CHAPTER 4 • Is based on the market value of goods and

services
National Income Accounting • Takes only final goods and services into
National income accounting consideration
• Relies on factors of production such as the
- is a bookkeeping system that a government uses country’s labor and capital • Is measured on
to measure the level of the country's economic an annual basis
activity in a given time period.
- Accounting records of this nature include data HOW IS GNP USED?
regarding total revenues earned by domestic
corporations, wages paid to foreign and domestic
workers, and the amount spent on sales and
Gross National Product statistics are used to
income taxes by corporations and individuals
residing in the country.
- Although national income accounting is not an • Measure the economic activity of a country
exact science, it provides useful insight into how • Evaluate and analyze economic growth
well an economy is functioning, and where • Assess how productive a country’s factors of
monies are being generated and spent. When production are
combined with information regarding the • Measure the value of important goods and
associated population, data regarding per capita resources
income and growth can be examined over a • Analyze the income earned by a country’s
period of time. residents
• Compare the performance of different
countries
• Develop economic policies aimed at
Some of the metrics calculated by using national
improving GNP figures
income accounting include the;
How is GNP Measured?
- gross domestic product (GDP)
TWO APPROACHES CAN BE USED TO MEASURE
- gross national product (GNP) GNP:
1. THE INCOME APPROACH
- and gross national income (GNI) 2. THE EXPENDITURE APPROACH
The GDP is widely used for economic analysis
INCOME APPROACH
on the domestic level and represents the total market
GNP = Wages + Interest Income + Rental Income
value of the goods and services produced within a
+ Profit
specific nation over a selected period of time.
• Measures the income or earnings received by
the country’s factors of production (Labor, Land,
LESSON 9 Capital) • GNP or National Income is the sum of
the following: o Wages: The salaries, income or
earnings that residents received for their work and
The Gross National Product (GNP) is a measure of a labor during an entire year.
nation’s economic activity by measuring the value of all o Interest Income: Any income earned
the finished goods and services produced by a nation’s from holding assets or funds in the
economy in one year by its nationals. following.
▪ Bank Savings Accounts
- GNP is calculated by adding personal ▪ Interest earned on foreign
consumption expenditures, government investments o Rental Income: Any
expenditures, private domestic investments, net income earned from owning and
exports, and all income earned by residents in renting property. It includes income
foreign countries, minus the income earned by from renting a house, apartments,
foreign residents within the domestic economy. rooms, office spaces.
The net exports are calculated by subtracting the o Profit: Income earned from
value of imports from the value of the country’s investments (dividends from stocks)
exports. EXPENDITURE APPROACH

GNP=C+I+G+X+Z
 • Measures the amount spent or paid This is because, in effect, the removal of the
(expended) on all goods and services during influence of inflation allows the comparison of
the year at market value or prices. the different years to focus solely on volume.
• Uses and sums up two main
components: Gross Domestic Product and Net
Income from Abroad.
• We need to first calculate Gross
Nominal GDP is an assessment of economic
Domestic Product (GDP) which is the value of
production in an economy that includes current prices in
a country’s products and services produced in
its calculation. In other words, it doesn’t strip out
a year.
inflation or the pace of rising prices, which can inflate
the growth figure. All goods and services counted in
5 Main Components of GDP
nominal GDP are valued at the prices that those goods
1. C—Private Consumption and and services are actually sold for in that year.
Expenditure (households)
2. I—Investment Expenditure
3. G— Government Expenditure 2. Real GDP—Real GDP is an inflation-
adjusted measure that reflects the quantity of
4. X—Exports
goods and services produced by an economy
5. M-Imports in a given year, with prices held constant from
year to year to separate out the impact of
LESSON 10 inflation or deflation from the trend in output
over time. Since GDP is based on the
Gross Domestic Product monetary value of goods and services, it is
- is the most widely used measure of a nation’s subject to inflation. Rising prices will tend to
economic performance. It is the market value of increase a country’s GDP, but this does not
all final goods and services produced in a nation necessarily reflect any change in the quantity
during a period of time, usually a year. It relies on or quality of goods and services produced.
markets to establish the relative value of goods Thus, by looking just at an economy’s nominal
and services. GDP, it can be difficult to tell whether the
- GDP is a quantitative, rather than qualitative, figure has risen because of a real expansion in
measure of the output of goods and services. production or simply because prices rose.

How does the government actually calculate GDP? 3. GDP per capita— GDP per capita is a
measurement of the GDP per person in a
One way national income accountants calculate GDP is country’s population. It indicates that the
to use the expenditure approach to measure the total amount of output or income per person in an
spending flowing through product markets in the economy can indicate average productivity or
circular flow diagram. The expenditure approach average living standards. GDP per capita can
measures the GDP by adding all the spending for the be stated in nominal, real (inflation-adjusted),
final goods during a period of time. or PPP (purchasing power parity) terms. At a
basic interpretation, per-capita GDP shows
Consumption. Personal consumption
how much economic production value can be
expenditures comprise total spending by households for
attributed to each individual citizen. This also
durable goods, non-durable goods, and services.
translates to a measure of overall national
Durable goods include items such as automobiles,
wealth since GDP market value per person
appliances, furniture because they last longer. Food,
also readily serves as a prosperity measure.
clothing, soap and gasoline are examples of nondurables
because they are used or consumed in less than a year.
Services, which is the largest category, include 4. GDP Growth Rate— The GDP
recreation, legal advice, medical treatment, education, growth rate compares the year-over-year (or
any transaction not in the form of a tangible object. quarterly) change in a country’s economic
output to measure how fast an economy is
Types of Gross Domestic Product growing. Usually expressed as a percentage
rate, this measure is popular for economic
policy-makers because GDP growth is thought
1. Nominal GDP—Nominal GDP is used to be closely connected to key policy targets
when comparing different quarters of output such as inflation and unemployment rates.
within the same year. When comparing the
GDP of two or more years, real GDP is used.
 5. GDP Purchasing Power Parity (PPP) INCOME APPROACH
— While not directly a measure of GDP, The income approach represents a kind of
economists look at purchasing power parity middle ground between the two other approaches to
(PPP) to see how one country’s GDP measures calculating GDP. The income approach calculates the
up in “international dollars” using a method income earned by all the factors of production in an
that adjusts for differences in local prices and economy, including the wages paid to labor, the rent
costs of living to make cross-country earned by land, the return on capital in the form of
comparisons of real output, real income, and interest, and corporate profits.
living standards.

LESSON 11
How is GDP Measured?
GDP can be determined via three primary
methods. All three methods should yield the same Gross national income (GNI)
figure when correctly calculated. These three
approaches are often termed the expenditure approach,
the output (or production) approach, and the income - is another measure of economic growth. It is the
approach. sum of all income earned by citizens or nationals
of a country (regardless of whether the
underlying economic activity takes place
EXPENDITURE APPROACH
domestically or abroad).
The expenditure approach, also known as the
spending approach, calculates spending by the - The relationship between GNP and GNI is similar
different to the relationship between the production
(output) approach and the income approach used
groups that participate in the economy. to calculate GDP. –
- GNP uses the production approach, while GNI
GDP = C + G + I + NX uses the income approach. With GNI, the income
of a country is calculated as its domestic income,
Where: plus its indirect business taxes and depreciation
(as well as its net foreign factor income).
C=Consumption refers to private - The figure for net foreign factor income is
consumption expenditures or calculated by subtracting all payments made to
consumer spending foreign companies and individuals from all
G=Government spending represents government payments made to domestic businesses.
consumption expenditure and gross investment.
I=Investment refers to private
LESSON 12
domestic investment or capital
expenditures.
GDP vs GNP vs GNI
NX=Net exports formula subtracts
Gross national income (GNI) calculates the
total exports from total imports (NX
total income earned by a nation's people and
= Exports − Imports).
businesses, including investment income, regardless of
where it was earned. Residence, rather than citizenship,
is the criterion for determining nationality in GNI
PRODUCTION (OUTPUT) APPROACH calculations. It also covers money received from abroad
The production approach is essentially the reverse of such as foreign investment and economic development
aid. GDP is the total market value of all finished goods
the expenditure approach. Instead of measuring the
and services produced within a country in a set time
input costs that contribute to economic activity, the
period. GNP includes the income of all of a country's
production approach estimates the total value of
residents and businesses whether it flows back to the
economic output and deducts the cost of intermediate country or is spent abroad. It also adds subsidies and
goods that are consumed in the process (like those of taxes from foreign sources.
materials and services). Whereas the expenditure
approach projects forward from costs, the production
approach looks backward from the vantage point of a
state of completed economic activity.