3. National Income
Accounting
National income accounts: an
accounting framework used in
measuring current economic activity
Three alternative approaches give the
same measurements
Product approach: the amount of
output produced
Income approach: the incomes
generated by production
Expenditure approach: the amount
of spending by purchasers
5. National Income Accounting
Why are the three approaches equivalent?
They must be, by definition
Any output produced (product approach) is purchased by
someone (expenditure approach) and results in income to
someone (income approach)
The fundamental identity of national income accounting:
total production = total income = total expenditure (2.1)
7. Gross Domestic Product (market value)
Market value: allows adding together unlike items by valuing
them at their market prices
Problem: misses nonmarket items such as homemaking, the
value of environmental quality, and natural resource depletion
There is some adjustment to reflect the underground
economy
Government services (that aren’t sold in markets) are valued
at their cost of production
8. Gross Domestic Product
(newly produced)
Newly produced: counts
only things produced in
the given period;
excludes things
produced earlier.
9. GrossDomesticProduct:Finalgoodsandservices
Final goods and services
Don’t count intermediate goods and services
(those used up in the production of other
goods and services in the same period that
they themselves were produced)
Final goods & services are those that are not
intermediate
Capital goods (goods used to produce other
goods) are final goods since they aren’t used
up in the same period that they are produced
10. Gross Domestic Product:
Final goods and services
Final goods and services
Inventory investment (the amount
that inventories of unsold finished
goods) is also treated as a final
good
Adding up value added works well,
since it automatically excludes
intermediate goods
11. Value added method
Example 1:calculate national income according to the
following data
Methodsofmeasuringnationalincome:Productmethod
Product Value of
product
Value of
intermediate
product
Value added
wheat 20 zero ؟
flour 25 ؟ ؟
bread 35 ؟ ؟
National income using value added
method
؟
12. Value added method
Sol of Example 1:
Methodsofmeasuringnationalincome
A-Productmethod
Product Value of
product
Value of
intermediate
product
Value added
wheat 20 zero 20
flour 25 20 5
bread 35 25 10
National income using value added method 35
13. Example 2:if national income for country x is 1670 million $.
Complete the following data to calculate the value added for each
project.
Methodsofmeasuringnationalincome:Productmethod
Product Value of product Value of intermediate
product
Value added
Apple farm 600 ؟ 600
Cheese factory ؟ 200 550
Cars factory 500 ؟ ؟
Ceramic factory 270 100 ؟
National income using value added method 1670
15. Gross
Domestic
Product:
GNP vs. GDP
GNP (gross national
product) = output
produced by domestically
owned factors of
production (nationals;
citizens)
GDP = output produced
within a nation
16. Gross Domestic Product:
GNPvs.GDP
Example: Engineering
revenues for a road built
by a U.S. company in
Saudi Arabia is part of
U.S. GNP (built by a U.S.
factor of production), not
U.S. GDP, and is part of
Saudi GDP (built in Saudi
Arabia), not Saudi GNP
Difference between
GNP and GDP is
higher for countries
that have many
citizens working
abroad
17. NFP
NFP = net
factor
payments
from abroad
NFP = payments to
domestically owned factors
located abroad( payments to
nationals abroad) minus
payments to foreign factors
located domestically (payments
to foreigners inside the
country)
18. GDP and GNP
GDP of Egypt= value of output produced by Egyptians
inside Egypt + value of output produced by foreigners
inside Egypt (a)
GNP OF EGYPT= value of output produced by Egyptians
inside Egypt + value of output produced by Egyptians
abroad (b)
So GDP= GNP –(b) +(a)
GDP= GNP –(b-a)
GDP= GNP- NFP
19. GrossDomesticProduct:TheexpenditureapproachtomeasuringGDP
Measures total spending on final goods and
services produced within a nation during a
specified period of time
Four main categories of spending:
consumption (C), investment (I), government
purchases of goods and services (G), and net
exports (NX)
Y = C + I + G + NX (2.3)
the income-expenditure identity
20. The expenditure approach to measuring GDP
Consumption: spending by domestic households on
final goods and services (including those produced
abroad)
Three categories
Consumer durables (examples: cars, TV sets, furniture,
major appliances)
Nondurable goods (examples: food, clothing, fuel)
Services (examples: education, health care, financial
services, transportation)
21. The expenditure approach to measuring GDP
Investment: spending for new capital goods
(fixed investment) plus inventory investment
Business (or nonresidential) fixed investment:
spending by businesses on structures and equipment
and software
Residential fixed investment: spending on the
construction of houses and apartment buildings
Inventory investment: increases in firms’ inventory
holdings
22. The expenditure approach to measuring GDP
Government purchases of goods and services:
spending by the government on goods or services
Not all government expenditures are purchases of goods and
services. Some are payments that are not made in exchange
for current goods and services
- One type is transfers, including Social Security payments,
welfare, and unemployment benefits
- Another type is interest payments on the government
debt
Some government spending is for capital goods that add to
the nation’s capital stock, such as highways, airports,
bridges, and water and sewer systems
23. The expenditure approach to measuring GDP
Net exports: exports minus imports
Exports: goods produced in the country that
are purchased by foreigners
Imports: goods produced abroad that are
purchased by residents in the country
Imports are subtracted from GDP, as they
represent goods produced abroad, and were
included in consumption, investment, and
government purchases
24. GrossDomesticProduct:TheincomeapproachtomeasuringGDP
Adds up income generated by production (including
profits and taxes paid to the government)
National income = compensation of employees (including
benefits) + proprietors’ income + rental income of persons +
corporate profits + net interest + taxes on production and
imports + business current transfer payments + current
surplus of government enterprises
25. GrossDomesticProduct:TheincomeapproachtomeasuringGDP
National income + statistical discrepancy = net national
product (meaning that national income almost equal net
national product)
Net national product = gross national product (GNP) -
depreciation (the value of capital that wears out in the period)
GNP – net factor payments (NFP) = GDP
26. Gross Domestic Product: The income
approach to measuring GDP
– Net National Income (NNI): This is GDP minus
depreciation.
Depreciation is the wear and tear on capital
equipment and buildings.
The formula for NNI:
NNI = GDP – Depreciation
– National Income (NI): This is NNI minus
indirect taxes plus subsidies.
Indirect taxes are taxes on the sale of services
and goods. Subsidies are payments made by the
government to producers.
27. Gross Domestic Product: The income
approach to measuring GDP
– Personal Income (PI): This is NI minus
corporate income taxes plus transfer payments.
Transfer payments are payments made by the
government to individuals that do not require the
recipient to provide any good or service in return.
The formula for PI:
PI = GDP – NIT
(where NIT=net indirect taxes).
– Disposable Income (DI): This is PI minus
personal income taxes.
28. Gross Domestic Product: The income
approach to measuring GDP
National income is usually measured in terms of
GDP because it is the most comprehensive
measure of economic activity. However, there are
times when it is more useful to measure national
income in terms of GNP.
29. The income approach to measuring GDP:
Private sector and government sector income
• Private disposable income = income of the private
sector
= private sector income earned at home (Y or GDP) and
abroad (NFP) + payments from the government sector
(transfers, TR, and interest on government debt, INT) –
taxes paid to government (T)
= Y + NFP + TR + INT – T (2.4)
• Government’s net income
= taxes – transfers – interest payments
= T – TR – INT (2.5)
30. The income approach to measuring GDP:
Private sector and government sector income
• Private disposable income + government’s net
income = GDP + NFP = GNP
31. GDP 6000
Gross investment 800
Net investment 200
Consumption 4000
Government purchases of goods and services 1100
Unemployment insurance payment provided by gov. 70
Government budget surplus 100
Example
Find the following:
NDP
Net exports
Government taxes
Disposable private income
32. SOLUTION
1. NDP= GDP – DEPRECIATION
Depreciation= gross investment – net investment
=800 – 200 = 600
NDP = 6000 – 600 =9200
2. Net exports =?
GDP = C+ I+G+NX
NX = GDP- (C+ I+G) = 100
34. Exercise
GDP 10000
Gross investment 1000
Net investment 200
Consumption 7000
Government purchases of goods and services 1200
Government transfers to residents 80
Government net income 100
Find the following:
NDP
Net exports
Government taxes
Disposable personal income
35. SOLUTION
1. NDP= GDP – DEPRECIATION
Depreciation= gross investment – net investment
=1000 – 200 = 800
NDP = 10000 – 800 =9200
2. Net exports =?
GDP = C+ I+G+NX
NX = GDP- (C+ I+G) = 800
36. SOLUTION
3. Gov. taxes =?
Gov. net income = taxes – transfers –interest payments
Taxes= Gov. net income+ transfers + interest payments
= 100 + 80 +0= 180
4. disposable income = GDP – taxes + transfers
= 10000 – 180 +80 = 9900