Personal consumption expenditures
Interest paid by consumers to business
Personal transfer payments to foreigners
Equals: personal saving
Personal savings as a percentage of disposable personal income:
7,417.7
 7063.5
 204.3
 31.3
118.6
1.6%
Source: See Table 18.2.
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C H A P T E R 18: Measuring National Output and National Income
Disposable Personal Income and
Personal Saving
• The personal saving rate is the percentage of
disposable personal income that is saved.
• If the personal saving rate is low, households
are spending a large amount relative to their
incomes; if it is high, households are spending
cautiously.
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C H A P T E R 18: Measuring National Output and National Income
Nominal Versus Real GDP
• Nominal GDP is GDP measured in current
dollars, or the current prices we pay for things.
Nominal GDP includes all the components of
GDP valued at their current prices.
• When a variable is measured in current dollars,
it is described in nominal terms.
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C H A P T E R 18: Measuring National Output and National Income
Calculating Real GDP
• 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.
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C H A P T E R 18: Measuring National Output and National Income
Calculating 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).
PIZZA
Goods
Nominal GDP
Prices of
Pizza
Quantities of Pizza
Pxq
Year 1
5
100
500
Year 2
7
100
700
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C H A P T E R 18: Measuring National Output and National Income
Calculating Real GDP
A Three-Good Economy
(1)
(2)
PRODUCTION
YEAR 1
YEAR 2
Q1
Q2
(3)
(4)
PRICE PER UNIT
YEAR 1
YEAR 2
P1
P2
(5)
(6)
(7)
(8)
GDP IN
YEAR 1
IN
YEAR 1
PRICES
P 1 x Q1
GDP IN
YEAR 2
IN
YEAR 1
PRICES
P 1 x Q2
GDP IN
YEAR 1
IN
YEAR 2
PRICES
P 2 x Q1
GDP IN
YEAR 2
IN
YEAR 2
PRICES
P 2 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
$12.10
$15.10
$18.40
$19.20
Total
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Nominal
GDP
in year 1
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Nominal
GDP
in year 2
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C H A P T E R 18: Measuring National Output and National Income
Calculating Nominal and Real GDP
Description
Equation
Resu
lt
Nominal GDP in the year 1
Sum ( P1 x Q1 )
12.1
Nominal GDP in the year 2
Sum ( P2 x Q2 )
19.2
If year 1 is the base year, the real GDP in the year 1
Sum ( P1 x Q1 )
12.1
If year 1 is the base year, the real GDP in the year 2
Sum ( P1 x Q2 )
15.1
If year 2 is the base year, the real GDP in the year 1
Sum ( P2 x Q1 )
18.4
If year 2 is the base year, the real GDP in the year 2
Sum ( P2 x Q2 )
19.2
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C H A P T E R 18: Measuring National Output and National Income
Calculating GDP Deflator and Inflation
If year 1 is the base year, the value of GDP deflator in year 2
( Nominal GDP in Y2 / Real GDP P1.q2) x 100
( P2.q2 / P1.q2) x 100
= ( 19.2 / 15.1 ) x 100 = 127.1
In this case the Inflation rate = 127.1 ‫ ـــ‬100 = 27.1%
If year 2 is the base year, the value of GDP deflator in year 1
( Nominal GDP in Y1 / Real GDP P2.q2 ) x 100
( P1.q1 / P2.q1 ) x 100
( 12.1 / 18.4 ) x 100 = 65.7
In this case the Inflation rate = 65.7 ‫ ـــ‬100 = -34.3 %
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C H A P T E R 18: Measuring National Output and National Income
Calculating GDP Deflator and Inflation
If year 1 is the base year, the value of GDP deflator in year 1
( Nominal GDP in Y1 / Real GDP P1.q1) x 100
( P1.q1 / P1.q1 ) x 100
( 12.1 / 12.1 ) x 100 = 100
In this case the Inflation rate = 100 ‫ ـــ‬100 = 0
If year 2 is the base year, the value of GDP deflator in year 2
( Nominal GDP in Y2 / Real GDP P2.q2) x 100
( P2.q2 / P2.q2 ) x 100
( 19.2 / 19.2 ) x 100 = 100
In this case the Inflation rate = 100 ‫ ـــ‬100 = 0
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C H A P T E R 18: Measuring National Output and National Income
Real and Nominal 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
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C H A P T E R 18: Measuring National Output and National Income
Calculating the GDP Deflator
• The GDP deflator is one measure of
the overall price level. The GDP
deflator is computed by the Bureau
of Economic Analysis (BEA).
• Overall price increases can be
sensitive to the choice of the base
year. For this reason, using fixedprice weights to compute real GDP
has some problems.
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C H A P T E R 18: Measuring National Output and National Income
The Problems of Fixed Weights
The use of fixed price weights to estimate real
GDP leads to problems because it ignores:
1. Structural changes in the economy.
2. Supply shifts, which cause large decreases in price and
large increases in quantity supplied.
3. The substitution effect of price increases.
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C H A P T E R 18: Measuring National Output and National Income
GDP and Social Welfare
• Society is better off when crime decreases,
however, a decrease in crime is not reflected in
GDP.
• An increase in leisure is an increase in social
welfare, but not counted in GDP.
• Nonmarket and household activities are not
counted in GDP even though they amount to real
production.
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C H A P T E R 18: Measuring National Output and National Income
GDP and Social Welfare
• GDP accounting rules do not adjust for production
that pollutes the environment.
• GDP has nothing to say about the distribution of
output. Redistributive income policies have no
direct impact on GDP.
• GDP is neutral to the kinds of goods an economy
produces.
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C H A P T E R 18: Measuring National Output and National 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.
• Tax evasion is usually thought to be the major
incentive for people to participate in the
underground economy
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C H A P T E R 18: Measuring National Output and National Income
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.
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C H A P T E R 18: Measuring National Output and National Income
Gross National Income per Capita
Per Capita Gross National Income for Selected Countries, 2002
COUNTRY
Switzerland
Japan
Norway
United States
Denmark
Ireland
Sweden
United Kingdom
Netherlands
Austria
Finland
Germany
Belgium
France
Canada
Australia
Italy
Spain
Greece
U.S. DOLLARS
36,970
35,990
35,530
34,870
31,090
28,880
25,400
24,230
24,040
23,940
23,840
23,700
23,340
22,640
21,340
18,770
18,470
14,860
11,780
COUNTRY
Portugal
South Korea
Argentina
Mexico
Czech Republic
Brazil
South Africa
Turkey
Colombia
Jordan
Romania
Philippines
China
Indonesia
India
Pakistan
Nepal
Rwanda
Ethiopia
U.S. DOLLARS
10,670
9,400
6,860
5,540
5,270
3,060
2,900
2,540
1,910
1,750
1,710
1,050
890
680
460
420
250
220
100
Source: The World Bank Atlas, 2002.
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