Chapter 4: The macro economy (AS Level)
4.1 National income statistics
A government measures a country’s total output to assess the performance of
the country/economy. An economy is usually considered to be doing well if its
output is growing at a sustainable rate. If an economy is growing at a slower rate
then, the government should introduce policy measures to stimulate the
economy. A government uses a wide range of measures (statistics) to measure its
output. They are collectively called national income statistics.
4.1.1 Meaning of national income
National Income of any country means the total value of the goods and services
produced by any country during its financial year. It is thus the consequence of
all economic activities that are running in any country during the period of one
year. It is valued in terms of money. In short one can say that the national income
of any country is the total amount of income that arises through various
economic activities in one year.
4.1.2 Measurement of national income
Some of the important measures of country’s output/national income include:
Gross Domestic Product (GDP)
Gross Domestic Product (GDP) is the most widely used measure of a country’s
output. It is the money value of all the finished products produced in a fiscal year
within the national boundary of a country. The output may be produced by the
domestically owned or the foreign owned factors of production but they must be
produced within the national boundary of the country. For example, GDP of UK
includes the money value of all the finished products produced in UK by the
domestically owned factors of production as well as the foreign factors located
in the UK.
Methods of measuring GDP
 Output method
 Income method
 Expenditure method
 Output method
This method measures the GDP by adding up the money value of all the finished
products (goods and services) produced by all the economic sectors of a country.
The economic sectors of a country are primary, secondary and tertiary sector. So,
according to this method, GDP is the sum of the money value of all the finished
products produced by these three economic sectors.
GDP= Money value of finished products produced by primary sector + Money
value of finished products produced by the secondary sector + money value of
services produced by the tertiary sector.
The output method includes the value of only the finished products while
measuring the GDP. It does not include the value of intermediate products. If the
value of intermediate products (semi-finished products or inputs) is included, the
problem of double counting will occur. So, to avoid the problem of double
counting, only the value of finished products or the value added to the
intermediate products are taken into account.
For example, if a furniture manufacturer buys wood worth $20,000 and it
manufactures furniture worth $30,000 then, the value added to wood is $10,000.
In this case, to avoid the problem of double counting only the value of furniture
($30,000) or the value added to wood ($20,000 +$10,000) is taken into account. If
the value of both wood and furniture is included then, there will be a problem of
double counting and the value of GDP will be greater than the actual value.
 Income method
This method measures the GDP by adding up the income received by all the
factors of production that contribute to the production of finished products.
The output produced is the combined efforts of land, labour, capital and
enterprise. So, the value of output produced is eventually distributed among the
factors of production in the form of rent, wages, interest and profit. According to
the income method,
GDP= Rent + wages +Interest + Profit
The income method does not include the transfer payments like unemployment
benefits, old age allowances, state pensions etc. in the value of GDP. This is
because they are not the payments received for the production and exchange of
goods and services rather they are just the transfer of income from one group to
another.
 Expenditure Method
This method measures the GDP by adding up all the expenditures that occur in
the country in a fiscal year. All the expenditures that occur in a country in a year
are broadly classified into the following four types:
Private consumption expenditure (C)
Private investment expenditure (I)
Government spending on consumption and investment (G)
Net exports (X-M)
So according to the expenditure method,
GDP=AD=AE=C+I+G+(X-M)
All the above three methods should give the same value as all of them measure
the output produced in an economy. The amount of income generated in an
economy is the result of the output produced. So,
Output = Income
If it is assumed that all the income is spent then,
Income= expenditure
So by rule,
Output = Income = expenditure
 Gross National Product (GNP)
GNP is the money value of all the finished products produced in a year by the
domestically owned factors of production. The output may be produced within or
outside the national boundary of a country but they must be produced by the
domestically owned factors of production. For example, GNP of UK includes the
money value of all the finished products produced in a year by the domestically
owned factors of production located within or outside the national boundary of
UK.
Mathematically,
GNP = GDP + Net factor income from abroad
Net factor income from abroad= Factor income received by the domestically
owned factors located abroad – factor payments made to the foreign factors
located in the country.
 Net Domestic Product (NDP)
NDP is the money value of all the finished products produced in a year within the
national boundary of a country after deducting the depreciation charges or capital
consumption. So,
NDP = GDP - Depreciation / capital consumption
 Net National Product (NNP) or Net National Income (NNI)
NNP is the money value of all the finished products produced in a year by the
domestically owned factors of production after deducting depreciation charges or
capital consumption. So,
NNP= GNP- Depreciation/ capital consumption
NNP is also called the national income and can be considered the best measure of
country’s output. This is because it includes the value of output produced abroad
by the domestically owned factors, excludes the value of output produced in the
country by the foreign factors and deducts the depreciation of capital goods that
occur while producing the finished products.
4.1.3 Adjustment of measures from market prices to basic prices
 GDP at market price and GDP at factor cost
GDP at market price is the GDP measured in terms of the prices of the goods in
the shops or other retail outlets.
GDP at market price = C+I+G+(X-M)
GDP at factor cost is the GDP measured in terms of the prices of the factors of
production used to produce the finished products. It is obtained by deducting the
indirect taxes and adding subsidies to the GDP at market price. Indirect taxes are
deducted as they increase the market price of the products and subsidies are
added as they reduce the market price of the products. So,
GDP at factor cost = GDP at market price – indirect taxes + subsidies
4.1.4 Adjustment of measures from gross values to net values
Gross value of a country’s income / output can be converted to net values by
deducting the depreciation charges or capital consumption. For example GDP is
converted into NDP by deducting the depreciation charges or capital
consumption. Similarly, deducting the depreciation charges or capital
consumption from the GNP gives the NNP. So,
NDP = GDP – depreciation or capital consumption.
NNP = GNP – depreciation or capital consumption
 Money GDP and real GDP
Money GDP or Nominal GDP is the GDP measured in terms of the prices of the
goods in the year in which they are produced. It is also called the GDP at current
prices and is the measure that has not been adjusted to inflation.
Example:
Total output produced in 2010= 200,000 units
Price level = $5
So, Money GDP in 2010 = $1000, 000
Total output in 2012 = 200,000 units
Price level = $8
So, Money GDP in 2012 = $1600, 000
Money GDP may give a misleading picture about the country’s performance. It
may increase not because of an increase in the output but simply because of an
increase in the price level. So, to get a true picture of the country’s performance
the money GDP has to be converted into real GDP. It is the GDP measured in
constant prices and is the measure that has been adjusted to inflation. By
converting the money GDP into real GDP, the effect of inflation is removed.
Money GDP is converted into real GDP using the price index. The price index used
to convert the money GDP into real GDP is called the GDP deflator. It measures
the value of output produced and not the value of output consumed.
Mathematically,
Real GDP = Money GDP (Year 1) x
Current year price index =
𝑩𝒂𝒔𝒆 𝒚𝒆𝒂𝒓 𝒑𝒓𝒊𝒄𝒆 𝒊𝒏𝒅𝒆𝒙
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒚𝒆𝒂𝒓 𝒑𝒓𝒊𝒄𝒆 𝒊𝒏𝒅𝒆𝒙 (𝑮𝑫𝑷 𝒅𝒆𝒇𝒍𝒂𝒕𝒐𝒓)
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 𝑝𝑟𝑖𝑐𝑒 𝑙𝑒𝑣𝑒𝑙
𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑝𝑟𝑖𝑐𝑒 𝑙𝑒𝑣𝑒𝑙
x 100
Example: 1
Total output produced in 2010 = 200,000 units
Price level = $5
So, Money GDP in 2010 = $1000, 000
Total output in 2012 = 200,000 units
Price level = $8
So, Money GDP in 2012 = $1600, 000
Real GDP = $1600, 000 x
𝟏𝟎𝟎
𝟏𝟔𝟎
[Price Index= $8/$5 x 100 =160]
= $1000, 000
Example: 2
Total output produced in 2010= 200,000 units
Price level = $5
So, Money GDP in 2010 = $1000, 000
Total output in 2012 = 300,000 units
Price level = $8
So, Money GDP in 2012 = $2400, 000
Real GDP = $2400, 000 x
𝟏𝟎𝟎
𝟏𝟔𝟎
= $1500, 000
% increase in money GDP =140 %
% increase in real GDP = 50%
Exercise:
In 2016 a country’s GDP is $1000. In 2017 nominal/ money GDP rises to $1092
and the price index increases by 4%. Calculate:
 Real GDP
 % increase in Money GDP
 % increase in real GDP
Real GDP = Money GDP (Year 1) x
𝑩𝒂𝒔𝒆 𝒚𝒆𝒂𝒓 𝒑𝒓𝒊𝒄𝒆 𝒊𝒏𝒅𝒆𝒙
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒚𝒆𝒂𝒓 𝒑𝒓𝒊𝒄𝒆 𝒊𝒏𝒅𝒆𝒙
=$1092 x 100/104
=1050
% increase in money GDP = 9.2%
% increase in real GDP
= 5%
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