Mohammed Razibul Islam University of Dhaka

1. Measurement of National
Income

2. • Like the accounts of a business national
income accounts have two sides: a product
side and an income side.
• On the product side production and sales are
measured.
• The income side measures the distribution of
the proceeds from sales.

3. • On the product side there are two widely
reported measures of overall production:
• Gross domestic product (GDP) and gross
national product (GNP)
• GDP and GNP differ in their treatment of
international transactions.
• GNP includes earnings of Bangladeshi
corporations overseas and Bangladeshi
residents working overseas: GDP does not.

4. • Conversely, GDP includes earnings from current
production in Bangladesh that accrue to foreign
residents or foreign owned firms: GNP excludes
those items.
• For example, profits earned in Bangladesh by a
foreign owned firm would be included in GDP but
not in GNP.
• The difference between GDP and GNP is large for
a country such as Pakistan and Bangladesh with a
large number of residents working overseas than
foreign residents working in Bangladesh

5. • On the income side of national accounts, the
central measure is national income which will
be discussed later.

6. Definition of GDP
• GDP is a measure of all currently produced final
goods and services evaluated at market price.
• A number of aspects of this definition require
clarification.
• Currently produced: GDP includes only currently
produced goods and services and includes only
goods and services produced during a given
period such as per quarter and per year.

7. • Such market transaction as exchanges of
previously produced houses, cars or factories
do not enter into GDP.
• Exchanges of assets such as stocks and bonds
are examples of other market transactions
that do not directly involve current production
of goods and services and therefore not in
GDP.

8. • Final goods and services: Only the production of final
goods and services enters GDP. Goods that are used in
the production of other goods rather than being sold
to final purchasers , the intermediate goods are not
counted separately in GDP.
• Evaluated at market prices: GDP is the value of goods
and services determined by the common measuring
rod of market prices. Bus this excludes the services or
goods that are not sold in markets, such as services of
homemakers or output of home gardeners as well as
non-reported output from illegal activities such as sale
of narcotics, gambling etc.

9. • GDP can be broken down into components such
as: GDP=C + I + G +X –M
• Consumption is the largest component of GDP. It
consists of household sector’s purchases of
currently produced goods and services.
Consumption can be further broken down into
consumer durable goods (automobiles,
television), nondurable consumer goods (foods ,
clothing etc.) and consumer services( medical
services, haircuts).

10. • The investment component of GDP consists three
subcomponents .
• The largest component is business fixed
investment. It consists of purchases of newly
produced plant and equipment ----the capital
goods.
• The second is residential construction
investment, the building of single and multifamily
housing units.
• The final component is inventory investment, the
change in business inventories.

11. • Government purchases of good and services
are the share of current output bought by the
government sector.
• But not all G are part of GDP because not all G
represent a demand for currently produced
goods and services.
• Government transfer payment to individuals
(such as old age pensions) are examples of
expenditures that are not included in GDP.

12. • The final component of GDP is net exports.
• These represent direct contribution of the foreign sector to
GDP.
• Gross exports are currently produced goods and services
sold to foreign buyers. They are a part of GDP.
• Imports are purchases by domestic buyers of goods and
services produced abroad and should not be counted in
GDP.
• Imported goods, however, are included in C, I and G in GDP.
• Therefore we need to subtract the value of imports to
arrive at the total of domestically produced goods and
services.

13. National income
• We now turn to the income side of national
accounts.
• Here starting point is GNP total, not GDP.
• The reason is that it is GNP that includes
income earned abroad by Bangladeshi
residents and firms but excludes earnings of
foreign residents and firms from production in
Bangladesh.

14. • To go from GDP to GNP, we add foreign earnings
of Bangladeshi residents and firms and subtract
earnings in Bangladesh by foreign residents and
firms.
• GNP=GDP + factor payments from abroad –
• factor payments to abroad.
• National income is the sum of all factor earnings
from current production of goods and services.
Factor earnings are incomes of factors of
production: land labor and capital.

15. Calculation of National Income
• The first charge against GNP that is not included
in NI is depreciation. The portion of capital stock
used up must be subtracted from final sales
before NI is computed.
• Because depreciation represents a cost of
production , not factor income.
• Making this subtraction gives us net national
product.
• From this total, both indirect taxes-sales tax and
excise taxes-and the net of some additional item
labeled “other” are subtracted to arrive at NI.

16. Calculation of NI
• Gross National product
• Minus: Depreciation
• Net National product
• Minus: Indirect taxes and other
• National income

17. Components of NI
• Compensation of employees
• Corporate profits
• Proprietors’ income
• Rental income of persons
• Net interest income
• Proprietors’ income is the income of
unincorporated business

18. From NI to Personal Income (PI) and
Disposable Personal Income (DPI)
• National income is a measure of income earned from
current production of goods and services.
• For some purposes, it is useful to have a measure of income
received by persons regardless of source.
• For example, consumption expenditures by households
would be influenced by income.
• The relevant income concept would be one of all income
received by persons.
• We also want a measure of income after deducting
personal tax payments.
• When we deduct tax payments from personal income we
get a measure of disposable (after-tax) personal income.

19. Relationship between NI, PI and DPI
• National income
• Less corporate profits, contribution to social security
• Plus Dividends, transfer payments to persons, personal
interest income
• Equals personal income
• Less personal taxes and Nontax payments
• Equals disposable personal income
• Less personal consumption expenditures, interest paid
to business, personal TP to foreigners
• Equals personal saving

20. .
• A series of adjustments takes us from NI to PI, the
amount of income that HH and noncorporate
businesses receive.
• First we reduce NI by the amount that
corporations earn but do not pay out, either
because the corporations are retraining earnings
or because they are paying taxes to the
government.
• This adjustment is made by subtracting corporate
profits which equals, corporate taxes, dividends
and retained earnings and adding back dividends.

21. • The items added in going from NI to PI are
payments to persons that are not in return for
current production of goods and services.
• Examples are government TP such as social
security payments, veterans’ pensions and
payments to retired government workers.
• The other item to be added in going from NI to PI
is personal interest income---mostly interest
payments by government to persons
• Government interest payments are made on
bonds issued by the government.

22. Real GDP and nominal GDP
• Real GDP is calculated at constant prices or
base year prices (from July new base year is
2005-2006).
• Using 2005-2006, for example, we can
compute the value of GDP in 2012-13 in terms
of the price level in 2005-2006.
• Nominal GDP is calculated in terms of current
prices.

23. Nominal GDP, Real GDP and Implicit
Price Deflator
• Year Nominal GDP Real GDP Implicit Price
• Deflator
• -----------------------------------------------------------
• 2005-06 6244.4 6244.4 100.0
• 2010-11 7636.0 6928.4 110.2
• 2011-12 8079.9 7188.8 112.4

24. • The ratio of nominal GDP to real GDP is just
the ratio of current price level of goods and
services relative to price level in the base year.
• it is a measure of aggregate price level, which
we call a price index.
• This index of the prices of goods and services
in GDP is called the implicit price deflator.

25. • We measure changes in aggregate price level by
comparing values of the implicit GDP deflator (IPD) in
different years.
• For example, consider a comparison of the IPD
• between base year 2005-06 and 2011-12 in Bangladesh
example. In the base year IPD has a value of 100.
• In 2011-12 the value of IPD was 112.4. This means that
nominal GDP (GDP at current prices) was 12.4 percent
higher than the same goods and services valued at
2005-06 prices.
• That is aggregate price level rose 12.4 percent between
2005-06 and 2011-12.

26. • We can also use the implicit GDP deflator to
measure price changes between two years
neither of which is the base year.
• Between 2010-11 and 2011-12 for example,
Implict GDP deflator rose from 110.2 to 112.4.
• As measured by this index the percentage rise
in the aggregate price level (or rate of
inflation) between these two years was
• [(112.4-110.2)/110.2]*100=2.0%

27. • Now consider how GDP deflator got its name.
• The ratio of nominal GDP to Real GDP it
termed a deflator because we can divide
nominal GDP by this ratio to correct for the
effect to correct for the inflation in GDP---to
deflate GDP. This follows because
• GDP deflator=nominal GDP/Real GDP
• Real GDP=nominal GDP?GDP deflator.

28. Consumer price Index versus GDP
deflator
• Just as GDP turns the quantities of many
goods and services into a single number
measuring the value of production, the CPI
turns the prices of many goods and services
into a single index measuring the overall level
of prices.
• That is CPI is the price of basket of goods and
services in current year relative to the price of
the same basket in some base year.

29. • For example, suppose that the typical consumer
buys 5 apples and 2 oranges every month. Then
the basket of goods consists of 5 apples and 2
oranges and the CPI is:
• CPI=(5*current price of Apples)+ 2* current price
of Oranges)/(5*2002 price of
Apples)+(2*2002price of Oranges).
• This index tells us how much it costs now to buy 5
apples and 2 oranges relative to how much it cost
to buy the same basket of fruit in 2002.

30. CPI versus GDP Deflator
• The GDP deflator and CPI give somewhat
different information about what is happening
to the overall level of prices in the economy.
• There are three key differences between these
two measures.

31. • GDP deflator measures the prices of all goods and
services produced, whereas CPI measures the
prices only goods and services bought by the
consumers.
• Thus an increase in prices of the goods bought by
the government and firms will show up in GDP
deflator but not in CPI.
• GDP deflator includes only those goods produced
domestically. Imported goods are not part of GDP
and do not show up in GDP deflator.

32. • The most important difference is the way the two
measures aggregate the many prices in the
economy.
• The CPI assigns fixed weights to the prices of
different goods whereas GDP deflator assigns
changing weights.
• CPI is computed using a fixed basket of goods
whereas GDP deflator allows basket of goods to
change over time as the composition of GDP
changes.

33. • Now the question is Which one is superior as a
price index?
• The answer is that neither is clearly superior.
• Suppose price of oranges increases because of
serious drought in the country.
• Because CPI is computed with a fixed basket of
goods that includes oranges (whereas oranges
are not part of GDP), the increase in the price of
oranges causes a substantial rise in CPI but does
not affect GDP deflator.

34. • That is , CPI also called a Laspeyers index
(fixed basket) tends to overstate the increase
in the cost of living because it does not take
into account that consumers have the
opportunity to substitute less expensive goods
for more expensive ones.
• By contrast, GDP deflator also called a Paasche
index (changing basket) tends to understate
the increase in he cost of living.

35. • That is GDP deflator shows no rise in price.
• Yet surely the higher price of oranges makes
the consumers worse off.

36. Household Work by Women a Year
• The value of unpaid HH work of Bangladeshi
women is equivalent to as much as 87.2% of
last fiscal year’s GDP according to a study by
CPD.
• The govt. should focus on changing the
estimation practice system of National
Accounting so that women’s unaccounted
activities are reflected in GDP.

37. • Women’s unpaid activities are considered non-
economic and thus remain outside the traditional
framework of GDP estimation.
• The CPD has used two methods in conducting the
research: the replacement cost method and the
willingness to accept method.
• Replacement cost is a method which measures
how much money one would pay monthly if
he/she were to hire someone to do the HH
chores instead of doing them by himself or
herself.

38. • In willingness to accept method, the value is
calculated on how much money one wishes to
pay monthly for all unpaid work that he/she
does daily, considering types of work,
education, age and time spent for works.
• Based RCM, the estimated value of women’s
unpaid work is equivalent to 76.8% (Tk.
594,845 crore in constant prices) of the GDP
in FY 2013-14.

39. • Based on WAM, the corresponding estimate
was 87.2% (Tk. 675,398 crore in constant
prices) of GDP in FY 2013-14.
• The study is conducted with a comprehensive
survey of 13640 individuals aged 15 years and
above of whom 8320 are female and 5320 are
male residing in 5670 HH across 64 districts.

40. • The study also argues that the time spent for
unpaid activities is about three times higher
than that of a male person.
• On an average a female spends about 8 hours
on unpaid activities while a male spends
around three hours.