1. MEASURING NATIONAL OUTPUT AND
INCOME
PRINCIPLE OF ECONOMICS

2. Measuring of National Income and
Output
 measures of national income and output are used in economics to
estimate total economic activity in a country or region,
including gross domestic product, gross national product, and net
national income.
 All are specially concerned with counting the total amount of goods
and services produced within some "boundary".
 The boundary is usually defined by geography or citizenship, and
may also restrict the goods and services that are counted. For
instance, some measures count only goods and services that are
exchanged for money, excluding bartered goods, while other
measures may attempt to include bartered goods
by imputing monetary values to them.

3. 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

4. National Income and Product
Accounts
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 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 U.S. Department of Commerce is
responsible for producing and maintaining
the ―National Income and Product Accounts‖
that keep track of GDP.

5. Final Goods and Services
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 The term final goods and services
in GDP 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.

6. Value Added
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 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.

7. Exclusions of Used Goods
and Paper Transactions
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 GDP ignores all transactions in
which money or goods change
hands but in which no new goods
and services are produced.

8. Exclusion of Output Produced Abroad
by Domestically Owned Factors of
Production
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 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).

9. Calculating GDP
GDP can be computed in two ways:
 The expenditure approach: A method of
computing GDP that measures the total 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

10. Personal Consumption Expenditures
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 Personal consumption expenditures (C) are
expenditures by consumers on the following:
 Durable goods: Goods that last a relatively
long time, .
 Nondurable goods: Goods that are used up
fairly quickly, .
 Services: Things that do not involve the
production of physical things,.

11. Gross Private Domestic Investment
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 Investment refers to the purchase of new
capital.
 Total investment by the private sector is
called gross private domestic investment. .

12. Gross Private Domestic Investment
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 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.

13. Gross Private Domestic Investment
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 Remember that GDP is not the
market value of total sales during a
period—it is the market value of
total production.
 The relationship between total
production and total sales is:
GDP = final sales + change in business inventories

14. Gross Investment
versus Net Investment
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 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

15. Government Consumption
and Gross Investment
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 Government consumption and gross
investment counts expenditures by
federal, state, and local governments
for final goods and services.

16. Net Exports
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 Net exports (EX – IM) is the difference
between exports and imports. The figure
can be positive or negative.
 Exports (EX) are sales to foreigners of
U.S.-produced goods and services.
 Imports (IM) are U.S. purchases of goods
and services from abroad).

17. The Income Approach
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 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

18. From GDP to Disposable Personal
Income
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 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.
 Personal income is the income received by
households after paying social insurance
taxes but before paying personal income
taxes.

19. Disposable Personal Income and
Personal Saving
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 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.

20. Nominal Versus Real GDP
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 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.

21. Calculating Real GDP
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 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.

22. Calculating the GDP Deflator
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 The GDP deflator is one measure of the overall
price level. The GDP deflator is computed by the
Bureau of Economic Analysis (BEA).
 Overall price increases can be sensitive to the
choice of the base year. For this reason, using
fixed-price weights to compute real GDP has some
problems.

23. The Problems of Fixed Weights
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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.
The use of fixed price weights to estimate real GDP
leads to problems because it ignores:

24. GDP and Social Welfare
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 Society is better off when crime decreases,
however, a decrease in crime is not
reflected in GDP.
 An increase in leisure is an increase in
social welfare, but not counted in GDP.
 Nonmarket and household activities are not
counted in GDP even though they amount
to real production.

25. GDP and Social Welfare
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 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.

26. The Underground Economy
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 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.

27. Gross National Income per Capital
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 To make comparisons of GNP between
countries, currency exchange rates must be taken
into account.
 Gross National Income (GNI) is a measure used to
make international comparisons of output. GNI is
GNP converted into dollars using an average of
currency exchange rates over several years
adjusted for rates of inflation.
 GNI divided by population equals gross national
income per capita.