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15Measuring Domestic Output and National Income

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Chapter Objectives• How GDP and GNI is Defined

and Measured• Relationships Between GDP, Net

Domestic Product, Gross National Income, Household Income, and Disposable Income

• The Nature and Function of a GDP Price Index

• The Difference Between Nominal GDP and Real GDP

• Some Limitations of the GDP Measure

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Assessing Economy’s Performance

• National Income Accounting• Gross Domestic Product (GDP)

Gross value added at factor cost+ other taxes on production- other subsidies on productionGross value added at basic prices+ taxes on production- Subsidies on productionGDP at market prices

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Assessing Economy’s Performance

• National Income Accounting• Gross Domestic Product

(GDP)– A Monetary Measure– Avoid Double Counting

• Intermediate Goods• Final Goods• Value Added

– Exclude Nonproduction Transactions

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Assessing Economy’s Performance

• Financial Transactions Excluded–Public Transfer Payments–Private Transfer

Payments–Stock (and Bond) Market

Transactions• Second Hand Sales

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Three Approaches to GDP• Income Approach

–Wages / Rental Incomes–Interest Incomes / Profits

• Expenditure and Value added (production) Approach–Final-Product or Value-

Added / The Sum of the Money Spent to Buy the Output

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Approaches to GDPExpenditure

ApproachIncome

Approach

GDP

= =

+Consumption by

Households

Investment byBusinesses

GovernmentPurchases

ExpendituresBy Foreigners

+

+

+++

Wages

Rents

Interest

Profits

StatisticalAdjustments

+

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Expenditure ApproachPersonal Consumption Expenditures• Durable Consumer Goods• Nondurable Consumer Goods• Consumer Expenditures for

ServicesGross Private Domestic Investment • Machinery, Equipment, and Tools• All Construction• Changes in Inventories• Noninvestment Transactions

C

I

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Expenditure Approach

January 1 Year’s GDP December 31

Consumption& Government

Spending

Depreciation

NetInvestment

GrossInvestment

Stock ofCapital

Increased

Stock ofCapital

Gross InvestmentDepreciation

Net Investment-=

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Expenditure ApproachGovernment Purchases• Expenditures for Goods and

Services• Expenditures for Social

CapitalNet Exports

Xn = Exports (X) – Imports (M)

Putting It All Together: GDP = C + I + G + Xn

G

Xn

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The Income Approach• Compensation of Employees• Net operating surplus

– Rent– Interest– Proprietors Income– Corporate profits

• Corporate Income Taxes• Dividends• Undistributed Corporate Profits

– Consumption of fixed capital– Taxes and Subsidies

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GDP Approaches Compared

Compensation

Net operating surplus

(profits, rents and

Interest)

Consumption of fixed

capital

Taxes on Production

Less: Subsidies on

production

Gross Domestic

Product

R855 845

636 378

256 373

263 244

12 754

R1 999 086

Personal

Consumption (C)

Gross Private

Domestic

Investment (I)

Government

Purchases (G)

Net Exports (Xn)

Gross Domestic

Product

Accounting Statement for the S.A Economy, 2009in Billions current prices

ReceiptsExpenditures Approach

AllocationsIncome Approach

R1 227 816

438 346

394 653

-61 729

R1 999 086

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Comparative GDPs selected nations

Source: World Bank

United States

China

United Kingdom

Brazil

Australia

Sweden

South Africa

Botswana

Uganda

Zimbabwe

0 1 2 3 4 5 15 7 8 9 10 12

$13 811

$3280

$2726

$821

$277

$11

$11

$444

$3

GDP in billions of DollarsGLOBAL PERSPECTIVE

$1314

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The Production Approach

Stages of Production

Sales Value Value Added

Firma A: Sheep Farm

R0 – R120 R120

Firm B: Wool processor

R120 – R180 R60

Firm C: Suit Manufacturer

R180 – R220 40

Firm D: Clothing wholesaler

R220 -R270 R50

Firm E: Retail Clothier

R270- R350 R80

Total Sales Value R1140

Value Added R350

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The Income Approach• Other National Accounts

– Net Domestic Product (NDP)– Gross National Income (GNI)– Household Income (HI)– Disposable Income (DI)

DI = C + S15.1

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Circular Flow RevisitedS.A. Domestic Output and the Flows of Expenditure and Income

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Nominal Versus Real GDP• Nominal GDP• Real GDP• Price Index• GDP Price IndexPriceIndexIn GivenYear

= x100Price of Market Basket

In Specific Year

Price of Same BasketIn Base Year

RealGDP =

Nominal GDP

Price Index (in hundredths)

15.2

15.1

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Shortcomings of GDP• Nonmarket Activities• Leisure• Improved Product Quality• The Informal Sector• GDP and the Environment• Composition and Distribution

of the Output• Noneconomic Sources of

Well-Being

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Key Terms• national income accou

nting• gross domestic produ

ct• intermediate goods• final goods• multiple counting• value added• expenditures approach• income approach• Production approach• personal consumption

expenditures (C)

• gross private domestic investment (Ig)

• net private domestic investment

• government purchases• net exports (Xn)

• taxes on production and imports

• Gross national income• net domestic product

(NDP)• Household income (HI)• disposable income (DI)• nominal GDP• real GDP• price index

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Basic MacroeconomicRelationships