This chapter discusses measuring total output and income through concepts like GDP, GNP, and their components. GDP is the total market value of all final goods and services produced within a country in a given period. It has four main components: consumption, investment, government spending, and net exports. GDP can be measured by summing total income or total spending. GNP differs from GDP by including income earned abroad. The chapter notes various conceptual limitations to using GDP as a complete measure of economic well-being and living standards.

1. Dolan, Economics Combined Version 4e, Ch. 19
Macroeconomics
Rittenberg
Chapter 6:
“Measuring Total
Output and Income”

2. 1. MEASURING TOTAL
OUTPUT
Learning Objectives
1. Define gross domestic product and its
four major spending components and
illustrate the various flows using the
circular flow model.
2. Distinguish between measuring GDP as
the sum of the values of final goods and
services and as the sum of values added
at each stage of production.
3. Distinguish between gross domestic
product and gross national product.

3. GDP = C + I +G + XN
• C = Consumption (household spending)
• I = Gross Private Domestic Investment
• Fixed Investment (real Capital Purchases)
• Inventory Investment (changes in inventory of finished
products, intermediate products, or raw materials)
• G = Government Purchases
• excludes transfer payments
• XN = Net Exports (Exports – Imports)

4. © 2013, published by Flat World Knowledge
1.1 The Components of GDP
• A flow variable is a variable that is
measured over a specific period of time.
• A stock variable is a variable that is
independent of time.
GDP =
C + I + G + Xn

5. © 2013, published by Flat World Knowledge
1.1 The Components of GDP
• Personal consumption is a flow variable that
measures the value of goods and services
purchased by households during a time period.
Firms Households
Personal consumption
Consumer goods
and services
Factors of
production (labor,
capital, and natural
resources)
Factor incomes (wages, interest, profit, and rent)

6. © 2013, published by Flat World Knowledge
1.1 The Components of GDP
• Gross private domestic investment is the
value of all goods produced during a period for
use in the production of other goods and
services.
Firms Households
Personal consumption
Private investment
Factor incomes

7. © 2013, published by Flat World Knowledge
1.1 The Components of GDP
• Government purchases are the sum of purchases
of goods and services from firms by government
agencies plus the total value of output produced by
government agencies themselves during a time
period.
• Transfer payments – (excluded in Government
Purchases) are payments that do not require the
recipient to produce a good or service (in that time
period) in order to receive them.
– Examples: Welfare, Unemployment, Student Financial Aid,
Military Retirement, Social Security, ETC.

8. Which of the following would not count in the G
(Government Purchases) component of GDP?
A. Money spent to build a new bridge
B. Pensions paid to retired presidents
C. Salaries paid to state college professors
D. Paper supplies purchased by the IRS
E. All of these are part of Government
Purchases
Clicker:

9. © 2013, published by Flat World Knowledge
1.1 The Components of GDP
Firms Households
Personal consumption
Factor incomes
Private investment
Government
agencies
Government
purchases

10. © 2013, published by Flat World Knowledge
1.1 The Components of GDP
• Exports are the sales of a country’s goods
and services to buyers in the rest of the world
during a particular time period.
• Imports are purchases of foreign-produces
goods and services by a country’s residents
during a period.
• Net Exports are exports minus imports.
Exports (X) – imports (M) = net exports (Xn)
• A trade deficit occurs when there are
negative net exports.
• A trade surplus occurs when there are
positive net exports.

11. © 2013, published by Flat World Knowledge
1.1 The Components of GDP
• Exports are the sales of a country’s goods
and services to buyers in the rest of the world
during a particular time period.
• Imports are purchases of foreign-produces
goods and services by a country’s residents
during a period.
• Net Exports are exports minus imports.
Exports (X) – imports (M) = net exports (Xn)
• A trade deficit occurs when there are
negative net exports.
• A trade surplus occurs when there are
positive net exports.

12. © 2013, published by Flat World Knowledge
1.1 The Components of GDP
Firms Households
Personal consumption
Factor incomes
Private investment
Government
agencies
Government
purchases
Net
Exports
Rest of the world

13. © 2013, published by Flat World Knowledge
1.1 The Components of GDP

14. © 2013, published by Flat World Knowledge
1.2 Final Goods and Value
Added
• The Value added is the amount by which the
value of a firm’s output exceeds the value of
the goods and services the firm purchases
from other firms.
Good Produced by Purchased by Price Value Added
Logs Logger Sawmill $12,000 $12,000
Lumber Sawmill Construction firm $25,000 $13,000
House Construction firm Household $125,000 $100,000
FINAL VALUE $125,000
SUM OF VALUES ADDED $125,000

15. © 2013, published by Flat World Knowledge
1.3 GNP: An Alternative
Measure of Output
• Gross national product (GNP) is the total
value of final goods and services produced during
a particular period with factors of production
owned by the residents of a particular country.
EQUATION 1.3
GDP + net income received from abroad by
residents of a nation = GNP

16. © 2013, published by Flat World Knowledge
Clicker:
• GDP Accounting:
• A ton of oranges grown in Tulare County
CA and purchased by a wholesale firm in
Tokyo, Japan would be counted in:
A. Consumption
B. Net exports as a +
C. Net exports as a –
D. Investment

17. © 2013, published by Flat World Knowledge
Clicker: 2 points
• GNP/GDP Accounting:
• A ton of oranges grown in Tulare County CA by
a us farmer and and ultimately sold by a grocery
chain in Kanas would count as:
A. Consumption
B. Net exports as a +
C. Net exports as a –
D. Investment

18. © 2013, published by Flat World Knowledge
Clicker:
• GNP/GDP Accounting:
• A ton of strawberries grown in Mexico by DOLE,
(a US firm) and brought into the US by a
wholesale produce firm.
A. Is part of Mexico’s GDP
B. Is part of US GDP
C. Is part of Mexico’s consumption
D. Is counted as Government purchases in the US
GDP

19. © 2013, published by Flat World Knowledge
Clicker:
• GNP/GDP Accounting:
• A ton of strawberries grown in Mexico by DOLE,
(a US firm) and brought into the US by a
wholesale produce firm.
A. Is part of Mexico’s GNP
B. Is part of US GNP

20. © 2013, published by Flat World Knowledge
2. MEASURING TOTAL
INCOME
Learning Objectives
1. Define gross domestic income and
explain its relationship to gross domestic
product.
2. Discuss the components of gross
domestic income.
3. Define disposable personal income and
explain how to calculate it from GDP.

21. © 2013, published by Flat World Knowledge
2.1 The Components of GDI
• Gross domestic income (GDI) is the total
income generated in an economy by the
production of final goods and services during
a particular period.
– Employee compensation
– Profits
– Rental income
– Net interest
– Depreciation
– Indirect taxes

22. © 2013, published by Flat World Knowledge
2.1 The Components of GDI
Gross domestic product $15,176.1 Gross Domestic Income $15,214.8
Personal Consumption
Expenditures
10,784.5 Compensation of Employees 8,347.3
Gross Private Domestic
Investment
1,906.6 Profits 2,633.0
Government consumption
expenditures and gross
investment
3,047.3 Rental income of persons 406.3
Net exports of goods and
services
–562.3 Net interest 710.3
Taxes on production and imports 1,155.1
Consumption of fixed capital (depreciation) 1,962.8
Statistical discrepancy –38.7
GDP and GDI, 2011

23. © 2013, published by Flat World Knowledge
2.2 Tracing Income from the
Economy to Households
GDP + net factor earnings from abroad =gross national product (GNP)
GNP – depreciation (consumption of fixed
capital)
=net national product (NNP)
NNP – statistical discrepancy =national income (NI)
NI – income earned but not received [e.g.,
taxes on production and imports, social
security payroll taxes, corporate profit taxes,
and retained earnings] + transfer payments
and other income received but not earned in
the production of GNP
=personal income (PI)
PI – personal income taxes =disposable personal income (DPI)
From GDP to Disposable Personal Income
• Disposable personal income is the income
households have available to spend on goods and
services.

24. © 2013, published by Flat World Knowledge
3. GDP AND ECONOMIC
WELL-BEING
Learning Objectives
1. Discuss and give examples of
measurement and conceptual problems
in using real GDP as a measure of
economic performance and of economic
well-being.
2. Explain the use of per capita real GNP or
GDP to compare economic performance
across countries and discuss its
limitations.

25. © 2013, published by Flat World Knowledge
3.1 Measurement Problems in
Real GDP
• There are two measurement problems,
other than those associated with
adjusting for price level changes, in
using real GDP to assess domestic
economic performance.
– Revisions
– The Service Sector

26. © 2013, published by Flat World Knowledge
3.2 Conceptual Problems with
Real GDP
• A second set of limitation or real GDP
stems from problems inherent in the
indicator itself.
– Household Production
– Underground and Illegal Production
– Leisure
– The GDP Accounts Ignore “Bads” (e.g.
crime spending, negative externalities,
environmental pollution)
• More GDP cannot necessarily be equated
with more human happiness.

27. © 2013, published by Flat World Knowledge
3.3 International Comparisons
of Real GDP and GNP
• Per capita real GNP or GDP is a
country’s real GNP or GDP divided by its
population.
• Comparing one country’s output to
another presents additional challenges.
That said, when the data suggest huge
disparities in levels of GNP per capita, for
example, we observe real differences in
living standards.