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CHAPTER 9: CHAPTER 9: MEASURING NATIONAL OUTPUT & MEASURING NATIONAL OUTPUT &

NATIONAL INCOMENATIONAL INCOME

OutlineOutline9.1 GDP and GNP 9.1 GDP and GNP

9.2 9.2 Calculating GDP Calculating GDP

9.39.3 GNP & Personal Income GNP & Personal Income

9.4 Nominal and Real GDP 9.4 Nominal and Real GDP

9.5 Limitations of the GDP Concept 9.5 Limitations of the GDP Concept

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9.1 GDP and GNP9.1 GDP and GNPGross Domestic Product (GDP)

◦ The total market value of all final goods and services produced by factors of production in a country over a given period of time.

Final goods and services Refers to goods & services produced for final

use. “Final use” means no more further

processing. Thus, final goods/services are generally goods/services that are readily be consumed by consumers.

Intermediate goods Goods that produced by one firm for the

usage in further processing by another firm. The value of intermediate goods is not

counted in GDP because to avoid double counting.

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Value Added• 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.

• Double counting can also be avoided by counting only the value added to a product by each firm in its production process.

Stage of Production

Values of Sales

(RM)

Value Added

(RM)

(1) Oil drilling

(2) Refining

(3) Shipping

(4) Retail sale

Total value added

1.00

1.30

1.60

2.00

1.00

0.30

0.30

0.40

2.00

Table: Value added in the Production of a Gasoline

Gross National Product (GNP)◦ Total market value of all final goods and

services produced by a resident of a country during a given period of time.

(or)GDP (+) factor income received from

abroad(–)factor income paid abroad

Gross National Product

GNP = GDP + net factor income from abroad

Figure: GDP in MalaysiaFigure: GDP in Malaysia

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9.2 CALCULATING GDP9.2 CALCULATING GDP

There are two (2) approaches available for measuring GDP and both are used.

They are;

(1) The expenditure approach

(2) The income approach

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(1) The Expenditure (1) The Expenditure ApproachApproachDefinition:

◦A method of computing GDP that measures the amount spent on all final goods during a given period.

◦Formula:

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GDP = C + I + G + NXGDP = C + I + G + NX

Personal consumption expenditures (C) ◦ household spending on consumer goods.

Gross private domestic investment (I) ◦ spending by firms & households on capital

goods such as plant, equipment, inventory & new residential structures.

Government consumption & gross investment (G)◦ expenditures by federal, state, and local

governments for final goods and services.Net exports (X – IM)

◦ net spending by the rest of the world.◦ exports (EX) minus imports (IM)

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Calculating GDP: Calculating GDP: (1)The Expenditure Approach(1)The Expenditure Approach

GDP = C + I + G + NX

Durable good + Non-durable goods + Services (C) (+) Residential Investment + Non-residential

Investment + Changes in inventories (I) (+) Federal gov. + State gov. + Local gov. (G) (+) (Export – Import) (NX)

Gross Domestic Product (GDP)

Personal Consumption Personal Consumption Expenditures (C)Expenditures (C)

C = expenditures by consumers on the following:

◦Durable goods: Goods that last a relatively long time, eg. cars & appliances.

◦Nondurable goods: Goods that are used up fairly quickly, eg. food & clothing.

◦Services: Things that do not involve the production of physical things, eg. legal services, medical services, & education.

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Gross Private Domestic Gross Private Domestic Investment (I)Investment (I)

I = the purchase of new capital goods or total investment by the private sector. It includes the purchase of new housing, plants, equipment, & inventory by the private sector.◦Nonresidential investment includes

expenditures by firms for machines, tools, plants.

◦Residential investment includes expenditures by households & firms on new houses.

◦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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Government Spending (G)Government Spending (G) && Net Export (X-IM)Net Export (X-IM)

Government consumption & gross investment (G) counts expenditures by federal, state & local governments for final goods & services.

Net exports (NX) is the difference between exports & imports; (Export – Import)◦Exports (X) are sales to foreigners of

goods & services produced in Malaysia.◦Imports (IM) are purchases of goods &

services from abroad by Malaysian. 13

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Components of U.S. GDP, 2002: The Expenditure ApproachComponents of U.S. GDP, 2002: The Expenditure ApproachBILLIONS OF

DOLLARSPERCENTAGE

OF GDP

Personal consumption expenditures (C) 7303.7 69.9Durable goods 871.9 8.3Nondurable goods 2115.0 20.2Services 4316.8 41.3

Gross private domestic investment (l) 1543.2 14.8Nonresidential 1117.4 10.7Residential 471.9 4.5Change in business inventories 3.9 0

Government consumption and gross investment (G)

1972.9 18.9

Federal 693.7 6.6State and local 1279.2 12.2

Net exports (EX – IM) 423.6 4.1Exports (EX) 1014.9 9.8Imports (IM) 1438.5 13.8

Total gross domestic product (GDP) 10446.2 100.0Note: Numbers may not add exactly because of rounding.Source: U.S. Department of Commerce, Bureau of Economic Analysis.

(2)(2) The Income Approach The Income Approach

Definition:◦The total income earned by the

factors of production owned by a country’s citizens.

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Calculating GDP: Calculating GDP: (2) The Income Approach(2) The Income Approach

National income (+) Depreciation (+) (Indirect taxes – subsidies) (+) Net factor payments to the rest of the world (+) others

GDP

National Income: Compensation to employees (+) Proprietors’ income

(+) Corporate profits (+) Net interest

(+) Rental income National Income

Net Factor Payment to the Rest of the World: (Foreigners’ income – citizens’ earning aboard)

Others: (Business transfer payments +

Discrepancy)

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Table: Components of U.S. GDP, 2002: The Income Approach

BILLIONS OFDOLLARS

PERCENTAGE

OF GDP

National income 8,199.9

80.3

Compensation of employees 6,010.0

58.9

Proprietors’ income 943.5 7.3Corporate profits 748.9 7.3Net interest 554.8 5.4Rental income 142.7 1.4

Depreciation 1,351.3

13.2

Indirect taxes minus subsidies 739.4 7.2Net factor payments to rest of the world

11.1 0.1

Other 96.1 0.9Gross domestic product 10,205.

6100.

0

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Compensation of employees ◦Includes wages, salaries, and various

supplements—employer contributions to social insurance and pension funds, for

◦For example: paid to households by firms and by the government.

Proprietors’ income ◦The income of unincorporated

businesses.Rental income

◦The income received by property owners in the form of rent.

Corporate profits ◦The income of corporate businesses.

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Net interest ◦ The interest paid by business.

Indirect taxes minus subsidies ◦Taxes such as sales taxes, customs

duties, and license fees, less subsidies that the government pays for which it receives no goods or services in return.

Net business transfer payments ◦ Net transfer payments by businesses

to others.

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9.3 GNP & PERSONAL 9.3 GNP & PERSONAL INCOMEINCOME

Gross National Product (GNP)◦ The total market value of all final

goods and services produced within a given period by factors of production owned by a country’s citizen, regardless of where the output is produced.

Personal Income◦The total income of households before

paying personal income tax.

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Table: GDP, GNP, NNP, National Income, Personal Income, and Disposable Personal Income, 2002

DOLLARS(BILLIONS)

GDP 10,205.6

Plus: receipts of factor income from the rest of the world + 342.1

Less: payments of factor income to the rest of the world 353.2

Equals: GNP 10,194.5

Less: depreciation 1,351.3

Equals: net national product (NNP) 8,843.2

Less: indirect taxes minus subsidies plus other 643.3

Equals: national income 8,199.9

Less: corporate profits minus dividends 332.6

Less: social insurance payments 731.2

Plus: personal interest income received from the government and consumers

+ 439.1

Plus: transfer payments to persons +1,148.7

Equals: personal income 8,723.9

Less: personal taxes 1,306.2

Equals: disposable personal income 7,417.7

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Table: Disposable Personal Income and Personal Saving, 2002

DOLLARS(BILLION

S)Disposable personal income 7,417.7

Less:

Personal consumption expenditures 7063.5

Interest paid by consumers to business 204.3

Personal transfer payments to foreigners 31.3

Equals: personal saving 118.6

Personal savings as a percentage of disposable personal income:

1.6%

9.4 NOMINAL VERSUS REAL 9.4 NOMINAL VERSUS REAL GDPGDP

Nominal GDP◦ Definition: values the production of

goods and services at current prices or current dollar that we pay for things.

Real GDP ◦Definition: values the production of

goods and services at constant prices or Nominal GDP adjusted the price changes.

◦Formula:

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Real GDP = Nominal GDP / price index

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TABLE: A Three-Good Economy(1) (2) (3) (4) (5) (6) (7) (8)

GDP IN GDP IN GDP IN GDP INYEAR 1 YEAR 2 YEAR 1 YEAR 2

IN IN IN INPRODUCTION PRICE PER UNIT YEAR 1 YEAR 1 YEAR 2 YEAR 2

YEAR 1

YEAR 2 YEAR 1 YEAR 2 PRICES PRICES PRICES PRICES

Q1 Q2 P1 P2 P1 x Q1 P1 x Q2 P2 x Q1 P2 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

Total $12.10 $15.10 $18.40 $19.20

Nominal GDPin year 1

Nominal GDPin year 2

Calculating Nominal & Real GDP

GDP DeflatorGDP DeflatorDefinition:

◦Measure of the price level calculated as the ratio of nominal GDP to real GDP times 100.

◦It tells us what portion of the rise in nominal GDP that is attributable to a rise in prices rather than a rise in the quantities produced.

Formula:

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GDP Deflator = (Nominal GDP/Real GDP) x 100

9.59.5 LIMITATIONS OF GDP LIMITATIONS OF GDP CONCEPTCONCEPT

Ignore non-market and household activities◦Ignores “do-it-yourself” household production.◦Example: The “output” of a housewife taking care of

her children or family. Underground economy

◦Part of an economy in which transactions take place and in which income is generated that is unreported and therefore not counted in GDP.

◦Example: All market activity that goes unreported because it’s illegal or those involved want to evade taxes

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Distribution output◦Re-distributive income policies have no

direct impact on GDP because most output goes to a few people .

◦Example: Imputed dollar amount for food produced by farm families for their own consumption.

Health and Life Expectancy◦Good health and a long life do not show

up in the real GDP, at least not directly.◦As GDP increased, our life expectancy

higher, but we face new health and life expectancy problems every year, such as AIDS and drug abuse.

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Kinds of goods◦Did not differentiate the important

goods (e.g. medicines or foods) against ‘harmful’ goods (cigarettes).

Pollution◦Economy activity directly influence

the quality of environment. Leisure

◦Increase the social welfare, will tend to decrease the output (GDP).

◦Leisure is not explicitly bought and sold in a market

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