UBEA 1013: ECONOMICS
CHAPTER 9:
MEASURING NATIONAL OUTPUT &
NATIONAL INCOME
9.1 GDP & GNP
9.2 Calculating GDP: The Expenditure Approach
9.3 Calculating GDP: The Income Approach
9.4 GNP & Personal Income
9.5 Nominal and Real GDP
9.6 Limitations of the GDP Concept
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UBEA 1013: ECONOMICS
9.1 GDP & GNP
Gross domestic product (GDP) is the total market
value of all final goods and services produced within a
given period by factors of production located within a
country.
Gross national product (GNP) is 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.
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UBEA 1013: ECONOMICS
A. Understanding the Definition of GDP:
1. 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.
2. Intermediate goods are produced by one firm for the usage in
further processing by another firm. The value of intermediate
goods is not counted in GDP.
Why? To avoid double counting.
How to count GDP? Using value added.
3. Value added is the difference between the value of goods as
they leave the stage of production and the cost of the goods as
they enter that stage.
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UBEA 1013: ECONOMICS
B. General Rules in Calculating GDP:
1. In calculating GDP, we can either sum up the value
added at each stage of production or take the value of
final sales to avoid double counting.
 E.g. of Table 9.1: If take the value of final sales = $1.00.
 If use value added = $1.00.
 If add up all value of sales at every stage of production,
we get $2.95. Those values from stage (1) to (3) are
added twice compare to value added method or taking
the value of final sales.
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UBEA 1013: ECONOMICS
Table 9.1:Value Added in the Production of a Gallon of Gasoline
Value Added in the Production of a Gallon of Gasoline
(Hypothetical Numbers)
STAGE OF PRODUCTION
VALUE OF SALES
VALUE ADDED
$ .50
$ .50
(2) Refining
.65
.15
(3) Shipping
.80
.15
1.00
.20
1.95
$ 1.0
0
(1) Oil drilling
(4) Retail sale
Total value added
Sum of sales:
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UBEA 1013: ECONOMICS
Note: GDP is the market value of total production.
So, productions (outputs) for the GDP calculation period
that have not been sold yet still included in the GDP
calculation.
In contras, GDP calculation did not include those
productions (outputs) that have been produced in the
previous period and sold in the current GDP calculation
period.
Thus, The relationship between total production and
total sales is represent by the following equation:
GDP = final sales + change in business inventories
[Refer to 9.2 (A)(3)]
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UBEA 1013: ECONOMICS
GDP Calculation IGNORE / EXCLUDE:
i. Purely financial transaction
ii. Re-sales or Secondhand sales
IF
GDP Calculation ALSO EXCLUDE:
GDP
The output produced abroad by
domestically owned factors of
production
Plus
BUT INCLUDED: The output
produced domestically by
foreign owned factors of
production
GNP
Minus
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UBEA 1013: ECONOMICS
Calculating GDP
Expenditure Approach
Income Approach
Measure spending
Measure income
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UBEA 1013: ECONOMICS
9.2 Calculating GDP: The Expenditure Approach
GDP = [Consumption] + [Investment] +
[Government spending] + [Net Export]
GDP = [Durable good + Non-durable goods + Services] +
[Gross Private domestic investment] + [Federal government
+ State government + Local government] + [Export –
Import]
GDP = [Durable good + Non-durable goods + Services] +
[Non-residential investment + Residential investment +
Changes in inventories] + [Federal government + State
government + Local government] + [Export – Import]
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UBEA 1013: ECONOMICS
Table 9.2: Components of U.S. GDP, 2002: The Expenditure Approach
Personal consumption expenditures (C)
Durable goods
Nondurable goods
Services
Gross private domestic investment (l)
Nonresidential
Residential
Change in business inventories
Government consumption and gross investment
(G)
Federal
State and local
Net exports (EX – IM)
Exports (EX)
Imports (IM)
Total gross domestic product (GDP)
Note: Numbers may not add exactly because of rounding.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
BILLIONS OF
DOLLARS
PERCENTAGE
OF GDP
7303.7
871.9
2115.0
4316.8
1543.2
1117.4
471.9
3.9
1972.9
69.9
8.3
20.2
41.3
14.8
10.7
4.5
0
18.9
693.7
1279.2
- 423.6
1014.9
1438.5
10446.2
6.6
12.2
- 4.1
9.8
13.8
100.0
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UBEA 1013: ECONOMICS
9.3 Calculating GDP: The Income Approach
GDP = [National income] + [Depreciation] +
[(Indirect taxes – subsidies)] + [Net factor payments
to the rest of the world] + [other]
GDP = [Compensation to employees + Proprietors’ income
+ Corporate profits + Net interest + Rental income] +
[Depreciation] + [(Indirect taxes – subsidies)] + [Foreigners’
income – citizens’ earning aboard] + [Business transfer
payments + Discrepancy]
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UBEA 1013: ECONOMICS
Table 9.3: Components of U.S. GDP, 2002: The Income Approach
National income
Compensation of employees
Proprietors’ income
Corporate profits
Net interest
Rental income
Depreciation
Indirect taxes minus subsidies
Net factor payments to the rest of the
world
Other
Gross domestic product
BILLIONS OF
DOLLARS
PERCENTAG
E
OF GDP
8,199.9
80.3
6,010.0
943.5
748.9
554.8
58.9
7.3
7.3
5.4
142.7
1.4
1,351.3
13.2
739.4
7.2
11.1
0.1
- 96.1
10,205.6
- 0.9
100.0
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UBEA 1013: ECONOMICS
9.4 GNP & Personal Income
Table 9.4a: GDP, GNP, NNP, National Income, Personal Income, and Disposable
Personal Income, 2002
DOLLARS
(BILLIONS)
GDP
Plus: receipts of factor income from the rest of the world
Less: payments of factor income to the rest of the world
Equals: GNP
Less: depreciation
Equals: net national product (NNP)
Less: indirect taxes minus subsidies plus other
Equals: national income
Less: corporate profits minus dividends
Less: social insurance payments
Plus: personal interest income received from the government and
consumers
Plus: transfer payments to persons
Equals: personal income
Less: personal taxes
Equals: disposable personal income
10,205.6
+ 342.1
- 353.2
10,194.5
- 1,351.3
8,843.2
- 643.3
8,199.9
- 332.6
- 731.2
+ 439.1
+1,148.7
8,723.9
- 1,306.2
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7,417.7
UBEA 1013: ECONOMICS
Table 9.4b: Disposable Personal Income and Personal Saving, 2002
DOLLARS
(BILLION
S)
Disposable personal income
Less:
Personal consumption expenditures
Interest paid by consumers to business
Personal transfer payments to foreigners
Equals: personal saving
Personal savings as a percentage of disposable personal
income:
7,417.7
- 7063.5
- 204.3
- 31.3
118.6
1.6%
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UBEA 1013: ECONOMICS
9.4 Nominal & Real GDP
Nominal GDP is GDP measured in current dollars,
or the current prices we pay for things.
When a variable is measured in current dollars or the
current price, it is described in nominal terms but it
can be adjusted into real terms.
Nominal GDP adjusted for price changes is called
real GDP.
Real GDP = Nominal GDP / price index
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UBEA 1013: ECONOMICS
9.5 Limitations of the GDP Concept
1. Most of the social and humanist aspects are not
captured in the GDP or other national accounting
measurements. E.g. society is better off when crime
decreases, however, a decrease in crime is not
reflected in GDP.
2. An increase in leisure is an increase in social welfare,
but not counted in GDP. In contrast, increase in leisure
will tend to decrease output (GDP).
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UBEA 1013: ECONOMICS
3. Non-market and household activities are not counted
in GDP even though they amount to real production.
E.g. the “output” of a housewife taking care of her
children or family is not counted in the GDP, implying
that mother housewives’ contributing to the economy
is not recognized
4. GDP accounting rules do not adjust for production that
pollutes the environment.
5. GDP has nothing to say about the distribution of
output. Re-distributive income policies have no direct
impact on GDP.
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UBEA 1013: ECONOMICS
6. GDP is neutral to the kinds of goods an economy
produces. It did not differentiate the important goods
(e.g. medicines or foods) against ‘harmful’ goods
(cigarettes).
7. The underground economy is the part of an economy
in which transactions take place and in which income
is generated that is unreported and therefore not
counted in GDP.
End
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