National Income

Accounting
Macroeconomics

 Macroeconomics
answers questions like
the following:
 Why is average income high in
some countries and low in
others?
 Why do prices rise rapidly in
some time periods while they
are more stable in others?
 Why do production and
The Economy’s
Income and Expenditure
When judging whether the economy is
doing well or poorly, it is natural to
look at the total income that everyone
in the economy is earning.
The Economy’s
Income and Expenditure
 For an economy as
a whole, income
must equal
expenditure
because:
 Every transaction
has a buyer and a
seller.
 Every dollar of
 The Circular-Flow
Diagram

 The equality
of income
and
expenditure
can be
illustrated
with the
circular-
flow
diagram.
5
GDP is the
market
value of all
final goods
and
services
produced
within a
country in
a given
period.
The Measurement of GDP
 Output is valued at
market prices.
 It records only the
value of final goods,
not intermediate
goods (the value is
counted only once).
 It includes both
tangible goods (food,
clothing, cars) and
intangible services
GDP = (Price of apples  Quantity of apples)
+ (Price of oranges  Quantity of oranges)
= ($0.50  4) + ($1.00  3) GDP = $5.00

2) Used goods are not included in the calculation of

GDP.
3) The treatment of inventories depends on if the
goods are stored or if they spoil. If the goods are
stored, their value is included in GDP. If they spoil,
9
GDP remains unchanged. When the goods are finally
 Year GDP Growth (%) Annual Change
7.20%
2022-23 -17.20%

2021-22 8.70% 15.28%

2020-21 -6.60% -10.33%
2019-20 3.74% -2.72%
India’s 2018-19 6.45% -0.34%

GDP 2017-18
2016-17
6.80%
8.26%
-1.46%
0.26%

Growth 2015-16
2014-15
8.00%
7.41%
0.59%
1.02%
Rate 2013-14 6.39% 0.93%
2012-13 5.46% 0.22%
2011-12 5.24% -3.26%
2010-11 8.50% 0.64%
2009-10 7.86% 4.78%
2008-09 3.09% -4.57%
What Is Counted in GDP?

GDP includes all items

produced in the
economy and sold
legally in markets.
What Is Not Counted in
GDP?
 GDP excludes most items that are
produced and consumed at home and
that never enter the marketplace.
 It excludes items produced and sold
illicitly, such as illegal drugs.
Intermediate goods are not counted in GDP– only the
value of final goods. Reason: the value of
intermediate goods is already included in the market
price. Value added of a firm equals the value of the
firm’s output less the value of the intermediate goods
the firm purchases.

Some goods are not sold in the marketplace and

therefore don’t have market prices. We must use
their imputed value as an estimate of their value.
For example, home ownership and government
services.

13
Value added

The value of output minus the value of the

intermediate goods used to produce that
output

1
NOW YOU TRY:
Identifying value-added
 A farmer grows a bushel of wheat
and sells it to a miller for $1.00.
 The miller turns the wheat into flour
and sells it to a baker for $3.00.
 The baker uses the flour to make a loaf of
bread and sells it to an engineer for $6.00.
 The engineer eats the bread.
Compute value added at each stage
of production and GDP
Final goods, value added, and GDP

 GDP = value of final goods produced

= sum of value added at all stages
of production.
 The value of the final goods already includes
the value of the intermediate goods,
so including intermediate and final goods in
GDP would be double-counting.

1
1
Other Measures of Income
 Gross National
Product (GNP)
 Net National
Product (NNP)
 National Income
 Personal Income
 Disposable
Personal Income
Gross National Product
 Gross national
product (GNP) is
the total income
earned by a
nation’s permanent
residents (called
nationals).
 It differs from GDP
by including
income that our
citizens earn
 GNP vs. GDP
 Gross National Product (GNP):
Total income earned by the nation’s factors of
production, regardless of where located
 Gross Domestic Product (GDP):
Total income earned by domestically-located
factors of production, regardless of nationality

GNP – GDP = factor payments from abroad

minus factor payments to abroad
 Examples of factor payments: wages, profits, rent,
interest & dividends on assets

2
NOW YOU TRY:
Discussion Question

In your country, which would you

want to be bigger,
GDP or GNP? Why?
 Net National Product (NNP)
 Net National
Product (NNP) is
the total income
of the nation’s
residents (GNP)
minus losses from
depreciation.
 Depreciation is
the wear and tear
on the economy’s
stock of
 National Income

 National Income is
the total income
earned by a
nation’s residents
in the production of
goods and services.
 It differs from NNP
by excluding
indirect business
taxes (such as sales
taxes) and
 Personal Income
 Personal income is the
income that households
and noncorporate
businesses receive.
 Unlike national income,
it excludes retained
earnings, which is
income that corporations
have earned but have
not paid out to their
owners.
 In addition, it includes
Disposable Personal Income
 Disposable personal income is the income
that household and noncorporate
businesses have left after satisfying all
their obligations to the government.
 It equals personal income minus personal
taxes.
 Y
Y==C
C++ II +
+GG+
+ NX
NX
Total demand
Total demand Investment
Investment
for domestic
for is composed
domesticis composed spending by
spending by
output (GDP)
output (GDP) of
of businesses and
businesses and
households
households Net exports
Net exports
or net
or net foreign
foreign
Government
Consumption Government demand
demand
Consumption
purchases of
spending by
spending by
purchases of goods
goods
and services
households and
households services

This is the called the national income

accounts identity. 26
The Components of GDP

 Consumption (C):
 The spending by
households on goods
and services, with the
exception of
purchases of new
housing.
 Investment (I):
 The spending on
capital equipment,
inventories, and
 The Components of GDP
 Government
Purchases (G):
 The spending on

goods and services

by local, state, and
federal
governments.
 Does not include

transfer payments
because they are
not made in
exchange for
currently produced
The value of final goods and services measured at
current prices is called nominal GDP. It can change
over time either because there is a change in the
amount (real value) of goods and services or a change
in the prices of those goods and services.

Hence, nominal GDP Y = P  y, where P is the price

level and y is real output– and remember we use
output and GDP interchangeably.

Real GDP or, y = YP is the value of goods and

services measured using a constant set of prices.

29
Real GDP controls for inflation
 Changes in nominal GDP can be due to:
 changes in prices.
 changes in quantities of output
produced.
 Changes in real GDP can only be due to
changes in quantities,
**One way to construct real GDP is by
using
constant base-year prices.

3
Real vs. nominal GDP

n
GDPt =  PitQit
i1
n
RGDPt =  PiBQit
i1

3
NOW YOU TRY:
Real & Nominal GDP

2006 2007 2008

P Q P Q P Q

good A $30 900 $31 1,000 $36 1,050

good B $100 192 $102 200 $100 205

 Compute nominal GDP in each year.

 Compute real GDP in each year using
2006 as the base year.
NOW YOU TRY:
Answers
nominal GDP multiply Ps & Qs from
same year
2006: $46,200 = $30 × 900 + $100 ×
192
2007: $51,400
2008: $58,300

real GDP multiply each year’s Qs by

2006 Ps
2006: $46,200
2007: $50,000
GDP Deflator
 Inflation rate: the percentage
increase in the overall level of prices
 One measure of the price level: GDP
deflator
Definition:

3
NOW YOU TRY:
GDP deflator and inflation rate
GDP Inflation
Nom. GDP Real GDP
deflator rate

2006 $46,200 $46,200 n.a.

2007 51,400 50,000

2008 58,300 52,000

 Use your previous answers to compute
the GDP deflator in each year.
 Use GDP deflator to compute the
inflation rate from 2006 to 2007, and
from 2007 to 2008.
NOW YOU TRY:
Answers
Nominal GDP Inflation
Real GDP
GDP deflator rate

2006 $46,200 $46,200 100.0 n.a.

2007 51,400 50,000 102.8 2.8%

2008 58,300 52,000 112.1 9.3%

The GDP deflator measures the prices of all goods produced,
whereas the CPI measures prices of only the goods and services
bought by consumers. Thus, an increase in the price of goods
bought by firms or the government will show up in the GDP
deflator but not in the CPI.

Also, another difference is that the GDP deflator includes only

those goods and services produced domestically. Imported
goods are not a part of GDP and therefore don’t show up in the
GDP deflator.

38
GDP and Economic Well-Being

 GDP is the best

single measure of
the economic well-
being of a society.
 GDP per person
tells us the income
and expenditure of
the average person
in the economy.
 GDP and Economic Well-
Being
 Higher GDP per
person indicates a
higher standard of
living.
 GDP is not a perfect
measure of the
happiness or quality
of life, however.
 GDP and Economic Well-
Being
Some things that contribute to
well-being are not included in
GDP.
 The value of leisure.

 The value of a clean

environment.
 The value of almost all

activity that takes place

outside of markets, such as the
value of the time parents
spend with their children and
the value of volunteer work.
 Limitations of the GDP Concept
The Underground Economy
underground
economy The part of
the economy in
which transactions
take place and in
which income is
generated that is
unreported and
therefore not counted
in GDP.
 Summary
 Because every transaction has a buyer and a seller, the
total expenditure in the economy must equal the total
income in the economy.
 Gross Domestic Product (GDP) measures an
economy’s total expenditure on newly produced
goods and services and the total income earned from
the production of these goods and services.
Summary
 GDP is the market value of all final goods and
services produced within a country in a given
period of time.
 GDP is divided among four components of
expenditure: consumption, investment,
government purchases, and net exports.
Summary

 Nominal GDP uses current prices to value

the economy’s production. Real GDP uses
constant base-year prices to value the
economy’s production of goods and
services.
 The GDP deflator--calculated from the ratio
of nominal to real GDP--measures the level
of prices in the economy.
Summary
 GDP is a good measure of economic
well-being because people prefer
higher to lower incomes.
 It is not a perfect measure of well-being
because some things, such as leisure
time and a clean environment, aren’t
measured by GDP.