In-class example
Mr. A owns a fishing company.
He catches 50 fish for $1 per fish.
He employs Mr. B and Mr. C and pays each $10 in wages. He pays $15 to rent a boat to Ms. J.
Mr. D produces wood. He produces 100 units for $2 per unit. He rents land from Ms. E for $40.
Mr. F builds boats. Each new boat uses 40 units of wood and 20 units of nails costing $0.50 per unit. He
produced 1 boat which was sold to Mr. A for $80. (The boat was not sold until the end of the year, and
was not used by A to catch this year’s fish.)
The Government purchases 15 units of wood, collects $35 of taxes, and pays out $10 in pensions each to
Ms. H and Ms. I.
10 fish are exported. 20 units of nails and 2 pineapples ($3 each) are imported.
Incomes:
A
B
C
D
E
F
$15
$10
$10
$160
$40
-$10
G
H
$10
I
$10
J
$15
Sub-total: $260
Gross Output
by Industry (units):
Fish
50
Minus Intermediate Goods:
0
Final Goods Output (units):
50
Value of Final Goods
Wood
Boat
Nail
Pineapple
100
1
0
0
40
0
20
0
60
1
-20
0
50
120
40
45
80
-10
0
Total
Value
2
136
sum = 240
By use of output:
Consumption
Investment
1
Gov’t Expenditure
80
15
Net Exports
10
Total units
50
30
60
1
-20
-2
-6
-20
0
240
Note: Government’s income is taxes, it spends it on Gov’t expenditure and transfer payments. If we
want to count the incomes of H and I (who receive pensions) because it can be spent, we should
subtract taxes from the incomes of everyone else (since the taxes paid cannot be spent or saved by the
individuals.)
Then we should count the government’s net income as Tax Receipts minus transfer payments (it is what
the government has left over to save or spend). Therefore to fix the income approach – we can either
not count income from Government transfers which brings the total down to 240; or we can subtract
the tax collections of 35 from persons A through J, then add the government’s disposable income:
Total personal income
Subtract taxes
260
35
Personal disposable income
Government’s disposable income = 35-20 =
225
15
National Income
240
Suppose Mr. K went on work-and-travel during the year and came home with $25.
Is it part of our country’s income?
Is it part of our country’s GDP?
Answer: In this case, it is income, but it is not GDP. It is net factor payments received, or NFP. NFP are
payments we receive for helping produce something counted in some other country’s GDP.
Next: Show how national savings are computed.