14
Measuring domestic
output and national
income
Copyright 2015 McGraw-Hill Education
To ponder upon…
Do we use economics everyday?
▪ What does the size of the economy entails?
▪ If I buy a Burger from McDonalds what part is included in the
Measuring of the GDP
▪ Economic Growth = Change in the GDP ??
Copyright 2015 McGraw-Hill Education
In this chapter you will learn:
• Definition and measurement of GDP and GNI
• Relationships between GDP, net domestic
product (NDP), gross national income (GNI),
household income, and disposable income
• The nature and function of a GDP price index
• The difference between nominal GDP and real
GDP
• Some limitations of the GDP measure
Copyright 2015 McGraw-Hill Education
Where from now?
Gross
Domestic
Product
Measuring
GDP:
Expenditure
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Measuring
GDP:
Income
Measuring
GDP:
Production
Nominal vs
Real GDP
Shortcomings
of the GDP
Assessing the economy’s performance
National income
accounting
It enables the economists
and policy makers to:
• Economy’s aggregate
performance analogous
to private accounting for
individuals
• Assess the health of the
economy by comparing
levels of production at
regular intervals.
• Track the long-run
course of the economy
to see whether it has
grown, been constant, or
declined.
• Formulate policies that
will safeguard and
improve the economy’s
health.
Copyright 2015 McGraw-Hill Education
GDP vs GNI
Gross Domestic Product (GDP)
• The total market value of all final goods and services
produced in a given year within the borders of the country.
• Citizen-supplied or foreign-supplied resources employed
WITHIN the country.
Gross National Income (GNI)
• The total market value of all final goods and services
produced in a given year by the residents or registered
business from a particular country anywhere in the world.
• Ownership-based
• Also what is earned abroad and repatriated by residents.
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GDP at factor, basic and market prices
Gross value added at factor cost
(linked to Income approach)
• Plus other taxes on products
• Less other subsidies on products
Gross value added at basic prices
• Plus taxes on production
• Less subsidies on production
Gross Domestic Product at market
prices (linked to the Expenditure
approach)
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Taxes and Subsidies on Production
Taxes on production
• Refers to tax on production not linked to specific goods or
services
• Eg Propery tax, UIF
• Why add them to wages, rent, interest and profits?
• For accounting convenience!!!!!
Subsidies on production
• Subsidies paid to business in order to subsidize the
production of a particular commodity to allow
manufacturers to sell at a lower price.
• Why add them to wages, rent, interest and profits?
• For accounting convenience!!!!!
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Taxes and Subsidies on Products
Taxes on products
• Taxes payable per unit of some good or service
• Eg VAT, excise taxes, business property taxes, license
fees, custom duties (import and export duties)
• E.g. sin taxes on alcohol or cigarettes
• Propose export tax on scrap metal
Subsidies on production
• Subsidies paid to business in order to subsidise the
production of a particular commodity to allow
manufacturers to sell at a lower price.
• E.g. Past export subsidies, bread
Copyright 2015 McGraw-Hill Education
Gross Domestic Product (GDP)
Monetary measure
Double counting
• Most products go through a series of production stages
before they reach the market
• GDP includes only final goods; excludes intermediate
goods
• Value added measurement
Excludes non-production transactions, e.g.
financial transactions and second-hand sales
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Two Approaches to GDP
Income approach
(earnings or
allocations approach)
Expenditure and
value-added
(production) approach
• Wages / rental
incomes
• Interest income /
profits
• Concerns income
derived or created
from production
• Final-product or
value-added
• Concerns the sum of
money spent to
purchase the output
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Approaches to GDP
Expenditure
Approach
Income
Approach
Consumption by
Households
Wages
+
Investment by
Businesses
+
Government
Purchases
+
Expenditures
By Foreigners
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G
= D=
P
+
+
+
+
Rents
Interest
Profits
Statistical
Adjustments
Expenditure approach
Consumption by
Households
+
Investment by
Businesses
+
Government
Purchases
+
Expenditures
By Foreigners
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Personal consumption
expenditures, C
• Durable consumer goods, e.g.
refrigerators
• Non-durable consumer goods, e.g.
groceries
• Consumer expenditures for services,
e.g. doctors
Expenditure approach (2)
Consumption by
Households
+
Investment by
Businesses
+
Government
Purchases
+
Expenditures
By Foreigners
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Gross private
domestic investment, I
• Machinery, equipment, and tools
• All construction
• Changes in inventories
• Non-investment transactions
Expenditure approach (3)
Gross Investment – Depreciation = Net investment
Net
Investment
Gross
Investment
Depreciation
Stock of
Capital
January 1
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Increased
Consumption
& Government
Spending
Year’s GDP
Stock of
Capital
December 31
Expenditure approach (4)
Consumption by
Households
+
Investment by
Businesses
+
Government
Purchases
+
Expenditures
By Foreigners
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Government
purchases, G
• Government
consumption
expenditure
and
gross
investment
• Expenditures for goods and
services
• Expenditures for social capital,
e.g. schools and highways
Expenditure approach (5)
Consumption by
Households
+
Investment by
Businesses
+
Government
Purchases
+
Expenditures
By Foreigners
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Net exports,
Xn
• Xn = Exports (X) – Imports (M)
• Spending on SA output by
people abroad= exports (X)
• Spending by South Africans on
foreign goods and services =
imports (M)
Expenditure approach (6)
Consumption by
Households (C)
+
Investment by
Businesses (I)
+
Government
Purchases (G)
+
Expenditures
By Foreigners (Xn)
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GDP
=
C+I+G+Xn
The income approach
Wages
+
+
+
+
Rents
Interest
Profits
Statistical
Adjustments
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Compensation of
employees
– Incidentally, the largest
share of national income
– Salary supplements also
included
• Payments
to
social
insurance, pension, health
and
welfare
funds
for
workers
The income approach (2)
Wages
+
+
+
+
Rents
Interest
Profits
Statistical
Adjustments
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Net operating surplus
– Rent from the supply of
property resources
– Interest
– Proprietors income
The income approach (2)
Wages
+
+
+
+
Rents
Interest
Profits
Statistical
Adjustments
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Net operating surplus
– Corporate profits
• Corporate income taxes
• Dividends
• Undistributed corporate
profits/ retained earnings
– Consumption
of
fixed
capital
– Taxes and subsidies
GDP Approaches compared
Accounting Statement for the S.A Economy, 2013
(in billions at current prices)
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The production approach: Example
Stages of Production
Sales Value
Value Added
Firm A: Sheep Farm
R0 – R120
R120
Firm B: Wool processor
R120 – R180
R60
Firm C: Suit Manufacturer
R180 – R220
R40
Firm D: Clothing wholesaler
R220 -R270
R50
Firm E: Retail Clothier
R270- R350
R80
Total Sales Value
Value Added
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R1140
R350
Other National Accounts
Net Domestic
Product (NDP)
• GDP-Consumption of fixed capital
• GDP adjusted for depreciation
• GDP at market prices+ primary income
from the rest of the world – primary
Gross National
income to the rest of the world
Income (GNI)
Disposable
income (Yd)
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• Personal income (Y) – taxes (T)
• Yd= C+S
Other National Accounts (2)
Household
income
(HI)
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• All income received earned
or unearned.
• Gross operating surplus
mixed income +
compensation for employees
+ property income received –
property income paid=
Gross balance of primary
income
• Gross balance of primary
income + social benefits
received+ other current
transfers received – current
taxes on income and wealth
– social contributions paid=
Gross Disposable income
Nominal Versus Real GDP
How can we compare market values of GDP if the
value of money is changing in response to
inflation/deflation from year to year?
– Nominal GDP
based on the prices that prevailed when the output
was produced (unadjusted)
– Real GDP
deflated or inflated to reflect changes in the price
level.
Real =
GDP
Copyright 2015 McGraw-Hill Education
Nominal GDP
Price Index (in hundredths)
Nominal Versus Real GDP(2)
• Price index
– Measure of the price of a specified collection of
goods and services (market basket) in a specific
year compared to the price of an identical
basked in a reference year.
Price
Index
=
In Given
Year
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Price of Market Basket
In Specific Year
Price of Same Basket
In Base Year
x 100
Nominal Versus Real GDP(3)
• Price index
(1)
(2) Price
Units
Year
of Pizza
of
per unit
output
(3)
Price
Index
(Year
1=100)
(4)
(5)
Unadjusted
Adjusted
or Nominal
or Real
GDP
GDP
(1)X(2)
1
5
R10
100
R50
R50
2
3
4
5
7
8
10
11
20
25
30
28
200
250
-
140
200
-
70
80
-
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Nominal Versus Real GDP(4)
Derive real GDP from nominal GDP
Method 1
• Find nominal GDP for each year
• Compute a GDP price index
• Divide each year’s nominal GDP by that year’s price index
(in hundredths) to determine real GDP
Method 2
• Break down nominal GDP into physical quantities of output
and prices for each year.
• Find real GDP for each year by determining the rand
amount that each year’s physical output would have sold
for if base-year prices had prevailed. (The GDP price index
can then be found by dividing nominal GDP by real GDP).
Copyright 2015 McGraw-Hill Education
Shortcomings of GDP
Non-market activities
The informal sector
• Particularly pertinent within South Africa
GDP and national wellbeing
• Leisure
• Improved product quality affects wellbeing
• GDP and the environment, e.g. effects of polluted water
• Non-economic sources of wellbeing
• The economics of happiness?
Composition and distribution of the output
• Optimal mix of goods for society?
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Key Terms
• national income
accounting
• gross domestic
product
• intermediate goods
• final goods
• multiple counting
• value added
• expenditures approach
• income approach
• Production approach
• personal consumption
expenditures (C)
• gross private domestic
investment (Ig)
• net private domestic
investment
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• government purchases
• net exports (Xn)
• taxes on production
and imports
• Gross national income
• net domestic product
(NDP)
• Household income (HI)
• disposable income (DI)
• nominal GDP
• real GDP
• price index
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