2. GDP (Gross Domestic Product)
GDP is the market value of all final goods and services
produced within the economy in a given period of time.
It doesn’t matter if it’s produced by citizens or
foreigners. If they are located within the country’s
boundaries, their production is included in GDP.
3. Types of GDP:
Nominal GDP: When GDP or the value of goods and services
are measured at current prices, classified as nominal GDP.
Real GDP: When GDP or the value of goods and services are
measured using a constant set of prices (prices of a given
year), classified as real GDP.
4. How to calculate nominal and real GDP
Equation for Nominal GDP =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑒𝑎𝑟 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 ∗ 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑒𝑎𝑟 𝑝𝑟𝑖𝑐𝑒
=PX1X1+PY1Y1 =12*10+8*12 = 216
Where,
PX1= Current year price of Good X
X1= Current year quantity of Good X
PY1 = Current year price of Good Y
Y1= Current year quantity of Good Y
Commodity
Produced
Current Year Quantity
(unit)
(2013)
Current Year Price
(TK. per unit) (2013)
Base Year price (TK. per unit)
=2012
X 10 12 10
Y 12 8 6
Equation for Real GDP =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑒𝑎𝑟 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 ∗ 𝐵𝑎𝑠𝑒 𝑌𝑒𝑎𝑟 𝑝𝑟𝑖𝑐𝑒
=PxoX1+PyoY1= 10*10+ 6*12 = 172
Where,
PX0= Base year price of Good X
X1= Current year quantity of Good X
PY0 = Base year price of Good Y
Y1= Current year quantity of Good Y
5. GDP (Gross National Product)
Gross National Product or GNP is the total market value of everything
(i.e. goods and services) produced by the residents of the country during
a particular year.
GNP includes the income earned by the country’s nationals within and
outside the country, but it excludes the income earned by foreign
citizens and companies within the country.
6. How to get GNP from GDP and vice-versa
To obtain GNP, we add receipts of factor income (wage, rent, and profit) from
the rest of the world and subtract payments of factor income to the rest of the world.
GNP = GDP – factor payments to abroad + factor payments from abroad
OR
GDP = GNP – factor payments from abroad + factor payments to abroad
7. NNP (Net National Product)
Net national product equals GNP less replacement investment
(Capital consumption allowances). Each year, some of the
economy’s capital stock wears out.
NNP= GNP- Depreciation
8. NI (National Income)
National income (NI): National income sums the total
amount earned by residents of a country for their land, labor,
capital, and entrepreneurial talent, whether within the country or
abroad. Hence, national income is sometimes referred to as factor
income, because it equals the income received by residents. i.e.
National income = wages + interest + rent + profits or by
subtracting indirect business taxes from net national product.
NI= NNP- indirect taxes + subsidies
9. Methods of Calculating National Income
1. Income Method
The income method of calculating national income focuses on the production perspective.
Now production of goods and services involves the use of land, labor, capital, and so on. And if
we consider these factors of production, income is generated via rent, wages and salaries, profits,
and interest.
We can then calculate the national income by adding all these types of income. Another
important source of income is mixed income. Mixed income refers to the income generated by
self-employed professionals and sole proprietors. (Besides, there are some self-employed persons
who employ their own labour and capital such as doctors, advocates etc. Their income is called
mixed income).
According to the income method:
National Income = Rent + Wages + Interest + Profit + Mixed Income
The income method, however, does not consider transfer payments, prize money (lotteries),
illegal money and sale of second-hand goods.
10. 2. Expenditure Method
The expenditure method arrives at national income by adding up all expenditures made
on goods and services during a year. Income can be spent either on consumer goods or
capital goods.
The expenditure method takes the following elements into consideration:
Purchase of consumer goods and services by residents and households (C)
Business enterprises’ expenditure on capital goods and stocks (I)
Government expenditure on goods and services (G)
Net exports (exports-imports) (NX)
11. 2. Expenditure Method Continu….
Consumption: Consumption is normally the largest component in the economy, consists of goods and services bought
by households. It is divided into three subcategories: Non-durable Goods: Goods that last only a short time such as food
and clothing. Durable Goods: Goods that last a long time, such as cars and TV’s. Service: Services include the work
done for consumers by individuals and firms, such as haircuts and doctor visits.
Investment: Investment consists of the additions to the nation’s capital stock of building, equipment, software,
inventories during a year. In other words investment consists of goods bought for future use. Investment is also divided
into three sub categories: Business fixed investment is the purchase of new plant and equipment by firms. Residential
investment is the purchase of new housing by households and landlords. Inventory investment is the increase in firms’
inventories of goods (if inventories are falling, inventory investment is negative).
Government purchase: Government purchase is the goods and services bought by the federal, state and local
government. This category includes such item as military equipment, highways, and service provided by government
workers. It does not include the transfer payments to individual such as social security and welfare. Because transfer
payments reallocate existing income and are not made in exchange for goods and services, they are not part of GDP.
Net exports: Net exports accounts for trade with other countries. Net exports are the value of goods and services sold to
other countries minus the value of goods and services that foreigners sell to us.
12. 2. Expenditure Method Continu….
Hence, according to the expenditure method:
GDPMP = C + I + G + (X-M)
= C+I+G+NX
On deducting consumption of fixed capital (i.e. depreciation) from gross domestic product at
market prices (GDPMP). We get net domestic product at market price (NDPMP).
i.e. NDPMP = GDPMP – consumption of fixed capital or Depreciation
In this method, we then subtract net indirect taxes (that is, indirect taxes – subsidies) to
arrive at net domestic product factor cost (NDPFC).
NDPFC = NDPMP – Net indirect taxes
Lastly we add net factor income from abroad to obtain net national product at factor cost
(NNPFC), which is called national income.
NI = GDPMP – Depreciation – Net indirect tax + Net factor income from abroad
Where,
Net indirect tax = Taxes – Subsidies
Net factor income from abroad = Factor income from abroad - Factor income to abroad
13. 3. Product method or Value-added Method:
In this method, national income is measured as a flow of goods and services. We calculate
money value of all final goods and services produced in an economy during a year. Final
goods here refer to those goods which are directly consumed and not used in further
production process.
Suppose the quantity of goods and services produced in a year are X1, X2, X3, X4, X5… Xn
and price of those goods and services are P1, P2, P3, P4, P5… Pn, respectively, then the national
income will be:
GDPMP=P1X1+ P2X2+ P3X3+ P4X4+ P5X5+… +PnXn
NDPMP = GDPMP – consumption of fixed capital or Depreciation
NDPFC = NDPMP – Net indirect taxes
NI = GDPMP – Depreciation – Net indirect tax + Net factor income from abroad
This is the production method of national income accounting.
14. How to Avoid double Counting Problems/ Explanation of the
method of Value-Added Approach
15. Per Capita Income
Per capita income (PCI) or total income measures the average income earned per person in
a given area (city, region, country, etc.) in a specified year. It is calculated by dividing the area's
total income by its total population.
Per capita income is national income divided by population size. Per capita income is often
used to measure a sector's average income and compare the wealth of different populations. Per
capita income is also often used to measure a country's standard of living. It is usually expressed
in terms of a commonly used international currency such as the euro or United States dollar.
16. PCI Calculation and Example
For example, the national income of Mexico in 2019 was approximately 2.55 trillion
dollars. At that time, the country’s population was approximately 127.6 million. The
calculation is:
As the calculation suggests, the per capita income of a Mexican
in 2019 is about $20,000 or $20,078.74, to be exact.
17. Economic Growth Rate
Economic growth refers to the increase in real GDP over time. Therefore, the economic
growth rate is measured as the rate of change of real GDP from one year to the next.
18. Difficulties in the measurement of national income
1. Lack of statistical data:
2. The danger of double counting:
3. Lack of trained staff:
4. Transfer earning:
5. non-marketed services:
6. Self-consumed production:
7. Different sectors of the economy are usually mixed with one
another.
8. Environmental Damage:
