Topic 13: Measuring the National Output and National Income

Topic 13: Measuring the National Output and National Income 1.The System of National Income Accounting 2.The GDP and methods of its measuring 3. GDP sisters 4. Nominal GDP versus Real GDP. The GDP deflator 5. GDP and economic well-beingNational Income Accounting The measuring National Output and National Income is indispensable for macroeconomic theory and policy. National Income accounting have been designed to measure the overall production performance of trhe economy. By Brue and McConnell a System of National Income Accounting allows us to keep a finger on the economic pulse of the nation. People do not live by bread alone not does society live on GDP alone. The SNA system is the international standard of measuring of macroeconomic indicators as National output and National Income. It provides the possibility to understand the interconnections between macroeconomic transactions and to compare macroeconomic indicators between countries. The creator of the SNA was an American economist S. Kuznets. The SNA developed in the USA in 1947. In 1993 some changes in SNA were introduced. In Moldova the SNA is developed from 1996.What Are These Accounting Measures? GROSS DOMESTIC PRODUCT GROSS NATIONAL PRODUCT ( VALUE ) NET DOMESTIC PRODUCT NET NATIONAL PRODUCT NATIONAL INCOME PERSONAL INCOME DISPOSABLE INCOMEGROSS DOMESTIC PRODUCT GDP is the total market value of all final goods and services produced within a Country in a given period of time (year) GDP is the total market value . . . Output is valued at market prices. . . . of all final . . .It records only the value of final goods, not intermediate goods (the value is counted only once). . . . goods and services . . . It includes both tangible goods (food, clothing, cars) and intangible services (haircuts, house cleaning, doctor visits). . . . produced . . . It includes goods and services currently produced, not transactions involving goods produced in the past. . . . within a Country . . . It measures the value of production within the geographic confines of a country. . . .in a given period of time. It measures the value of production in a specific interval of time, usually a year. GDP includes all items produced in the economy and sold legally in markets. What Is Not Counted in GDP? Excludes Nonproduction Transactions. GDP excludes most items that are produced and consumed at home and that never enter the marketplace. Excludes items produced and sold illicitly, such as illegal drugs. Excludes financial Transactions: Public Transfer Payments Private Transfer Payments Stock Market Transactions. Excludes secondhand sales Because every transaction has a buyer and a seller, the total expenditure in the economy must equal the total income in the economy. Buying (spending money) and selling (receiving money) are two aspects of the same tranzactioins Gross Domestic Product (GDP) measures an economys total expenditure on newly produced goods and services and the total income earned from the production of these goods and services. Me can view GDP looking to expenditures approach or income approach. EXPENDITURES APPROACH:

1.Personal Consumption Expenditures ( C ) are the spending by households on goods and services, with the exception of purchases of new housing and include the expenditures for: Durable Consumer Goods Nondurable Consumer Goods Services 2.Gross Private Domestic Investment ( Ig ) means the spending of firms on: Machinery, Equipment, and Tools All Construction Inventories New housing Gross vs. Net Investment Gross Private Domestic Investment Depreciation = Net Private Domestic Investment3.Government Purchases (G) include: - the spending on goods and services by local and central governments - the wages of officials (workers in the public sector) - public investments (spending for investment boons)Does not include transfer payments because they are not made in exchange for currently produced goods or services. 4. Net Exports (Xn) means what the foreign sector spent on domestically produced goods : (the value of Exports minus the value of imports) Net Exports (Xn) = Exports (Ex) Imports (Im) Putting it all together:GDP = C + Ig + G + Xn THE INCOME APPROACH: GDP looking to income approach includes: Compensation of employees or wages Rents are income payments received by owners of property resources (land, house, appartment) Interest means the income payments to the suppliers of money capital Proprietors Incomes (incomes received proprietorships and partnerships as private business firms) Corporate Profits (corporate income taxes, dividends, undistributed corporate profits)are the earnings of owners of corporations Nonincome charges or allocations, including: - Depreciation - Indirect business taxes

The value-added method of calculating of GDPThe SNA includes the measuring of the value-added created by each firm in order to avoid double counting.The value-added is the market value of a firms output less the value of the inputs the firm has bought from others. The value-added is the sum of all incomes created by the firms (Wages, Rent, Interest, Profit)GDP sisters:

GNI (GNP) is the market value of total output produced by a nations residents (citizens of this country) on the base of resources located in this country or abroad. It differs from GDP by including income that our citizens earn abroad and excluding income that foreigners earn in a country.GNI = GDP - Net foreign factor income earned in this country or GDP + Net foreign factor income earned abroad.NDP = GDP - depreciation (a part of output needed to replace the capital goods consumed in producing that GDP).NDP is GDP adjusted for depreciation. It is a better measure of the production, available for consumption than is gross output.NI (NNI) means all income earned by owners of economic resources in this country.NI = NDP Net foreign factor income earned in this country(- indirect business taxes) or NDP + Net foreign factor income earned abroad (- indirect business taxes).PI is income received whether earned or unearned by individuals (welfare compensation, pensions).PI = NI - (corporate income taxes + social security contributions + undistributed corporate profit + indirect taxes) + transfer payments + interest income that households receive from their holding of government debt (N).DI (Yd) means an income that is allocated by individual for consumption and saving. It is the income that individuals have left after satisfying all their obligations to the government.Yd = PI - personal taxes, Yd = Consumption + SavingU.S. GDP, NDP, NI, PI, & DI, 2002Gross Domestic Product (GDP) $10,446

Consumption of fixed capital

-1,393Net Domestic Product (NDP) $9,053

Net foreign factor income earned

in the U.S.

- 10

Indirect business taxes

-695National Income (NI)

$8,348

Social security contributions

-748

Corporate income taxes

-213

Undistributed corporate profits -141

Transfer payments

+1,683Personal Income (PI)

$8,929

Personal Taxes

-1,113Disposable Income (DI)

$7,816Nominal GDP - is the amount of final goods and services produced in a given year valued at the current prices. Nominal GDP reflects both the price level and output produced. Real GDP - is the amount of final goods and services produced in a given year valued at prices of basic year (reference year). Real GDP reflects only the output produced.Potential GDP(Y*) is the value of final goods and services produced in conditions of full employment of available economic resources. GDP Data for 2012year and 2013 yearItem2012 year2013year

Q1P1Q x PQ2P2Q x P

Balls Bats10020$ 1,00$ 5,00$ 100$ 10016022$ 0,50$ 22,5$ 80$ 495

Nominal GDP$ 200$ 575

2012 is the base yearBase year prices value of real GDP for 2013 yearItemQ2P1Q x P

Balls Bats16022$ 1,00$ 5,00$ 160$ 110

Real GDP$ 270

GDP Deflactor= Nominal GDP / Real GDP X 100%

The GDP deflator is a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100. It tells us the rise in nominal GDP that is attributable to a rise in prices rather than a rise in the quantities produced.Year Nominal GDPReal GDPGDP Deflator

20122013$ 200$ 575$ 200$ 270100230

Measuring of GDP Deflator is significant for two reasons:1. Measuring inflation or deflation2. Comparing GDP.

In terms of nominal GDP, thetop fivecountries are: United States of America China Japan Germany France If there is high inflation ina country, there may be rapid growth in nominal GDP but not much growth in real GDP. All countries have different rates of inflation. Therefore, when comparing GDP growth rates indifferent countries, real GDP is used. Real GDP growth paints a more accurate picture and allows economists to compareeconomic growthindifferent countries.

Thetop fivecountries in terms ofreal GDP growth ratefor 2009 were: Macau Qatar Azerbaijan China EthiopiaGDP and economic well-being

GDP is a measure of economic well-being of a society because people prefer higher to lower incomes. It is a good measure of market-oriented activity

GDP per person tells us the mean income and expenditure of the people in the economy. Higher GDP per person indicates a higher standard of living. There should be a strong positive correlation between real GDP and social welfare. GDP and GDP per capita as indicators of well-being have some disadvantages: Average measuring ( one person has 2 cars, other not = 1 car average per person) Not analysis of qualitative aspects of welfare ( 2 countries with the same level of GDP, but with differing levels of literacy of population, rate of death..) No information about differing purchasing power of $ 1 No effects of ecological problems on National production Some things that contribute to well-being are not included in GDP, such as The value of leisure. The value of a clean environment. The happiness or quality of life. The value of almost all activity that takes place outside of markets, such as the value of the time parents spend with their children and the value of volunteer work.Conclusion: GDP is not a perfect measure of well-being because some things, such as leisure time and a clean environment, arent measured by GDP.Alternative concepts :

OECD Your Better Life Index 11 subindicators combined (Housing, Income, Jobs, Community, Education, Environment, Governance, Health, Life Satisfaction, Safety) http://oecdbetterlifeindex.org/ UNDP Human Development Index 4 subindicators combined (life expectancy at birth, mean years of schooling, expected years of schooling, gross national income per capita) http://hdr.undp.org/en/statistics/hdi / Net Economic welfare by J. Tobin and W. Nordhaus (1972): GDP+value of goods,excluded from GDP(leisure time) -value of bads(pollution)