Chapter 25

Measuring Domestic Output and National

Income

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Assessing the Economy’s Performance

• National Income Accounting measures economy’s overall performance

• *Bureau of Economic Analysis compiles National Income and Product Accounts• Assess health of economy• Track long run course• Formulate policy• Who use these infos? *BNM, MOF - Malaysia

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Gross Domestic Product

• Measure of aggregate output• Monetary measure (in terms of RM, $)• All goods & svcs produced must be converted to RM• To avoid multiple counting• Only use market value final goods• Ignore intermediate goods (WIP)• Count value added (the market value of a firm’s output

less the value of the inputs that the firm purchased from others.)

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Gross Domestic Product

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(1)Stage of Production

(2)Sales Value

Of MaterialsOr Product

$ 0

Firm A, sheep ranch 120

Firm B, wool producer 180

Firm C, coat manufacturer 220

Firm D, clothing manufacturer 270

Firm E, retail clothier 350

Total Sales Value $1140

Value Added (total income)

(3)ValueAdded

]--------$120 (= $120 - $ 0)

]-------- 60 (= 180 - 120)

]-------- 40 (= 220 - 180)

]-------- 50 (= 270- 220)

]-------- 80 (= 350 – 270)

$350

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Gross Domestic Product

• Exclude financial transactions b’coz they have nothing to do with productions of final goods.

• 2 types of financial transxctn:a) purely financial trnsxcn – public trsfr KWSP,

SOCSO, PTPTN, BR1M.b) 2nd hand sales - sell PM used car to u.

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How Do U know this person is rich?

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How do u know the economic health of Penang?

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Two Approaches to GDP

• Income approach• Count income derived from production• Wages, rental income, interest income,

profit• Expenditure approach• Count sum of money spent buying the final

goods• Who buys the goods?

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Two Approaches to GDP

GDP

= =

+Consumption by

Households

Investment byBusinesses

GovernmentPurchases

ExpendituresBy Foreigners

++

+++

Wages

Rents

Interest

Profits

StatisticalAdjustments

+

Expenditures or Output Approach

Income or Allocations Approach

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Goods that normally have 3 or more life of expectancy

food, clothing,

and petrol

Bank, Insurance,

travel

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Expenditures Approach

• Gross private domestic investment (Ig)(pelaburan dalam negara)

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Expenditures Approach

• Gross private domestic investment (Ig)(pelaburan dalam negara

• Creation of new capital assets

• Noninvestment transactions excluded

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How does today’s investment expand ?

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Expenditures Approach

January 1 Year’s GDP December 31

Consumption,government

expenditures, and net exports

Depreciation

NetInvestment

GrossInvestment

Stock ofCapital

Stock

ofCapital

Gross InvestmentDepreciationNet Investment

-=

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Expenditures Approach• Government purchases (G)• Expenditures for goods and services (govt spends for

military assets)

• Expenditures for publicly owned capital (govt spends for school, road, hospital)

• Excludes transfer payments• Net exports (Xn)• Add exported goods• Subtract imported goods• Xn= exports (X) – imports (M)

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GDP = C + Ig + G + Xn

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Accounting Statement for the U.S. Economy, 2012 (in

Billions)

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Comparative GDP

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The Income Approach• This approach allocates expenditures as income to those

responsible for producing the output• Compensation of employees• Rents• Interest• Proprietor’s income• Corporate profits

• Corporate income taxes• Dividends• Undistributed corporate profits

• Taxes on production and imports

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The Income Approach• From national income to GDP• Subtract net foreign factor income (income Malaysians gains from

supplying resources abroad – income that Indonesians gain from supplying resources to Malaysia)

• Statistical discrepancy• Consumption of fixed capital

• Other national accounts• Net domestic product (NDP)• National income (NI)• Personal income (PI)• Disposable income (DI)

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U.S. Income Relationships 2012

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Circular Flow Revisited

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Nominal GDP vs. Real GDP

• GDP is a dollar measure of production• We don’t use GDP to measure because currency always

change.• Using dollar values creates problems• Nominal GDP• Based on prices when output was produced

• Real GDP• Reflect changes in the price level• Use base year price

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GDP Price Index

• Use price index to determine real GDP

PriceIndexIn GivenYear

= x 100Price of Market Basket

In Specific YearPrice of Same Basket

In Base Year

RealGDP =

Nominal GDP

Price Index (in hundredths)

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GDP Price Index

Year

(1)Units of Output

(2)Price of

PizzaPer Unit

(3)Price Index

(Year 1 = 100)

(4) Unadjusted, or Nominal,

GDP(1) X (2)

(5)Adjusted,

or Real, GDP

1 5 $10 100 $ 50 $50

2 7 20 200 140 703 8 25 250 200 80

4 10 30 --- --- ---

5 11 28 --- --- ---

• Calculating Real GDP (Base Year = Year 1)

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Is GDP a perfect measure to measure an econ’s health?

(para: is wealth a perfect measure a person?)

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Shortcomings of GDP

• Nonmarket activities• Leisure• Improved product quality• The underground economy• GDP and the environment• Composition and distribution of the output• Noneconomic sources of well-being

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Underground Economy

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Sources of BEA Data

• Consumption• Census Bureau’s Retail Trade Survey• Census Bureau’s Survey of Manufacturers• Census Bureau’s Service Survey• Industry Trade Sources

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Sources of BEA Data

• Investment• All consumption data sources• Census Bureau’s Housing Starts Survey and

Housing Sales Survey• Retail Trade Survey• Wholesale Trade Survey• Survey of Manufacturing

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Sources of BEA Data

• Government Purchases• Office of Personnel Management• Construction Surveys• Census Bureau’s Survey of Government

Finance• Net Exports• U.S. Customs Service• BEA Surveys and Analysis