*CHAPTER 9: MEASURING NATIONAL OUTPUT & NATIONAL INCOME

Outline9.1 GDP and GNP

9.2 Calculating GDP

9.3 GNP & Personal Income

9.4 Nominal and Real GDP

9.5 Limitations of the GDP Concept

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9.1 GDP and GNPGross Domestic Product (GDP)The total market value of all final goods and services produced by factors of production in a country over a given period of time.Final goods and servicesRefers to goods & services produced for final use. Final use means no more further processing. Thus, final goods/services are generally goods/services that are readily be consumed by consumers.Intermediate goodsGoods that produced by one firm for the usage in further processing by another firm. The value of intermediate goods is not counted in GDP because to avoid double counting.

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Value AddedThe difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage.Double counting can also be avoided by counting only the value added to a product by each firm in its production process.

Table: Value added in the Production of a Gasoline

Gross National Product (GNP)Total market value of all final goods and services produced by a resident of a country during a given period of time.

(or)GDP (+) factor income received from abroad()factor income paid abroadGross National ProductGNP = GDP + net factor income from abroad

Figure: GDP in Malaysia*

9.2 CALCULATING GDPThere are two (2) approaches available for measuring GDP and both are used.They are;(1) The expenditure approach(2) The income approach

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(1) The Expenditure ApproachDefinition: A method of computing GDP that measures the amount spent on all final goods during a given period.Formula: *GDP = C + I + G + NX

Personal consumption expenditures (C) household spending on consumer goods.Gross private domestic investment (I) spending by firms & households on capital goods such as plant, equipment, inventory & new residential structures.Government consumption & gross investment (G)expenditures by federal, state, and local governments for final goods and services.Net exports (X IM) net spending by the rest of the world.exports (EX) minus imports (IM)

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*Calculating GDP: (1)The Expenditure ApproachGDP = C + I + G + NXDurable good + Non-durable goods + Services (C) (+) Residential Investment + Non-residential Investment + Changes in inventories (I) (+)Federal gov. + State gov. + Local gov. (G) (+) (Export Import) (NX)

Gross Domestic Product (GDP)

Personal Consumption Expenditures (C)C = expenditures by consumers on the following:Durable goods: Goods that last a relatively long time, eg. cars & appliances.Nondurable goods: Goods that are used up fairly quickly, eg. food & clothing.Services: Things that do not involve the production of physical things, eg. legal services, medical services, & education.*

Gross Private Domestic Investment (I)I = the purchase of new capital goods or total investment by the private sector. It includes the purchase of new housing, plants, equipment, & inventory by the private sector.Nonresidential investment includes expenditures by firms for machines, tools, plants.Residential investment includes expenditures by households & firms on new houses.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.*

Government Spending (G) & Net Export (X-IM)Government consumption & gross investment (G) counts expenditures by federal, state & local governments for final goods & services.

Net exports (NX) is the difference between exports & imports; (Export Import)Exports (X) are sales to foreigners of goods & services produced in Malaysia.Imports (IM) are purchases of goods & services from abroad by Malaysian. *

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Components of U.S. GDP, 2002: The Expenditure ApproachBILLIONS OF DOLLARSPERCENTAGE OF GDPPersonal consumption expenditures (C)7303.769.9Durable goods871.98.3Nondurable goods2115.020.2Services4316.841.3Gross private domestic investment (l)1543.214.8Nonresidential1117.410.7Residential471.94.5Change in business inventories3.90Government consumption and gross investment (G)1972.918.9Federal693.76.6State and local1279.212.2Net exports (EX IM)- 423.6- 4.1Exports (EX)1014.99.8Imports (IM)1438.513.8Total gross domestic product (GDP)10446.2100.0Note: Numbers may not add exactly because of rounding. Source: U.S. Department of Commerce, Bureau of Economic Analysis.

(2) The Income Approach

Definition:The total income earned by the factors of production owned by a countrys citizens.*

*Calculating GDP: (2) The Income Approach National income (+) Depreciation (+) (Indirect taxes subsidies) (+) Net factor payments to the rest of the world (+) others

GDP

National Income: Compensation to employees (+) Proprietors income (+) Corporate profits (+) Net interest (+) Rental income National Income

Net Factor Payment to the Rest of the World: (Foreigners income citizens earning aboard)

Others: (Business transfer payments + Discrepancy)

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Table: Components of U.S. GDP, 2002: The Income ApproachBILLIONS OF DOLLARSPERCENTAGE OF GDPNational income8,199.980.3Compensation of employees6,010.058.9Proprietors income943.57.3Corporate profits748.97.3Net interest554.85.4Rental income142.71.4Depreciation1,351.313.2Indirect taxes minus subsidies739.47.2Net factor payments to rest of the world11.10.1Other- 96.1- 0.9Gross domestic product10,205.6100.0

*Compensation of employees Includes wages, salaries, and various supplementsemployer contributions to social insurance and pension funds, forFor example: paid to households by firms and by the government.Proprietors income The income of unincorporated businesses.Rental income The income received by property owners in the form of rent.Corporate profits The income of corporate businesses.

*Net interest The interest paid by business.Indirect taxes minus subsidies Taxes such as sales taxes, customs duties, and license fees, less subsidies that the government pays for which it receives no goods or services in return.Net business transfer payments Net transfer payments by businesses to others.

*9.3 GNP & PERSONAL INCOMEGross National Product (GNP) The total market value of all final goods and services produced within a given period by factors of production owned by a countrys citizen, regardless of where the output is produced.Personal IncomeThe total income of households before paying personal income tax.

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Table: GDP, GNP, NNP, National Income, Personal Income, and Disposable Personal Income, 2002DOLLARS (BILLIONS)GDP10,205.6Plus: receipts of factor income from the rest of the world+ 342.1Less: payments of factor income to the rest of the world- 353.2Equals: GNP10,194.5Less: depreciation- 1,351.3Equals: net national product (NNP)8,843.2Less: indirect taxes minus subsidies plus other- 643.3Equals: national income8,199.9Less: corporate profits minus dividends- 332.6Less: social insurance payments- 731.2Plus: personal interest income received from the government and consumers+ 439.1Plus: transfer payments to persons+1,148.7Equals: personal income8,723.9Less: personal taxes- 1,306.2Equals: disposable personal income7,417.7

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Table: Disposable Personal Income and Personal Saving, 2002DOLLARS (BILLIONS)Disposable personal income7,417.7Less:Personal consumption expenditures- 7063.5Interest paid by consumers to business- 204.3Personal transfer payments to foreigners- 31.3Equals: personal saving118.6Personal savings as a percentage of disposable personal income:1.6%

9.4 NOMINAL VERSUS REAL GDPNominal GDP Definition: values the production of goods and services at current prices or current dollar that we pay for things.Real GDP Definition: values the production of goods and services at constant prices or Nominal GDP adjusted the price changes. Formula: *Real GDP = Nominal GDP / price index

*Calculating Nominal & Real GDP

TABLE: A Three-Good Economy(1)(2)(3)(4)(5)(6)(7)(8)GDP INGDP INGDP INGDP INYEAR 1YEAR 2YEAR 1YEAR 2ININININPRODUCTIONPRICE PER UNITYEAR 1YEAR 1YEAR 2YEAR 2YEAR 1YEAR 2YEAR 1YEAR 2PRICESPRICESPRICESPRICESQ1Q2P1P2P1 x Q1P1 x Q2P2 x Q1P2 X Q2Good A611$.50$ .40$3.00$5.50$2.40$4.40Good B74.301.002.101.207.004.00Good C1012.70.907.008.409.0010.80Total$12.10$15.10$18.40$19.20Nominal GDP in year 1Nominal GDP in year 2

GDP DeflatorDefinition:Measure of the price level calculated as the ratio of nominal GDP to real GDP times 100.It tells us what portion of the rise in nominal GDP that is attributable to a rise in prices rather than a rise in the quantities produced.Formula:

*GDP Deflator = (Nominal GDP/Real GDP) x 100

9.5 LIMITATIONS OF GDP CONCEPTIgnore non-market and household activitiesIgnores do-it-yourself household production.Example: The output of a housewife taking care of her children or family. Underground economyPart of an economy in which transactions take place and in which income is generated that is unreported and therefore not counted in GDP.Example: All market activity that goes unreported because its illegal or those involved want to evade taxes*

Distribution outputRe-distributive income policies have no direct impact on GDP because most output goes to a few people .Example: Imputed dollar amount for food produced by farm families for their own consumption.Health and Life ExpectancyGood health and a long life do not show up in the real GDP, at least not directly.As GDP increased, our life expectancy higher, but we face new health and life expectancy problems every year, such as AIDS and drug abuse.*

Kinds of goodsDid not differentiate the important goods (e.g. medicines or foods) against harmful goods (cigarettes). PollutionEconomy activity directly influence the quality of environment. LeisureIncrease the social welfare, will tend to decrease the output (GDP).Leisure is not explicitly bought and sold in a market

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