Chapter 6

Measuring Total Output and Income

Hossain: MSMC

GDP and GNP Gross national product (GNP) is

the total value of final goods and services produced during a particular period

P

GDP +

Income earned by Domestic Factors

=Net Factor Earning from

abroad

GNP

production owned by the residents of a

+

-= GDP Income earned by Foreign Factors

with factors of

particular country

Expenditure Approach to GDP Recall, GDP is the market value of

outputs (goods and services) produced in an economy (within geographic boundary) in a particular time period (typically a year)

To measure this, BEA uses a shortcut. It counts expenditures of all major spenders in the economy on

We called this Expenditure Approach to GDP

Newly produced final goods and services That are produced in that economy and in that year

Expenditure Approach to GDP

This approach assumes that Expenditure automatically captures the market value

In the Expenditure Approach major spenders are grouped under four categories. Do you remember them?

Consumers or Consumption (C) Businesses or Investment (I) Government or Government’s Purchase (G) ROW or Net Export (Xn) Therefore, under Expenditure

Approach,GDP = C + I + G + Xn

Income Approach to GDP

Recall, someone’s Expenditure must be someone else’s Income

Therefore, if Expenditure captures total market value, Income should also capture total market value in the economy

Under Income Approach, we will count the incomes of all major income earners in the economy

We will use a new identity called GDI or Gross Domestic Income

Income Approach to GDP

GDI is the total income generated in an economy by the production of final goods and services during a particular time period.

The major income earners include Employee

Compensation Profit Rental Income Net Interest

Depreciation Indirect Taxes

GDI to GDP (2008)

Employee Compensation:8,089.8 Profit:2,226.7 Rental Income: 63.1Net Interest: 903.8Depreciation: 1,899.7Indirect Taxes: 1,076.9

GDP Components

Total GDI: 14,260.0

GDI ComponentsConsumption (C):

10,169.5Investment (I): 2,013.6Government

Expenditure andInvestment (G):

2,943.9Net Export (Xn): 706.5

Total GDP: 14,420.5Statistical Discrepancy:

160.5Total GDP: 14,420.5

GDP to DPI

+ Net Factor Earning from Abroad = GNP

DepreciationNet National Product (NNP)

Statistical DiscrepancyNational Income (NI)

Income Earned, But Not Received

Start with GDP

Personal IncomePersonal Income Taxes

Disposable Personal Income (DPI)

Income Earned, But Not Received

Taxes on production and imports Social security payroll taxes Corporate profit taxes Retained earnings Transfer payments

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

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.

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.

When the data suggest huge disparities in levels of GNP per capita, we do observe real differences in living standards.