National Aggregates

Measurement of Macroeconomic Aggregates

Introduction

Concepts like GDP, GNP and national income are significant from the view of the macro economy of the country. They provide valuable information about the information of the economy’s health.

• GNP is the sum of all final goods and services produced by the factors of production – land, labor, capital, and entrepreneurship – of a country during a certain period of time

05/03/23 2

• If all such goods are valued as a price paid to all the factors of production, it is known as GNP at Factor cost. Factors of production earn income in the form of wages, salaries, rent, interest and profits etc. GNP is a flow concept.

• GDP, on the other hand, is the total market value of all final goods and services produced during a given period within the boundaries of the country, whether by domestic or foreign-supplied resources.

05/03/23 3

Session Outline

• Concept of value addition• National product aggregates• Relationship between Gross & Net; MP & FC;

and National & Domestic Concepts• Real and nominal GNP• Price indices and types

05/03/23 4

Concept of Value Addition

Stage: 1 Stage: 2 Stage: 3 Stage: 4 Stage: 5Value added by

Farmer = Rs.0.6

Value added by Miller = Rs.1.30

Value added by Baker = Rs.1.80

Value added by Retailer =

Rs.0.20

Final value of Baked

Bread = Rs.3.90

Value of storing and handling

by retailer

Value of storing Value of storing and handling and handling

by retailerby retailer

Value of baking operation

Value of baking operation

Value of baking Value of baking operationoperation

Value of milling wheat into

flour


flour


flour

Value of milling Value of milling wheat into wheat into

flourflour

Value of wheat from farmer




Value of wheat Value of wheat from farmerfrom farmer

Value added in different stages of bread production05/03/23 5

National Aggregates

1. Gross Domestic Product (GDP) a) at market price (MP)b) at factor cost (FC)

2. Gross National Product (GNP) a) at market price (MP)b) at factor cost (FC)

3. Net Domestic Product (NDP) a) at market price (MP)b) at factor cost (FC)

4. Net National Product (NNP) a) at market price (MP)b) at factor cost (FC)

05/03/23 6

Relationship between Gross & Net; MP & FC; and National & Domestic Concepts

05/03/23 7

Gross = Net + Depreciation

Market Prices = Factor Cost + [Indirect Taxes – Subsidies]

National = Domestic + Net Factor Income from Abroad

Real and Nominal GNP

Real GNP (Current Year)

=

Nominal GNP (current year) x GNP deflator

(base year)

GNP deflator (current year)

05/03/23 8

Price Indices

• Consumer Price Index (CPI)• Wholesale Price Index (WPI)• GDP deflator

05/03/23 9

10

Measurement of National Income

• Output (Value Added) Method• Expenditure Method• Income Method

11

Output (Value Added) ApproachThe Output (Value Added) Method

The agricultural and extractive industriesPlus Manufacturing industries

Plus Services and construction

Equals Gross Domestic Product at Factor Cost

Plus Net factor income from abroad ( = income received from abroad – income paid abroad)

Equals Gross National Product at Factor Cost

Less Capital consumption or depreciation

Equals Net National Product at Factor Cost or National Income

12

Expenditure Method1. Consumption (C)

2. Gross private domestic investment (Ig) [i.e. Net private domestic investment + depreciation]

3. Government purchases (G)

4. Net exports (NX)

Gross domestic product (GDP) at Market Prices

13

Income Method1. Compensation of employees2. Rents3. Interest4. Proprietors’ income5. Corporate income taxes6. Dividends7. Undistributed corporate profits8. Depreciation

Gross National Product (GNP) at Factor Cost9. Add: Indirect taxes10. Less: Subsidies

Gross National Product (GNP) at Market Price11. Less: Net income earned abroad

Gross Domestic Product (GDP) at Market Price

14

Expenditure Method Income MethodConsumption © Income from employment

Add: Government Spending (G) Add: Income from self-employment

Add: Gross Investment (Ig) Add:

Gross profits of companies (= Dividend + Corporate income tax + Undistributed corporate profits)

Add: Exports (E) Add: Interest

Less: Imports (M) Add: Rent

Gross National Product (GNP) at Factor Cost

Add: Indirect taxes

Less: Subsidies

Gross National Product (GNP) at Market Price

Less: Net factor income from abroad



15

Gross Domestic Product (GDP) at Market PriceLess: Indirect taxesAdd: Subsidies

Gross Domestic Product (GDP) at Factor CostAdd: Net factor income from abroad

Gross National Product (GNP) at Factor CostDepreciation

Net National Product (NNP) at Factor Cost (= National Income)Less: (Corporate income tax + Social security contributions)

Add: Transfer paymentsPersonal Income

Less: Personal taxes

Disposable Income

16

• Non-market production• Imputed values• Underground economy• Leisure and human cost• Double counting

Difficulties in Measuring the National Income

17

Uses of National Income Statistics

• An instrument of economic planning and review

• A means of indicating changes in a country’s standard of living

• A means of comparing the economic performance of different countries

• An indicator to appraise the changes in the economic growth of a country

18

Other Measures of National Income

• National Income (NNPFC) [income earned]

• Personal Income (PI) [income received]• Disposable Personal Income• Personal Savings

Education

National Aggregates