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Measuring National

Income
Macroeconomics 3.1

Macroeconomics studies the economy as a whole. The focus is on the


larger picture of the economy composed of collections of many
consumers, firms, resource owners and markets.

It is the study of the general price level of the economy, the total
demand for goods and services, the total output produced in the
economy, total employment, total investment, total exports and
imports, which in economics is called aggregates.

The study of macroeconomics is prompted by


some very important economic objectives:
Achieve economic growth
Achieve full employment
Achieve a stable or a gently rising price level
Achieve an equitable distribution of income
Achieve external balance (stable exchange
rate and avoid balance of payments
problems)

3.1 Measuring national


income

Circular flow of income


Methods of measurement
income, expenditure and output
Distinction between:
gross and net
national and domestic
nominal and real
total and per capita

The Circular Flow


Diagram

Circular flow of income

There is a Flash movie explaining


the Circular flow of income
Click on the link below
http://www.fgn.unisg.ch/eurmacro
/tutor/circularflow.html

GDP
http://www.youtube.com/watch?v=yUiU_xRPwMc&lis
t=PLF2A3693D8481F442&index=19&feature=plpp_vid
eo

Gross Domestic Product

GDP is the market value of all final


goods & services produced within a
country in a given time period

GDP is the market value


You cant compare apples with oranges
Market prices measure the amount people are willing to pay
for different goods, they reflect the value of those goods

Of all
Includes all items produced in the economy & sold legally

Final
Value of intermediate goods is already included in the
prices of the final goods
Problem of double counting

Goods & services


Tangible goods & intangible services

Produced
G & S currently produced
Does not include transactions involving items produced in
the past value of a used car sold on the market not included
in GDP

Within a country
GDP measures the value of production within
geographical confines, regardless of the nationality of
the producer

In a given period of time


a year or a quarter (3 months)

How GDP Is Measured?


Income (wages, salary, rent, interest, profits)

Firms

Households

Expenditures by Consumers, Investors, Government, and Net Exports

How GDP Is Measured?


Income (wages, salary, rent, interest, profits)

Firms

Same As

Households

Expenditures by Consumers, Investors, Government, and Net Exports

How GDP Is Measured?


Income (wages, salary, rent, interest, profits)
Value of what is
produced

Firms

Same As

Households

Value of what is
spent
Expenditures by Consumers, Investors, Government, and Net Exports

How GDP Is Measured?


Income (wages, salary, rent, interest, profits)
Flow of Income
Approach

Firms
Expenditures
Approach

Value of what is
produced

Same As

Households

Value of what is
spent

Expenditures by Consumers, Investors, Government, and Net Exports

How GDP Is Measured?


Income (wages, salary, rent, interest, profits)
Flow of Income
Approach

Value of what is
produced

Same As

Firms
Expenditures
Approach

Households

Value of what is
spent

Expenditures by Consumers, Investors, Government, and Net Exports

(GDP = C + I + G + Xn )

Methods of
Measurement

Factor Income
Adding up total payments for use of
factors of production
Interest imputed (estimated)
When the public sector utilises
wholly owned buildings, it is freely
using capital which would have
been paid for in the private sector

GDP (factor) income method of accounting


Factor Income

Amount (millions of
)

Employment Income (wages)

47,090

Self - employment income (wages +


profit)

10,903

Rental Income
Interest (imputed consumption of
non-trading capital)

6181
26,290

Total domestic income


less stock appreciation

218

statistical discrepancy

569

GDP at factor cost

102,869

Stock changes in 2 ways:


1. in physical amount
2. by value due to price inflation
If value of stocks increases
arbitrarily due to inflation, the
price increase or appreciation of
stock has to be deducted

GDP Expenditure method of Accounting


Expenditure type

Amount (millions of
)

Household consumption ( C )

55,202

Total private Expenditure on capital


(plus physical change in stocks) ( I )

27,461

Government Expenditure

15,413

Exports ( X )
imports ( - M )

112,938
95,702

GDP at market prices


less taxes on expenditure
plus subsidies
statistical discrepancy
GDP at factor cost

-14,572
2,697
-569
102,869

1. Using the expenditure approach, calculate the GDP of Canada in


2009
using the data below:

(millions CAD$)

Consumer expenditure on
goods & services
Business investment

1,527,258

Government expenditure

333,942

Exports

438,553

Imports

464,722

269,394

2. What percentage of GDP is made up by each of the four sectors


of
the economy?
3. Why dont economists simply ignore the imports figure, instead
of
actually deducting it, when calculating the GDP?

Expenditure Method
Investment : circulating capital
(unsold stocks), work in progress

Output method
Value added approach
All output generates rewards to
factor inputs

The Value-added Approach


to Measuring GDP
Production

Generated

Added

$100

$100

Farmer

harvest wheat

Miller

makes into flour

200

100

Baker

makes into bread

300

100

$600

$300

GDP counts only the $ value of the final


good

This is the same as the value-added.

GDP Output method of Accounting


Output type

Amount (millions of
)

Agriculture, forestry, fishing

4,003

Electricity, gas, water

1,329

Construction

8,085

Manufacturing

32,715

Transport, communication

6,014

Wholesale & retail trade

8,728

Banking, finance, insurance

8,478

Other services

22,789

Public administration, defence

4,032

Health care, education

9,991

Total
less adjustment for
financal services
statistical discrepancy

-3,863
569

Calculating nominal GDP using


the expenditure approach
Components
Consumer spending

Billion MNL
11.3

Investment spending

3.2

Government spending

3.5

Exports of goods & services

2.5

Imports of goods &


services

2.1

Using the information, calculate the nominal GDP for


Mountainland.

GDP: Domestic &


GNP: National

Net property income from abroad


National income is adjusted for income
accruing to foreign owners of property.
A foreign company will send interest,
rent and profit payments back to
shareholders.
These income payments have been
earned by citizens of another nation.

(UK )
Property income from abroad

55,526

Property income paid abroad

(-) 49907

Net property income from abroad

5,916

Gross Domestic Product

394,787

Net property income from


abroad

(+) 5,916

Gross National Product

400,703

Calculate
Mountainlands GNP
Components
Consumer
spending

Billion MNL
11.3

Investment
spending

3.2

Government
spending

3.5

Exports of
goods &
services

2.5

Imports of
goods &
services

2.1

GNP = GDP + income from


abroad income sent
abroad.
Income earned abroad =
2.7 bn. MNL
Income sent abroad = 4.7
bn. MNL

Domestic & National

Net property income from abroad =


Property income from abroad property
payments abroad

If the focus is economic welfare, then


national income is the better measure.
If focus was in employment, then
domestic income would be a more
relevant measure.

Real vs Nominal GDP


If total spending rises from one year
to the next:
1. The economy is producing a larger
amount of goods & services
2. Goods & services are being sold at
higher prices.
This distorts the true value of the GDP
Therefore economists use a measure
called REAL GDP

Table 2 Real and Nominal GDP


Consider an economy manufacturing only two goods: Hot
Dogs and Hamburgers

Table 2 Real and Nominal GDP

Table 2 Real and Nominal GDP

Nominal GDP uses current year prices


to place a value on the economys
production of goods & services
Real GDP uses constant base-year
prices to place a value on the
economys production of goods &
services
We deflate the nominal value by
removing the inflationary element

GDP deflator

The basis for deflating nominal


values to real values is an index
showing price change.
Consumer Price Index
GDP Deflator

GDP Deflator

Measures the current level of


prices relative to prices in the
base year.
GDP deflator = nominal GDP x
100
Real GDP

Total & per capita

Per capita income = National


Income
Population

National Income
Accounting
Money value of aggregate output
= GDP
Adjust for use of foreign factors of
production = GNP
Subtract depreciation of capital =
NNP
(to show net addition to GNP)

Gross & Net


Depreciation
Wearing out of capital goods
Gross investment includes all investment
irrespective of whether it adds new
capital stock or replaces capital which
is worn out.
NNP gives a true picture of the increase
in the productive capacity of the
economy.
NNP = GNP - depreciation

Depreciation

Each machine has a life span


Assume a machine has a life span
of 4 years, one fourth of any new
machine will wear out depreciate
during a year.
economists refer to NNP when
gauging a countrys future progress
in terms of future output capability.

Year
Event in firm
gross investment

machine # 1
machine # 2
= 100,000
= 200,000
100,000

200,000

25,000

25,000

depreciation # 2 (1/4 of
100,000 per year

50,000

depreciation # 3 - 5 (1/4 of
100,000 per year

25,000

75,000

2 mn

2.5

400,000

300,000

2.4 mn

2.8 mn

-25,000

-75,000

2.375 mn

2.725 mn

depreciation # 1(1/4 of
100,000 per year

total depreciation
total output (GDP)
net property income
GNP
less depreciation
NNP

Resoures

Mankiw G. ; Principles of
Economics; 3rd edition Pg 499
518

http://www.cr1.dircon.co.uk/TB/3/c
flow.htm

GDP Calculation, Nominal and Real Interest Rate, and


Central Banker Money Supply Control:
http://www.youtube.com/watch?v=XoIqVLO4Smg

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