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    Chapter 20: The Measurement of National Income: National Output and Value Added

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    Saaki Ganesh
    This document discusses how GDP is measured and calculated. It explains that GDP is equal to the total expenditure on final goods and services produced domestically in a given year. GDP can be measured in three ways: by summing the total value added by all firms, by totaling expenditures in key categories like consumption, investment and government spending, and by adding up all income payments generated from domestic production like wages, profits and taxes. The document provides detailed explanations of how GDP is calculated from the expenditure and income sides, including definitions of the components that make up total expenditures and incomes. It also discusses related concepts like GNP, real vs nominal GDP, and limitations of GDP as a measure of overall living standards.

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    Chapter 20: The Measurement of National Income: National Output and Value Added

    Uploaded by

    Saaki Ganesh
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    This document discusses how GDP is measured and calculated. It explains that GDP is equal to the total expenditure on final goods and services produced domestically in a given year. GDP can be measured in three ways: by summing the total value added by all firms, by totaling expenditures in key categories like consumption, investment and government spending, and by adding up all income payments generated from domestic production like wages, profits and taxes. The document provides detailed explanations of how GDP is calculated from the expenditure and income sides, including definitions of the components that make up total expenditures and incomes. It also discusses related concepts like GNP, real vs nominal GDP, and limitations of GDP as a measure of overall living standards.

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    This document discusses how GDP is measured and calculated. It explains that GDP is equal to the total expenditure on final goods and services produced domestically in a given year. GDP can be measured in three ways: by summing the total value added by all firms, by totaling expenditures in key categories like consumption, investment and government spending, and by adding up all income payments generated from domestic production like wages, profits and taxes. The document provides detailed explanations of how GDP is calculated from the expenditure and income sides, including definitions of the components that make up total expenditures and incomes. It also discusses related concepts like GNP, real vs nominal GDP, and limitations of GDP as a measure of overall living standards.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    42 views4 pages

    Chapter 20: The Measurement of National Income: National Output and Value Added

    Uploaded by

    Saaki Ganesh
    This document discusses how GDP is measured and calculated. It explains that GDP is equal to the total expenditure on final goods and services produced domestically in a given year. GDP can be measured in three ways: by summing the total value added by all firms, by totaling expenditures in key categories like consumption, investment and government spending, and by adding up all income payments generated from domestic production like wages, profits and taxes. The document provides detailed explanations of how GDP is calculated from the expenditure and income sides, including definitions of the components that make up total expenditures and incomes. It also discusses related concepts like GNP, real vs nominal GDP, and limitations of GDP as a measure of overall living standards.

    Copyright:

    © All Rights Reserved
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    of 4

    Chapter 20: The Measurement of National Income

    National Output and Value Added


    Production occurs in stages: Some firms produce outputs that are used as inputs by other firms,
    and these other firms, in turn, produce outputs that are used as inputs by yet other firms.
    If we added up all the market values of all outputs of all firms, we would obtain a total greatly
    in excess of the value of the economys actual output - double counting.
    2 types of output
    1) Intermediate Goods: All outputs that are used as inputs by other producers in a further
    stage of production
    2) Final Goods: Goods that are not used as inputs by other firms but are produced to be
    sold for consumption, investment, government, or export during the period under
    consideration (an item bought by its final user)
    It is extremely difficult, if not impossible to successfully distinguish final from intermediate
    goods.
    To avoid double counting, economists use the concept of value added.
    Value Added: The value of a firms output minus the value of the inputs that it purchases from
    other firms. (net value of its output)
    Value Added = Sales Revenue - Cost of Intermediate Goods
    Since the firms revenue must be fully exhausted by the cost of intermediate goods plus all
    payments to factors of production, value added = payments owed to the firms factors of
    production.
    Value added is the correct measure of each firms contribution to total output (GDP) - the
    amount of market value that is produced by that firm.
    The sum of all values added in an economy is a measure of the economys total output.
    National Income Accounting: The Basics
    The value of domestic output is equal to the value of the expenditure on that output and is also
    equal to the total income claims generated by producing that output.
    3 Methods of Calculating GDP
    1) Add up the value of all goods and services produced in the economy (value added)

    2) Add up total expenditure for each of the main components of final output
    3) Add up all the income claims generated by the act of production
    The conventions of double-entry bookkeeping require that the value of all production must be
    accounted for by a claim that someone has to that value. Thus, the values calculated from the
    income and the expenditure sides are identical conceptually and differ in practical
    measurements only because of errors of measurement. Any discrepancy arising from such
    errors is then reconciled so that one common total is given as the measure of GDP.
    GDP from the Expenditure Side
    Add up the expenditures needed to purchase the final output produced in that year
    GDP, Y (total expenditure on final output) is measured as a sum of
    1) Consumption Expenditure, C
    - Expenditure on all goods and services sold to their final users during the
    year
    - Includes services such as haircuts and dental care, non-durable goods
    such as vegetables and clothing, and durable goods such as cars and TVs
    2) Investment Expenditure, I
    - Expenditure on goods not for present consumption
    - 4 broad categories of expenditure
    Inventories
    Stocks of goods made but not yet sold and inputs
    purchased, but not yet used in production
    New Plant and Equipment
    Creating new capital goods
    Capital Stock: The economys total quantity of capital
    goods
    New Residential Housing
    A house/apartment is a durable asset that yields its utility
    over a long period of time
    The building of a new house
    Gross and Net Investment
    Gross Investment: The total investment that occurs in the
    economy
    Gross Investment = Inventories + New Plants and
    Equipment + New Residential Housing
    Gross investment is divided into 2 parts: replacement and
    net investment
    Replacement Investment: The amount of investment
    required to replace capital stock that loses its value
    Depreciation: The amount by which the capital stock is
    depleted through the production process
    Net Investment = Gross Investment - Depreciation

    3) Government Purchases, G
    - All government expenditure on currently produced goods and services,
    exclusive of government transfer payments
    - Ex. street-cleaning and firefighting
    - Government output is typically valued at cost rather than at market value
    4) Net Exports, (NX)
    - Imports: The value of all domestically produces goods and services,
    purchased from firms, households, or governments in other countries
    - Exports: The value of all goods and services sold to firms, households, and
    governments in other countries
    - Net Exports (NX) = Total Exports (X) - Total Imports (M)
    Y = C + I + G + (X - M)
    GDP from the Income Side
    Add up factor incomes and other claims until all of that value is accounted for
    1) Factor Incomes
    - Wages and Salaries: All pre-tax labor earnings
    - Interest: Interest that is earned on deposits, loans, or investments
    - Business Profits: Dividends and retained earnings are part of the GDP
    calculation
    2) Non-Factor Payments
    - Indirect Taxes and Subsidies: Taxes on the production/sale of goods and
    services (Ex. provincial sales taxes, GST)
    - Depreciation: Part of gross profits, but because it is needed to
    compensate for capital used up in the process of production, it is not part
    of net profits, not earned by any factor of production
    Y = Factor Incomes (Wages and Salaries + Interest + Business Profits) + Indirect Taxes
    (Net of Subsidies) + Depreciation
    20.3 National Income Accounting: Some Further Issues
    GDP and GNP
    Gross National Product (GNP): The value of total incomes earned by domestic residents
    GDP measures the value of all production located in Canada, no matter who receives
    the income from that production
    GNP measures the income received by Canadian residents, no matter where the
    production occurred to generate that income
    Income produced versus income received
    In Canada, GNP is slightly lower than GDP
    GDP is a better measure of the economic activity in a country, whereas GNP is a better
    measure of the income of a countrys residents
    Disposable Personal Income: The part of national income that is available to households
    to spend or save

    Real and Nominal GDP


    Nominal GDP: Total GDP valued at current prices
    Real GDP: GDP valued at base-period prices
    The GDP Deflator
    GDP Deflator: An index number derived by dividing nominal GDP by real GDP, whose
    change measures the average change in price of all the items in the GDP

    Changes in the GDP deflator and Consumer Price Index (CPI) similarly reflect overall
    inflationary trends, but changes in relative prices may lead the 2 price indices to move in
    different ways
    Omissions from GDP
    GDP and related measures of national income must be interpreted with their limitations
    in mind
    GDP excludes production resulting from illegal activities, that take place in the
    underground economy, or that do not pass through markers
    GDP and Living Standards
    Changes in real per capita income are a good measure of average material living
    standards, but material living standards are only part of what most people consider
    their overall well-being (religious and political freedom, ability to treat and prevent
    illness)

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