GDP Is Not Adjusted For Bads Generated in The Production of Goods

GDP Is Not Adjusted for Bads Generated in the
Production of Goods
Economic growth often comes with certain bads. For example, producing cars, furniture,
and steel often generates air and water pollution—considered bads by most people.
(Remember from Chapter 1 that a bad is anything from which individuals receive disutility.)
GDP counts the goods and services, but it does not net out the air and water pollution.
Thus, some economists argue that GDP overstates our overall economic welfare.
Per Capita GDP

If we divide a country’s GDP by the population in the country, we get per capita GDP.
For example, if a country has a GDP of $5 trillion and its population is 200 million,
GDP per capita is $25,000. Exhibit 2 shows the GDP (in billions of dollars) and per
capita GDP (in dollars) for various countries in 2007.
Is Either GDP or Per Capita GDP a Measure of Happiness or

Well-Being?
Are the people in a country with a higher GDP or higher per capita GDP better off or
happier than the people in a country with a lower GDP or lower per capita GDP? We cannot
answer that question because well-being and happiness are subjective. A person with more goods
may be happier than a person with fewer goods, but possibly not. The person with fewer goods
but a lot of leisure, little air pollution, and a relaxed way of life may be much happier than the
person with many goods, little leisure, and a polluted, stressful environment. We make this point
to warn against reading too much into GDP figures. GDP figures are useful for obtaining an
estimate of the productive capabilities of an economy, but they do not necessarily measure
happiness or well-being.
National Income
Total income earned by U.S. citizens and businesses, no matter where they reside or are located.
National income is the sum of the payments to resources (land, labor, capital, and
entrepreneurship).
National income |= Compensation of employees + Proprietors’ income + Corporate profits +

Rental income of persons + Net interest.
OTHER NATIONAL INCOME ACCOUNTING
MEASUREMENTS
Besides gross domestic product (GDP) and national income, three other national income
accounting measurements are important. They are net domestic product, personal
income, and disposable income. The five measurements—gross domestic product, national
income, net domestic product, personal income, and disposable income—are often used
interchangeably to measure the output produced and income earned in an economy.
Net Domestic Product
If we use the expenditure approach to compute GDP, we add consumption, investment,

government purchases, and net exports. Investment (or more specifically, gross private
domestic investment) includes fixed investment and inventory investment. Some of the
fixed investment, however, is used to replace worn-out or obsolete capital goods. It is not
used for the production of new goods. In short, gross private domestic investment contains
within it the capital consumption allowance. If we subtract the capital consumption
allowance from GDP, we are left with net domestic product (NDP). NDP measures
the total value of new goods available in the economy in a given year after worn-out
capital goods have been replaced.
Net domestic product (NDP) = GDP – Capital consumption allowance
Personal Income
Not all income earned is received, and not all income received is earned. An example
of “income earned but not received” is undistributed profits. Undistributed profits are
earned by stockholders but not received by them. Instead, the undistributed profits are
usually reinvested by the corporation. An example of “income received but not earned”
is Social Security benefits.
Personal income is the amount of income that individuals actually receive. It is equal
to national income minus such major earned-but-not-received items as undistributed
corporate profits, social insurance taxes (Social Security contributions), and corporate
profits taxes, plus transfer payments (which are received but not earned).
Personal income = National income - Undistributed corporate profits - Social insurance taxes
Corporate profits taxes + Transfer payments
Disposable Income
The portion of personal income that can be used for consumption or saving is referred
to as disposable personal income or simply disposable income. It is equal to personal
income minus personal taxes (especially income taxes). Sometimes, disposable income is
referred to as spendable income, take-home pay, or after-tax income
.
Disposable income = Personal income – Personal taxes

GDP Is Not Adjusted For Bads Generated in The Production of Goods

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GDP Is Not Adjusted for Bads Generated in the

Per Capita GDP

Is Either GDP or Per Capita GDP a Measure of Happiness or

National income |= Compensation of employees + Proprietors’ income + Corporate profits +

Net Domestic Product

If we use the expenditure approach to compute GDP, we add consumption, investment,

Net domestic product (NDP) = GDP – Capital consumption allowance

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