CHAPTER
6
Measuring National Output
and National Income
Prepared by: Fernando Quijano
and Yvonn Quijano
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
National Income
and Product Accounts
• National income and product
accounts are data collected and
published by the government describing
the various components of national
income and output in the economy.
• The Department of Commerce is
responsible for producing and
maintaining the “National Income and
Product Accounts” that keep track of
GDP.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Gross Domestic Product
• 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.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Final Goods and Services
• The term final goods and services
refers to goods and services
produced for final use.
• Intermediate goods are goods
produced by one firm for use in
further processing by another firm.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Value Added
• Value added is the difference
between the value of goods as they
leave a stage of production and the
cost of the goods as they entered that
stage.
• In calculating GDP, we can either sum up
the value added at each stage of
production, or we can take the value of
final sales. We do not use the value of
total sales in an economy to measure
how much output has been produced.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Value Added
Value Added in the Production of a Gallon of Gasoline
(Hypothetical Numbers)
STAGE OF PRODUCTION
(1) Oil drilling
VALUE OF SALES
VALUE ADDED
$ .50
$ .50
(2) Refining
.65
.15
(3) Shipping
.80
.15
1.00
.20
(4) Retail sale
Total value added
© 2002 Prentice Hall Business Publishing
$1.00
Principles of Economics, 6/e
Karl Case, Ray Fair
Exclusions from GDP
• GDP ignores all transactions in
which money or goods change
hands but in which no new goods
and services are produced.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
GDP Versus GNP
• GDP is the value of output produced by
factors of production located within a
country. Output produced by a
country’s citizens, regardless of where
the output is produced, is measured by
gross national product (GNP).
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Calculating GDP
GDP can be computed in two ways:
• The expenditure approach: A
method of computing GDP that
measures the amount spent on all
final goods during a given period.
• The income approach: A method of
computing GDP that measures the
income—wages, rents, interest, and
profits—received by all factors of
production in producing final goods.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
The Expenditure Approach
Expenditure categories:
• Personal consumption expenditures
(C)—household spending on consumer
goods.
• Gross private domestic investment
(I)—spending by firms and households
on new capital: plant, equipment,
inventory, and new residential structures.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
The Expenditure Approach
Expenditure categories:
• Government consumption and
gross investment (G)
• Net exports (EX – IM)—net
spending by the rest of the world, or
exports (EX) minus imports (IM)
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
The Expenditure Approach
• The expenditure approach calculates
GDP by adding together these four
components of spending. In equation
form:
GDP  C  I  G  ( X  M )
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Personal Consumption Expenditures
• Personal consumption expenditures (C)
are expenditures by consumers on the
following:
• Durable goods: Goods that last a relatively
long time, such as cars and household
appliances.
• Nondurable goods: Goods that are used up
fairly quickly, such as food and clothing.
• Services: The things that we buy that do not
involve the production of physical things, such
as legal and medical services and education.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Components of GDP, 1999:
The Expenditure Approach
Components of GDP, 1999: The Expenditure Approach
BILLIONS OF
DOLLARS
Total gross domestic product
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)
9,299.2
6,268.7
761.3
1,845.5
3,661.9
1,650.1
1,203.1
403.8
43.3
1,634.4
568.6
1,065.8
 254.0
990.2
1,244.2
PERCENTAGE
OF GDP
100.0
67.4
8.2
19.8
39.4
17.7
12.9
4.3
0.5
17.6
6.1
11.5
 2.7
10.6
13.4
Note: Numbers may not add exactly because of rounding.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Gross Private Domestic Investment
• Investment refers to the purchase of
new capital.
• Total investment by the private
sector is called gross private
domestic investment. It includes
the purchase of new housing, plants,
equipment, and inventory by the
private (or non-government) sector.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Gross Private Domestic Investment
• Nonresidential investment includes
expenditures by firms for machines, tools,
plants, and so on.
• Residential investment includes
expenditures by households and firms on
new houses and apartment buildings.
• Change in inventories computes the
amount by which firms’ inventories change
during a given period. Inventories are the
goods that firms produce now but intend to
sell later.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Gross Investment versus
Net Investment
• Gross investment is the total value
of all newly produced capital goods
(plant, equipment, housing, and
inventory) produced in a given period.
• Depreciation is the amount by which
an asset’s value falls in a given
period.
• Net investment equals gross
investment minus depreciation.
capitalend of period = capitalbeginning of period + net investment
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Government Consumption and
Gross Investment
• Government consumption and
gross investment (G) counts
expenditures by federal, state,
and local governments for final
goods and services.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Net Exports
• Net exports (EX – IM) is the difference
between exports (sales to foreigners of
U.S.-produced goods and services) and
imports (U.S. purchases of goods and
services from abroad). The figure can be
positive or negative.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
The Income Approach
• National income is the total income
earned by the factors of production
owned by a country’s citizens.
• The income approach to GDP breaks
down GDP into four components:
GDP = national income + depreciation + (indirect taxes –
subsidies) + net factor payments to the rest of the world
+ other
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
The Income Approach
Components of GDP, 1999: The Income Approach
BILLIONS OF
DOLLARS
Gross domestic product
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
9,299.2
7,469.7
5,299.8
663.5
856.0
507.1
143.4
1,161.0
689.7
11.0
 32.2
PERCENTAGE
OF GDP
100.0
80.3
57.0
7.1
9.2
5.5
1.5
12.5
7.4
0.1
 0.3
Source: See Table 17.2.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
From GDP to Disposable Income
GDP, GNP, NNP, National Income, Personal Income, and Disposable Personal Income,
1999
DOLLARS
(BILLIONS)
GDP
9,299.2
Plus: receipts of factor income from the rest of the world
+ 305.9
Less: payments of factor income to the rest of the world
 316.9
Equals: GNP
9,288.2
Less: depreciation
 1,161.0
Equals: net national product (NNP)
8,127.1
Less: indirect taxes minus subsidies plus other
 675.5
Equals: national income
7,469.7
Less: corporate profits minus dividends
 485.7
Less: social insurance payments
 662.1
Plus: personal interest income received from the government and consumers
+ 456.6
Plus: transfer payments to persons
+1,011.0
Equals: personal income
7,789.6
Less: personal taxes
 1,152.0
Equals: disposable personal income
6,637.7
Source: See Table 17.2.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
From GDP to Disposable Income
• Net national product equals gross
national product minus depreciation;
a nation’s total product minus what is
required to maintain the value of its
capital stock.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
From GDP to Disposable Income
• Personal income is the total income
of households. Equals (national
income) minus (corporate profits
minus dividends) minus (social
insurance payments) plus (interest
income received from the government
and households).
• Personal income is the income
received by households after paying
social insurance taxes but before
paying personal income taxes.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Disposable Personal Income and
Personal Saving
Disposable Personal Income and Personal Saving, 1999
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:
DOLLARS
(BILLIONS)
6,637.7
 6,268.7
 194.8
 26.6
147.6
2.2%
Source: See Table 17.2.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Disposable Personal Income and
Personal Saving
• The personal saving rate is the
percentage of disposable personal
income that is saved. If the personal
saving rate is low, households are
spending a large amount relative to
their incomes; if it is high,
households are spending cautiously.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Nominal versus Real GDP
• Nominal GDP is GDP measured in
current dollars, or the current prices
we pay for things. Nominal GDP
includes all the components of GDP
valued at their current prices.
• When a variable is measured in
current dollars, it is described in
nominal terms.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Calculating Real GDP
• A weight is the importance attached
to an item within a group of items.
• A base year is the year chosen for
the weights in a fixed-weight
procedure.
• A fixed-weight procedure uses
weights from a given base year.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Calculating Real GDP
A Three-Good Economy
(1)
(2)
PRODUCTION
YEAR 1
YEAR 2
Q1
Q2
(3)
(4)
PRICE PER UNIT
YEAR 1
YEAR 2
P1
P2
(5)
(6)
(7)
(8)
GDP IN
YEAR 1
IN
YEAR 1
PRICES
P 1 x Q1
GDP IN
YEAR 2
IN
YEAR 1
PRICES
P 1 x Q2
GDP IN
YEAR 1
IN
YEAR 2
PRICES
P 2 x Q1
GDP IN
YEAR 2
IN
YEAR 2
PRICES
P 2 X Q2
Good A
6
11
$.50
$ .40
$3.00
$5.50
$2.40
$4.40
Good B
7
4
.30
1.00
2.10
1.20
7.00
4.00
Good C
10
12
.70
.90
7.00
8.40
9.00
10.80
$12.10
$15.10
$18.40
$19.20
Total
Nominal GDP
in year 1
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Nominal GDP
in year 2
Karl Case, Ray Fair
Calculating the GDP Price Index
• The GDP price index is one measure of the
overall price level.
• The old procedure used by the Bureau of
Economic Analysis (BEA) to estimate
changes in the overall price level used the
quantities produced in a chosen year (the
base year) as weights. But overall price
increases are sensitive to the choice of the
base year. The new procedure, known as
the chained price index, avoids the
problems associated with the use of fixed
weights.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
The Problems of Fixed Weights
The use of fixed price weights to
estimate real GDP leads to problems
because it ignores:
1. Structural changes in the economy.
2. Supply shifts, which cause large
decreases in price and large increases in
quantity supplied.
3. The substitution effect of price increases.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Limitations of the GDP Concept
• Society is better off when crime
decreases, but a decrease in crime
is not reflected in GDP.
• An increase in leisure is an increase
in social welfare, not counted in
GDP.
• Nonmarket and domestic activities
are not counted even though they
amount to real production.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Limitations of the GDP Concept
• GDP accounting rules do not adjust
for production that pollutes the
environment.
• GDP has nothing to say about the
distribution of output. Redistributive
income policies have no direct
impact on GDP.
• GDP is neutral to the kinds of goods
an economy produces.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
The Underground Economy
• 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.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Per Capita GDP/GNP
• Per capita GDP or GNP measures a
country’s GDP or GNP divided by its
population.
• Per capita GDP is a better measure
of well-being for the average person
that its total GDP or GNP.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair
Per Capita GDP/GNP
Per Capita GNP for Selected Countries, 1998
COUNTRY
U.S. DOLLARS
COUNTRY
U.S. DOLLARS
40,080
34,330
33,260
32,380
29,340
26,850
25,850
25,620
25,380
24,940
24,760
24,110
21,400
20,300
20,250
20,020
18,340
15,940
14,080
11,650
Portugal
Argentina
South Korea
Czech Republic
Brazil
Mexico
Turkey
South Africa
Colombia
Jordan
Romania
Philippines
China
Indonesia
Pakistan
India
Rwanda
Nepal
Ethiopia
10,690
8,970
7,970
5,040
4,570
3,970
3,160
2,880
2,600
1,520
1,390
1,050
750
680
480
430
230
210
100
Switzerland
Norway
Denmark
Japan
United States
Austria
Germany
Sweden
Belgium
France
Netherlands
Finland
United Kingdom
Australia
Italy
Canada
Ireland
Israel
Spain
Greece
Source: The World Bank Atlas, 2000.
© 2002 Prentice Hall Business Publishing
Principles of Economics, 6/e
Karl Case, Ray Fair