GDP: The Measure of National Output

GNP: The Measure of National Income

The Output-Expenditure Model

Lecture Notes

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 GDP: The Measure of National Output

A branch of economics that deals with the economy

as a whole, using aggregate measures of output,
income, prices, and employment.

Gross Domestic Product (GDP) is one of our most

important macro measures and the most
important statistic in the National Income and
Product Accounts (NIPA). The NIPA keeps track of
the nation’s production, consumption, saving,
and investment. Other key measures exist, and
collectively they tell us a great deal about the
economic health and performance of our country.

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 The dollar value of all final goods, services, and structures produced
within a country’s national borders during a one-year period.

Product Quantity Price The dollar value

Automobiles XX XX XX
clothes XX XX XX
Goods
Shoes XX XX XX
…….. XX XX XX
Haircuts XX XX XX
Services Legal advice XX XX XX
…….. XX XX XX
Single family
XX XX XX
Multifamily
structures XX XX XX
Commercial
XX XX XX
…….
……. …….. XX XX XX
Total GDP = XXX

Table (15): Estimating gross domestic product (GDP)

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 Note When computing GDP, there some things are excluded:

Intermediate Underground
products economy
Secondhand Nonmarket
sales transactions

Products that are components of other final products included in GDP.

If a baker buys flour and sugar to make bread for sale, only the value of
the bread is counted.

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Secondhand sales, the sales of used goods, are also excluded from GDP
because no new production is created when products already in
existence are transferred from one owner to another. Although the sale
of a used car, house, or compact disc player may give others cash that
they can use on new purchases, only the original sale is included in GDP.

Nonmarket transactions, economic activities that do not generate

expenditures in the market, also are excluded. For example, services
that homemakers provide are excluded from GDP.

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Underground economy, unreported legal and illegal activities that
do not show up in GDP statistics, are not counted in GDP. Some of
these activities are illegal, such as those found in gambling,
smuggling and the drug trade. Other activities are legal, such as
those in flea markets, farmers’ market, but they involve cash
payments, which are difficult to trace.

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If the number of goods and services produced in the economy stays
the same from one year to the next while prices go up, GDP will go up
every year. Therefore, in order to make accurate comparisons over
time, GDP must be adjusted for inflation (this is the real GDP).

Economists use a set of constant prices in a base year, a year that

serves as the basis of comparison for all other years. For example, if
we compute GDP over a period of time using only prices that existed
in 2010, then any increases in GDP must be due to changes in the
quantity and cannot be caused by changes in the price.

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The terms GDP, current dollar GDP, nominal GDP, and current GDP all
mean that the output in any given year was measured using the prices
that existed in those years. Because these prices change from one year
to the next, nominal or current GDP is not adjusted for inflation.

Billions
dollars Current GDP

GDP in 2010 dollars

Year
2010
Figure (52): Current GDP vs. Real GDP

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If we want to see how the economy of a country is growing over time,
or how the output of one country compares to that of another, we
use GDP per capita.

We use GDP per capita to get the amount of output on a per person
basis.

𝑮𝑫𝑷
GDP per capita =
𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒑𝒐𝒑𝒖𝒍𝒂𝒕𝒊𝒐𝒏

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GDP is always measured in money, but there are a number of goods and
services which are difficult to be assessed in terms of money, e.g., painting
as a hobby by an individual

Double counting which arises from the failure to distinguish properly

between final and intermediate products.

Production from illegal activities is not included in GDP. Such goods and
services do have value and meet the needs of the consumers. But by
leaving them out, the GDP works out to less than the actual.

Problem of estimating the current depreciated value of a piece of capital.

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Capital gains or losses which accrue to property owners by increases or
decreases in the market value of their capital assets or changes in
demand are excluded from the GDP because such changes do not result
from current economic activities. It is only when capital gains or losses are
the result of the current flow or non-flow of productive activities that they
are included in the GDP.

It does not include the leisure foregone in the process of the production of
a commodity.

A good number of public services are also taken which cannot be estimated
correctly. How should the police and military services be estimated?

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 GNP: The Measure of National Income

Whenever business activity creates output, it generates jobs and

income for someone. GDP, then, is like a two-sided coin, where one
side represents output and the other side an equal amount of
income. If we want to see how much output is produced, we look at
one side of the coin. If we want to see how much income is generated,
we look at the other side of the coin.

When economists focus on total income rather than output, they

Note
measure it with gross national product (GNP).

Economists recognize one major category and several

subcategories of national income as a follow:

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 Total value of all final goods, services, and structures produced in one
year with labor and property supplied by a country’s residents,
regardless of where the production takes place.
OR
GNP measures the income of all Egyptians, whether the goods and
services are produced in Egypt or in other countries.

GNP = GDP + payments that Egyptians receive from outside Egypt

- payments made to all foreign owned businesses
located in Egypt

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 The second measure of national income is net national product (NNP),
or GNP less depreciation.
NNP = GNP - Depreciation

Depreciation, also called capital consumption allowances,

Depreciation represents the capital equipment that wore out or became
obsolete during the year.

NI = NNP – {Corporate income taxes + Retained earnings + Indirect

business taxes}

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The fourth measure of the nation’s total income is personal income
(PI)—the total amount of income going to consumers before
individual income taxes are subtracted.

PI = NI - payments into the Social Security fund that working

people make
+ Social Security checks that retired individuals receive

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The fifth measure of income in the NIPA is disposable personal income
(DPI)—the total income the consumer sector has at its disposal after
personal income taxes. Although it is the smallest measure of income,
it is important because it reflects the actual amount of money
consumers are able to spend.

At the individual level, a person’s disposable income is equal to the

amount of money received from an employer after taxes and Social
Security have been taken out.

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 The Output-Expenditure Model

The output-expenditure model shows how GDP is equal to the sum of

aggregate demand by the consumer, investment, government, and
foreign sectors.

GDP = C + I + G + (X – M)

C Consumption G Government expenditure

I Investment X Exports

X Imports

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Lecture Notes

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According to this model, the consumer sector spends its income on
the goods and services used by households. These personal
consumption expenditures include groceries, rent, and almost anything
else people buy. Income that is not spent appears as personal saving,
which is borrowed by the business and government sectors.

The investment, or business, sector spends its income on labor,

factories, equipment, inventories, and other investment goods. These
expenditures include the total value of capital goods created in the
economy during the year.

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The government sector spends its income on many categories, including
national defense, income security, interest on the national debt, health
care, and roads. The only major government expenditure not included in
total output is transfer payments, because this money is diverted for use
by others to buy goods and services.

The foreign sector also buys many Egyptian goods and services that make
up our GDP. In return, it supplies products to Egyptian consumers. For this
reason, the foreign sector’s purchases are called net exports of goods and
services. They are abbreviated as (X – M) to reflect the difference between
exports and imports.

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