Welcome to the Session
National Income Accounting
National Income Accounting
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National Income Accounting Defined
Circular Flow of Economic Activity
Measures of Output
GDP/GNP/NDP/NNP/NI/DI/DPI
Nominal GDP vs Real GDP
GDP Per Capita
Inflation and Price Index
Interest Rate and Real Interest Rate
Shortcomings of GDP as a Measure of Economic
Well-Being
Measures of Output (Production)
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National Income Accounting refers to the
measurement of aggregate economic activity,
particularly national income and its components.
Aggregate = Total or Gross
Revenue
(=GDP)
Good and
services sold
Spending
(=GDP)
MARKETS FOR
GOODS AND
SERVICES
Good and
services
bought
HOUSEHOLDS
FIRMS
Inputs for
Production
MARKETS FOR
FACTORS OF
PRODUCTION
Land, labor
and capital
Wages, rent,
interest and
profit (=GDP)
Income (=GDP)
Flow of goods & services
Flow of money: Taka
THE CIRCULAR FLOW DIAGRAM
Measures of Output (Production)
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Gross Domestic Product is the total
monetary value of final output produced
within a nations borders in a given time
period at current market prices
Gross Domestic Product is also referred to as
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Nominal Gross Domestic Product
Current Gross Domestic Product
Definition of GDP
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The market value of good i (Vi) is
equal to PiQi
GDP = sum of the market values of
all final goods and services
produced within the year.
GDP 
n
n
 V  P
i1
i
i1
i
 Qi
Measuring Gross Domestic Product
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The Expenditures Approach
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The Flow of Income Approach
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C + I + G + (Xn) = GDP
Households supply business with the factors of production in
return for payment in the form of wages, profits, rent, and
interest
The Value Added Approach
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Adds the increase in value at each stage of the production
and distribution process
GDP includes final goods and
services only
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Final goods - goods and services that are not
purchased for the purpose of producing other
goods and services or for resale
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Eg. Rice (final) and unhusked rice (intermediate
product)
Including intermediate goods and final goods
will result in “double counting”.
Three Approaches for measuring GDP
1. Expenditure Approach (upper loop) –
measures GDP as the sum of expenditures
on final goods and services.
2. Income Approach (lower loop) – measures
GDP as the sum of incomes of factors of
production (wages, rent, interest and profit.
3. Value-added Approach – measures GDP as
the sum of value added at each stage of
production (from initial to final stage)
Expenditure Approach
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Uses the upper loop of the circular flow
diagram.
Example: Suppose the economy has only
one product, namely, rice.
Good
Rice
Price per
unit
Q sold
Expenditure
20
1000
20,000
GDP
20,000
Income Approach
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Uses the lower loop of the circular flow diagram: sum of payments
to the various factors of production.
Suppose that in the production of rice the sales and expenses are as
follows:
Sales
P 20,000
Expenses:
Wages
8000
Rent
4000
Interest
2000
Total
Profit
GDP=Sum of Payments to
factors
14,000
6,000
20,000
P 20,000
Value Added Approach
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Suppose that rice is the only final product of an
economy: It goes through several (3) stages of
production.
Stage of Prod’n
Value of
intermediate
good
Farmer
Value of
Sales
Value-added
12,000
12,000
Rice Miller -Milled
Rice
12,000
15,000
3,000
Retailers - Rice
15,000
20,000
5,000
GDP= Total Value
Added
20,000
Two Things to Avoid when Compiling
GDP
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Multiple counting
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Only expenditures on final products – what
consumers, businesses, and government
units buy for their own use belong in GDP
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Intermediate goods are not counted
Used goods are not counted
Transfer payments
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Transfer payments are not payments for
currently produced goods and services
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When they are spent for final goods and services they
will go into GDP as consumer spending
Various Measures of Aggregate Economic Activity
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GDP (Gross Domestic Product)
- or + Net Factor Income
GNP
- Depreciation
NNP
- Indirect Business Tax
National Income
- RE + TP
Disposable Income
- Personal Tax
Disposable Personal Income
Per Capita GDP
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Per Capita GDP calculations attempt to give us
additional information about how we are doing as an
economy.
Per Capita GDP calculations may be a better measure
of the standard of living.
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For citizens living in the same country over time
For comparing standards of living between citizens of
different countries
Per Capita Nominal GDP
Per capita GDP
GDP
= -------------------------------Population
Per Capita Real GDP
To compare per capita GDP in one year with that of
another year we have to correct for inflation. In other
words, we really need to revise our formula
Real GDP
Per capita real GDP = -------------------------------Population
Nominal GDP and Real GDP
Nominal GDP measures the value of output in a given
period in the prices of that period, or, as it is
sometimes put, in current prices.
Real GDP measures changes in physical output in the
economy between different time periods by valuing
all goods produced in the two periods at the same
prices, or in constant prices.
Nominal GDP
Real GDP = -------------------------------GDP Deflator
The GDP Deflator
GDP deflator is the ratio of nominal GDP
in a given year to real GDP of that year.
Nominal GDP
Real GDP = -------------------------------GDP Deflator
Nominal Vs. Real GDP
Commodity 2007 NGDP 2008NGDP
2008RGDP
Rice
10 at 100
1000
15 at 150
2250
15 at 100
1500
Cloth
20 at 200
4000
5000
25 at 225
5625
7875
25 at 200
5000
6500
GDP Deflator= NGDP/RGDP= 7875/6500=1.21
Inflation and Prices
Inflation is the rate of change in prices, and the
price level is the accumulation of past inflations. If
Pt-1 represents the price level last year and Pt
represents today’s price level, then the inflation
rate over the past year can be written as
Pt - Pt-1
Inflation rate = -------------------------------Pt-1
Shortcomings of GDP as a Measure of
National Economic Well-being
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Problems of GDP Measurement
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Non Market Activities (Household
production)
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Imprecise Pricing of Govt. Activity
Illegal production
The underground economy
Use of Resources to Avoid ‘Bad’
Treatment of leisure time
Quality of Goods