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REV 01
TOPIC 2
MEASURING NATIONAL OUTPUT AND
NATIONAL INCOME
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Gross Domestic Product
• Gross domestic product (GDP) is the total
market value of all final goods and services
produced within a given period by factors of
production located within a country.
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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.
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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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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.
– 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.
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Value Added
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
$ 1.00
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Exclusions of Used Goods
and Paper Transactions
• GDP ignores all transactions in which money or
goods change hands but in which no new goods
and services are produced.
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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).
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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.
The Expenditure Approach
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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.
• 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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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 )
Components of GDP, 1999:
The Expenditure Approach
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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
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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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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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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 are the goods that firms produce now but
intend to sell later.
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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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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
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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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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 Malaysia
produced goods and services.
– Imports (IM) are Malaysia purchases of goods and
services from abroad).
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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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The Income Approach
Components of GDP, 2002: The Income Approach
National income
Compensation of employees
Proprietors’ income
Corporate profits
Net interest
Rental income
Depreciation
Indirect taxes minus subsidies
Net factor payments to the rest of the world
Other
Gross domestic product
BILLIONS OF
DOLLARS
PERCENTAGE
OF GDP
8,199.9
80.3
6,010.0
943.5
748.9
554.8
142.7
58.9
7.3
7.3
5.4
1.4
1,351.3
739.4
11.1
- 96.1
10,205.6
13.2
7.2
0.1
- 0.9
100.0
From GDP to Disposable Personal Income
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GDP, GNP, NNP, National Income, Personal Income, and Disposable Personal Income, 2002
DOLLARS
(BILLIONS)
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 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
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
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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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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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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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• 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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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.