Recall: $Y = C + I + G + (X-M)$

Terms Used in National Income Accounting

• GDP
• GNP
• NNP
• GDP per Capita
• Personal Income
• Disposable Income

Gross Domestic Product (GDP)

• This refers to the sum of all the final goods and services, produced in an economy in a year.

$\therefore GDP = C+I+G+(X-M)$

Gross National Product (GNP)

• This refers to the sum of all the final goods and services produced by NATIONALS of a country in a given year.

• That is: GNP includes Net Propert Income from Abroad or Net Factor Income from Abroad.
  

• N.B. Net Property Income from Abroad can either be Positive or Negative.
  

Net Property Income from Abroad consists of:

1. Income Inflows (+)
2. Income Outflows (-)

$$\ \therefore GNP = GDP + NPIA $$

$$\ NPIA = Income \space Inflows - Income \space Outflows $$ $$\ NPIA = Receipts \space from \space Abroad - Payments \space to \space Abroad $$ $$\ NPIA = Property \space Income \space Earned \space Abroad - Property \space Income \space Paid \space Abroad $$

If Income Inflows > Income Outflows $\space \longrightarrow + NPIA$

If Income Outflows > Income Inflows $\space \longrightarrow - NPIA$

Question 1

The Following Table shows the figures for Country X

$$\ \rightarrow Calculate \space GNP $$

Question 2

Classify the following under "Income Inflows" or "Income Outflows"

(A) Income Earned by a T&T resident working in the US on a short term contract. (B) Income earned by British Petroleum as a result of commercial operations in T&T. (C) Remittances from relatives in the US to family members in T&T.

Net National Product (NNP)

• This refers to the sum of all final goods and services produced by the resources of a country in a given year, less capital consumption or depreciation in the same year.

$$\ NNP = GNP - Capital \space Consumption $$
$$\ NNP = GNP - Depreciation $$

NB Capital Consumption or depreciation refers to the less in the value of capital as a result of depreciation.

GDP per Capita

• This refers to income per person.

$GDP \space per \space Capita = \cfrac{GDP}{Total \space Population}$

eg If GDP = $1 000 000 and total population is 5,000 persons.

Then, $GDP \space per \space capita = \cfrac{1000000}{5000}$

= $200 per person

Methods of Measuring National Income

1. Expenditure Method
2. Income Method
3. Product/Output Method

Expenditure Method

• The expenditure method sums the total of all expenditure on final goods and services produced within an economy.

The Expenditure Method Approach in determining GDP is expressed as:

$GDP = C+I+G+(X-M)$

$GDP = C+I+G+NX$

Formula to find GDP using the Expenditure Method:

Consumer Expenditure (C)

This method includes ALL consumers' expenditure on FINAL goods and services.

Investment Expenditure (I)

This includes ALL investment expenditure on:

(a) Gross Fixed Capital Formation

• Expenditure on the existing stock of capital goods such as machiner and equipment.

(b) Changes in Inventory

• Inventories are the stick of: finished goods, unfinished goods and work in progress.

GOvernment Expenditure (G)

This includes all Government Expenditure on:

(a) Recurrent Expenditure

• Goods and services consumed by government operation.

(b) Capital Expenditure

• Expenditure of goods like schools and hospitals.

NOTE:

• Transfer payments eg pensions, employment benefits are excluded from the national income calculation, although it represents a part of government expenditure. THerefore, Government Expenditure does NOT include government spending on transfer payments since no current production takes place when the fovernment pays pension and unemployment benefits.

Exports (X)

• This includes expenditure on all goods and services produced in the domestic economy but purchased by foreigners.

Imports (M)

• This includes all expenditure on final goods and services not produced in the domestic economy.

The Income Method

• This method can be measured by summing all components of income throughout the economy over a period of one year.
• Specifically, the income method summs all the factor incomes such as rent, wages, interest and profits from the factors of production.

The Income Approach in determining GDP is expressed as:

$$\ GDP = rent + wages + interest + profits $$

NOTE: Transfer Payments are not included in the calculation of GDP.

The Formula to find GDP using the income method:

The Product / Output Method

• The output method can be measured by summing the value added output at each stage of production in the economy, over a period of one year.

The formula to find GDP using the output method:

What are Intermediate Goods?

• This is a good that is produced and used as an input in the production of a final good and service.
• Intermediate goods are NOT included in the calculation of GDP in order to avoid a problem called double counting since the calculation of GDP only takes into account final goods and services.

What is Value Added?

• Value added refers to difference between the value of the output and the value of the intermediate good used in the production of that output.

Value of output - Cost of the intermediate good = Value Added

1st Step: Primary Production 2nd Step: Secondary Production 3rd Step: Tertiary Production (Value Added at each stage)

HENCE, $$\ Expenditure Method = Income Method = Output Method $$

Difference between Final Goods and Intermediate Goods

• An intermediate good is where the output is used as an input by other firms in the production process. Whilst final goods, is where the output is not used as an input by other firms but consumed by customers.

Difference between GDP and GNP

• GDP is an amount of final goods and services produced in a country within a specified period of time usually one year. Whereas, GNP is the amount of final goods and services produced by the nationals of a country and it includes Net Property Income from Abroad.
• Therefore, the GDP figure does not include Net Property Income from Abroad but the GNP figure includes Net Property Income from Abroad.

What is the difference between the Expenditure Approach and the Income Appraoch in the calculation of GDP?

• GDP can be determined by summing up all that is spent to buy this year's total output or by adding all the income derived from the production of this year's output.
• The expenditure approach adds up consumers' expenditure, government's expenditure, investment expenditure, and net exports to find GDP whilst the Income Approach adds up rent, wages, interest and profits to find GDP.

What is GDP at Factor Cost?

$$\ GDP \space at \space Factor \space Cost = GDP \space at \space market \space prices + subsides - indirect \space taxes $$

NOTE: This equation is called factor cost adjustment.

What is GDP at Market Price?

$$\ GDP \space at \space Market \space Prices = GDP \space at \space factor \space cost - subsides + indirect \space taxes $$