C. Bordoy UWC Maastricht National Income Accounting (NIA) Tragakes 2011, pp. 219-226.

C. BordoyC. BordoyUWC MaastrichtUWC Maastricht

National Income Accounting National Income Accounting (NIA)(NIA)

Tragakes 2011, pp. 219-226Tragakes 2011, pp. 219-226

Measuring economic activityMeasuring economic activity It involves measuring the national It involves measuring the national

income or output of an economy. income or output of an economy. Also referred to as NIA.Also referred to as NIA.

Why do we want to measure national Why do we want to measure national income / value of aggregate output?income / value of aggregate output? To assess performance over timeTo assess performance over time To make comparisons with other To make comparisons with other

economieseconomies As a basis for policy makingAs a basis for policy making


In Microeconomics: In Microeconomics: quantityquantity In Macroeconomics: In Macroeconomics: (monetary) (monetary)

valuevalue, as we need to add up , as we need to add up quantities of output of many different quantities of output of many different goods and services.goods and services.

Value = quantity x priceValue = quantity x price Level of aggregate output= Level of aggregate output=

aggregate output= value of aggregate output= value of aggregate output.aggregate output.


CFM: the value of aggregate output CFM: the value of aggregate output produced is equal to the total income produced is equal to the total income generated in producing that output, generated in producing that output, which is equal to the expenditures which is equal to the expenditures made to purchase that output.made to purchase that output.

‘‘National income’ and value of National income’ and value of aggregate output sometimes used aggregate output sometimes used interchangeably.interchangeably.

There are three ways to measure the There are three ways to measure the value of aggregate output.value of aggregate output.


1.1. ExpenditureExpenditure approach. Measures approach. Measures total amount of spending to buy total amount of spending to buy finalfinal goods and services. goods and services.

Intermediate goods are not counted.Intermediate goods are not counted. Four components:Four components:

1.1. Consumption spendingConsumption spending (C): all (C): all purchases by households on final g&s purchases by households on final g&s in a year (excludes housing).in a year (excludes housing).

2.2. Investment spendingInvestment spending (I) includes: (I) includes: Spending by firms on capital goodsSpending by firms on capital goods Spending on new constructionSpending on new construction Changes in inventoriesChanges in inventories


3.3. Government spendingGovernment spending (G): spending by (G): spending by governments within a country governments within a country (national, regional, local).(national, regional, local). Purchases of factors of productionPurchases of factors of production Investment by governments (Investment by governments (public public

investmentinvestment), usually on capital goods: ), usually on capital goods: roads, airports, hospitals, schools,…).roads, airports, hospitals, schools,…).

4.4. Net exportsNet exports, ie, exports minus imports , ie, exports minus imports (X-M).(X-M).

C + I + G +(X – M) = GDPC + I + G +(X – M) = GDP


GDP: the market value of all final GDP: the market value of all final goods and services produced in a goods and services produced in a country over a time period (usually a country over a time period (usually a year). year).

Remarks on Investment:Remarks on Investment:1.1. Investment is carried out also by Investment is carried out also by

governments, but included under G.governments, but included under G.

2.2. Investment in capital includes only Investment in capital includes only spending on physical capital, thus spending on physical capital, thus excluding:excluding:

Investments in human capital Investments in human capital Investments in natural capitalInvestments in natural capital


2.2. IncomeIncome approach. It adds up all approach. It adds up all income earned by the factors of income earned by the factors of production within a country over a production within a country over a time period.time period.

National income = National income = wages+rent+interest+ profits ≠ wages+rent+interest+ profits ≠ GDPGDP

In order to calculate GDP, some In order to calculate GDP, some adjustments need to be made to adjustments need to be made to national income.national income.


3.3. OutputOutput approach. Measures the approach. Measures the value of each good and service value of each good and service produced in the economy over a time produced in the economy over a time period (a year) and then sums them period (a year) and then sums them up to obtain the total value of output up to obtain the total value of output produced. produced.

It calculates the value of output by It calculates the value of output by economic sector, such as agriculture, economic sector, such as agriculture, manufacturing, transport, banking, etc. manufacturing, transport, banking, etc. This is then added up to obtain the value This is then added up to obtain the value of output for the entire economy.of output for the entire economy.

..C. BordoyC. Bordoy

UWC MaastrichtUWC Maastricht

GDP and GNI/GNP

In the real world, the value of output is not always equal to the total income generated in producing that output: Output produced by factors of production

owned by foreigners (a US multinational in India that remits its profits to the US). Does this profit count as Indian or US income?

A Spanish worker in Germany that sends a large part of his income to his family in Spain). Should ths income be counted as Spain’s or Germany’s income?

Domestic (GDP) means that output has been produced by factors of production within the country, regardless of who owns them.

National (Gross National Income/Product) means that the income is the income of the residents in that country, regardless where this income comes from. Profit remitted to US: included in Indian GDP

but part of US’ GNI, as it is income received by US’ residents.

Value of output produced by Spanish worker is included in Germany’s GDP but his income sent to Spain is part of Spain’s GNI.

GNI or GNP is the total income received by the residents of a country. It is equal to the value of all final g&s produced by the factors of production supplied by the country’s residents regardless where they are located.

GNI = GDP + Income from abroad – income sent abroad

Nominal and real Nominal value is value measured in terms

of prices that prevail at the time of measurement.

If nominal GDP increases in a year, the increase may be due to

1. changes in the quantities of output produced or2. changes in the prices of g&s or 3. changes in both.

We are interested in knowing how much the quantity of output has increased, so we need a measure of GDP that is not influenced by price changes.

Real value is a measure of value that takes into account changes in prices over time. It allows us to make meaningful comparisons over time in the value of any variable that is measured in money terms.

Nominal GDP (GNI) is measured in terms of current prices and it does not account for changes in prices.

Real GDP (GNI) is a measure of economic activity that has eliminated the influence of changes in prices.

Total and per capita Per capita=per person or per head. GDP per capita = Total GDP / total

population. Why are per capita measures

important:1. Different population sizes accross

countriesCountry A Country B

Population 1 million 2 million

GDP € 10 billion

€ 10 billion

GDP per capita € 10 000 € 5 000

2. Population growth. Changes in the size of GDP per capita depend on the relationship between growth in total GDP and growth in population:

If total GDP increases faster than the population, then GDP per capita increases.

If population increases faster than GDP, then GDP per capita decreases.

Gross and net The term ‘gross’ is related to spending to

produce capital. Physical capital has a finite life. Within a

year, some of the capital goods become worn out and are thrown away. This worn out capital is called depreciation.

Total/Gross investment = Replacement of worn out capital goods (depreciation) + New additions of capital goods (net investment).

Gross inv = depreciation + net investment

GDP = C + I + G + (X-M), where I=gross investment. Therefore:

NDP = GDP - depreciation

Evaluation of national income statistics

GDP and GNI are used to make comparisons among countries and over time and we use them as a measure of standards of living. However, they have two problems:

1. NI statistics do not accurately measure the true value of output produced in an economy.

2. Standards of living depend on a variety of factors which are not measured by NI statistics.

Why GDP/GNI do not accurately Why GDP/GNI do not accurately measure outputmeasure output

1.1. Non-marketed outputNon-marketed output: output of g&s that is : output of g&s that is not traded in the market and does not not traded in the market and does not generate any income. Example: one’s own generate any income. Example: one’s own work on repairing one’s home.work on repairing one’s home.

2.2. Output sold in Output sold in undergroundunderground (informal=parallel) markets. Goods are (informal=parallel) markets. Goods are traded in markets and generate income but traded in markets and generate income but they go unrecorded and are not included in they go unrecorded and are not included in the statistics. It includes:the statistics. It includes:

Legal g&s (reselling a good at a higher price Legal g&s (reselling a good at a higher price when there is a price ceiling, a plumber not when there is a price ceiling, a plumber not reporting income to avoid paying taxes)reporting income to avoid paying taxes)


Illegal g&s, such as drugs.Illegal g&s, such as drugs.

3.3. Quality of g&s are not accounted for. Quality of g&s are not accounted for. Technological advances often permit Technological advances often permit improved products to be sold at lower improved products to be sold at lower prices. This provides consumers with prices. This provides consumers with benefits which do not show up in benefits which do not show up in statistics.statistics.

4.4. Negative externalities nor the depletion Negative externalities nor the depletion of natural resources are accounted for. of natural resources are accounted for. They reduce society’s well-being but is They reduce society’s well-being but is not reflected in GDP/GNI.not reflected in GDP/GNI.

5.5. Differing domestic price levelsDiffering domestic price levels


Consider two countries with GDP per capita=$1000 Consider two countries with GDP per capita=$1000 producing only one identical goodproducing only one identical good

Country A has a greater purchasing power (the Country A has a greater purchasing power (the quantity of g&s that can be bought with money) quantity of g&s that can be bought with money) than country B, and thus a higher standard of living than country B, and thus a higher standard of living than the population of country B. If differences in than the population of country B. If differences in price levels across countries are not accounted for, price levels across countries are not accounted for, conclusions about standards of living are conclusions about standards of living are misleading.misleading.

Solution: to convert GDP/GNI values using special Solution: to convert GDP/GNI values using special exchange rates (purchasing power parities).exchange rates (purchasing power parities).


Country A

Country B

Price $100 $200

Number of units country can afford

10 5

Why GDP/GNI cannot accurately Why GDP/GNI cannot accurately measure standards of livingmeasure standards of living

1.1. They do not consider the composition of They do not consider the composition of output (weapons, education, health…). One output (weapons, education, health…). One country may have a lower per capita GDP country may have a lower per capita GDP than another but higher levels of merit goods than another but higher levels of merit goods provision.provision.

2.2. They cannot reflect achievements in levels of They cannot reflect achievements in levels of education, health and life expectancy, with a education, health and life expectancy, with a great impact on standards of living. The great impact on standards of living. The Human Development Index is a better Human Development Index is a better measure.measure.

3.3. No information on the distribution of income No information on the distribution of income and output.and output.


4.4. They do not take into account increased They do not take into account increased leisure. The average number of hours leisure. The average number of hours worked per week has increased in many worked per week has increased in many countries, with the number of leisure countries, with the number of leisure hours increasing. This contributes to hours increasing. This contributes to higher standards of living, but is not higher standards of living, but is not accounted for in GDP/GNI.accounted for in GDP/GNI.

5.5. They do not account for quality of life They do not account for quality of life factors, such as: crime rate, well-factors, such as: crime rate, well-functioning institutions, , degree of functioning institutions, , degree of political freedom,…political freedom,…


Comparisons over time and between Comparisons over time and between countriescountries

Even when using real values of Even when using real values of income and output comparisons of income and output comparisons of real GDP over time may be real GDP over time may be misleading. An increase in real GDP misleading. An increase in real GDP for a particular country may over or for a particular country may over or underestimate the true change in the underestimate the true change in the population’s standard of living.population’s standard of living.

The validity of international The validity of international comparisons is limited by the factors comparisons is limited by the factors mentioned above.mentioned above.


Green GDPGreen GDP

Measures of GDP and GNI are subject to the Measures of GDP and GNI are subject to the following limitations:following limitations:

They do not account for the loss of They do not account for the loss of environmental resources and losses in environmental resources and losses in environmental quality.environmental quality.

They include expenditures undertaken for They include expenditures undertaken for the purposes of cleaning up pollution as the purposes of cleaning up pollution as increases in the value of national output.increases in the value of national output.

As a consequence, the true value of output As a consequence, the true value of output and well-being is overestimated.and well-being is overestimated.


Environmental economists have been working Environmental economists have been working on methods to develop ‘green’ accounting on methods to develop ‘green’ accounting methods. The idea is to make the link methods. The idea is to make the link between the economy and the environment between the economy and the environment more visible in measures of aggregate more visible in measures of aggregate income and output, so that policy-makers income and output, so that policy-makers become more aware of the need for policy become more aware of the need for policy efforts to preserve the environment. efforts to preserve the environment.

Green GDP = GDP – the value of Green GDP = GDP – the value of environmental degradationenvironmental degradation

Green GDP = GDP – the value of Green GDP = GDP – the value of environmental degradation – P, where P= all environmental degradation – P, where P= all expenditures resulting from cleaning up expenditures resulting from cleaning up pollution.pollution.


C. Bordoy UWC Maastricht National Income Accounting (NIA) Tragakes 2011, pp. 219-226.

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