CHAPTER 9: MEASURING NATIONAL OUTPUT & NATIONAL INCOME
9.1 GDP and GNP
9.2 Calculating GDP
9.3 GNP & Personal Income
9.4 Nominal and Real GDP
9.5 Limitations of the GDP Concept
9.1 GDP and GNP
Gross 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.
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.
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.
Table: Value added in the Production of a Gasoline 1.00 0.30 0.30 0.40 2.00 1.00 1.30 1.60 2.00
Total value added
Value Added (RM) Values of Sales (RM) Stage of Production
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.
(+) factor income received from abroad
(–)factor income paid abroad
Gross National Product
GNP = GDP + net factor income from abroad
Figure: GDP in Malaysia
9.2 CALCULATING GDP
There are two (2) approaches available for measuring GDP and both are used.
(1) The expenditure approach
(2) The income approach
(1) The Expenditure Approach
A method of computing GDP that measures the amount spent on all final goods during a given period.
GDP = 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)
Calculating GDP: (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 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.
Gross Private Domestic 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.
Government Spending (G) & 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.
Components of U.S. GDP, 2002: The Expenditure Approach BILLIONS OF DOLLARS PERCENTAGE OF GDP Personal consumption expenditures (C) 7303.7 69.9 Durable goods 871.9 8.3 Nondurable goods 2115.0 20.2 Services 4316.8 41.3 Gross private domestic investment (l) 1543.2 14.8 Nonresidential 1117.4 10.7 Residential 471.9 4.5 Change in business inventories 3.9 0 Government consumption and gross investment (G) 1972.9 18.9 Federal 693.7 6.6 State and local 1279.2 12.2 Net exports (EX – IM) 423.6 4.1 Exports ( EX ) 1014.9 9.8 Imports ( IM ) 1438.5 13.8 Total gross domestic product (GDP) 10446.2 100.0 Note: Numbers may not add exactly because of rounding. Source: U.S. Department of Commerce, Bureau of Economic Analysis.
(2) The Income Approach
The total income earned by the factors of production owned by a country’s citizens.
Calculating GDP: (2) The Income Approach National income (+) Depreciation (+) (Indirect taxes – subsidies) (+) Net factor payments to the rest of the world (+) others GDP
Compensation to employees
(+) Proprietors’ income
(+) Corporate profits
(+) Net interest
(+) Rental income
Net Factor Payment to the Rest of the World:
(Foreigners’ income – citizens’ earning aboard)
(Business transfer payments + Discrepancy)
Table: Components of U.S. GDP, 2002: The Income Approach BILLIONS OF DOLLARS PERCENTAGE OF GDP National income 8,199.9 80.3 Compensation of employees 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 Depreciation 1,351.3 13.2 Indirect taxes minus subsidies 739.4 7.2 Net factor payments to rest of the world 11.1 0.1 Other 96.1 0.9 Gross domestic product 10,205.6 100.0
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.
The income of unincorporated businesses.
The income received by property owners in the form of rent.
The income of corporate businesses.
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.
9.3 GNP & PERSONAL INCOME
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.
The total income of households before paying personal income tax.
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
Table: Disposable Personal Income and Personal Saving, 2002 DOLLARS (BILLIONS) 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 GDP
Definition: values the production of goods and services at current prices or current dollar that we pay for things.
Definition: values the production of goods and services at constant prices or Nominal GDP adjusted the price changes .
Real GDP = Nominal GDP / price index
Calculating Nominal & Real GDP TABLE: A Three-Good Economy (1) (2) (3) (4) (5) (6) (7) (8) GDP IN GDP IN GDP IN GDP IN YEAR 1 YEAR 2 YEAR 1 YEAR 2 IN IN IN IN PRODUCTION PRICE PER UNIT YEAR 1 YEAR 1 YEAR 2 YEAR 2 YEAR 1 YEAR 2 YEAR 1 YEAR 2 PRICES PRICES PRICES PRICES Q 1 Q 2 P 1 P 2 P 1 x Q 1 P 1 x Q 2 P 2 x Q 1 P 2 X Q 2 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 GDP in year 1 Nominal GDP in year 2
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.
GDP Deflator = (Nominal GDP/Real GDP) x 100
9.5 LIMITATIONS OF GDP CONCEPT
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.
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
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.
Kinds of goods
Did not differentiate the important goods (e.g. medicines or foods) against ‘harmful’ goods (cigarettes).
Economy activity directly influence the quality of environment.
Increase the social welfare, will tend to decrease the output (GDP).
Leisure is not explicitly bought and sold in a market