Ch2 Measuring National CHAPTER OUTLINE

Output and National

Income • Gross Domestic Product
Definition

• Calculating GDP
- The Output Approach
- The Expenditure Approach
- The Income Approach

• Nominal versus Real GDP

- Nominal & Real GDP
- the GDP Deflator

• Limitations of the GDP Concept

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 Calculating
GDP

Output Expenditure Income

Approach Approach Approach

2
 Third: Income Approach
A method of computing GDP that measures the income received by all
factors of production in producing goods and services.
This will yield the net domestic income (NDP). Adding depreciation, we
obtain GDP.

Incomes of factors of production

1- wages: for workers
2- rent: for land, equipments, buildings
3- interest: for capital
4- profits: for owners of the firms

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National Income versus Domestic Income:

• Domestic income: The total income earned by the factors of

production located within a country (owned by a country’s
citizens or by foreigners).

• National income: The total income earned by country’s citizens

(located within a country or outside it).

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• Receipts of income from the rest of the world > Payments of income to
the rest of the world
(Net receipts from the rest of the world is positive)
National Income > Domestic Income

• Receipts of income from the rest of the world < Payments of income to
the rest of the world
(Net receipts from the rest of the world is negative)
National Income < Domestic Income

• Receipts of income from the rest of the world = Payments of income to

the rest of the world
(Net receipts from the rest of the world =0)
National Income = Domestic Income

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ATTENTION:
Any expenditure or income has to be related to introduce outputs of goods and
services at the current period to be counted in GDP, therefore the following items
are excluded in computing GDP.
1. Transfer payments
• social security payments
• old age payments
• disability pensions
• student grants
• unemployment compensation
• social governmental subsidies
2. Gifts
3. Presents
4. Borrowing

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From personal income to disposable income and
personal saving?

personal income
-Income tax
+ transfer payments
……………………………………………..

= Disposable income
- personal consumption expenditure
………………………………………………
=personal saving

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Disposable Personal Income or after-tax Income Personal
income minus personal income taxes. The amount that
households have to spend or save.

Personal Saving The amount of disposable income that is

left after total personal spending in a given period.

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Problem 1: (final exam 2013/2014)
Suppose that the personal income
$12,000 billion, the income taxes
$2,000 billion, and personal saving
$3,000 billion. What is personal
consumption?

This Photo by Unknown Author is licensed under CC

Answer: personal income- taxes = BY-ND

disposable income
Disposable income - personal saving=
personal consumption
12,000-2,000-3,000=$7,000

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Explain why you agree or disagree with each of the following
statements:
1. If receipts of income from the rest of the world are more than
payments of income to the rest of the world, therefore gross national
income should be less than gross domestic income.

2. Transfer payment is included in calculating GDP.

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 BE AWARE THAT THE OVERALL ECONOMIC ACTIVITIES OF ANY
ECONOMY CAN BE MEASURED BY:

1- Outputs of final goods and services produced within a given period by

factors of production.

2- The expenditure of all economic sectors (households, firms, government,

the rest of the world) on these goods and services.

3- Incomes of all factors of production received in producing these goods

and services.

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calculating GDP by the expenditure approach yields the
same answer as calculating GDP by the income
approach because every expenditure by a buyer is an
income for the seller, GDP can be computed in terms
of how much people spend or how much income they
receive.

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Problem (2)
Use the following information to answer the
questions below.

Wages 280
Rents 89
Interest 96
profits 85
net receipts from abroad 24
depreciation 170

This Photo by Unknown Author is licensed under CC BY-ND

 Calculate
1. GDP

2. GNP Gross national income

 Solution of problem (2)

• NDP = wages + interest+ rent +profits = 280 + 89+96+85 = $550 million

• GDP = NDP + depreciation = 550 + 170=$720 Million.

• GNP = national income = GDP + net receipts from abroad = 720 + 24 =

$744 million
Problem (3)
Use the following information to answer the
questions below. (number with $million)

Personal consumption 1000

Imports 150
net investment 1100
Government consumption 600
exports 200
Receipts of income from abroad 200
Payments of income to abroad 50
depreciation 200

This Photo by Unknown Author is licensed under CC BY-ND

Calculate:

1. GDP of this economy

2. GNP of this economy

3. NNP (national income NI) of this

economy
 Solution of problem (3)

• GDP = C+I+G+(X-IM) = 1000+(1100+200)+ 600+ (200-150) = $2950

million.

• GNP = GDP + receipts of income from abroad – payments of income to

abroad = 2950 + 200 - 50=$3100 million.

• NNP = GNP – depreciation = $2900 million

 Nominal versus Real GDP

Assuming 2 goods in the economy, apple and orange:

GDP 2010 = 𝑃𝑎𝑝𝑝𝑙𝑒,2010 X 𝑄𝑎𝑝𝑝𝑙𝑒,2010 + 𝑃𝑜𝑟𝑎𝑛𝑔𝑒,2010 X 𝑄𝑜𝑟𝑎𝑛𝑔𝑒,2010

= $200M

GDP 2011 = 𝑃𝑎𝑝𝑝𝑙𝑒,2011 X 𝑄𝑎𝑝𝑝𝑙𝑒,2011 + 𝑃𝑜𝑟𝑎𝑛𝑔𝑒,2011 X 𝑄𝑜𝑟𝑎𝑛𝑔𝑒,2011

= $300M

Nominal GDP is not a good measure of production growth

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 Nominal versus Real GDP

Without any adjustment, the GDP calculation is distorted by inflation.

This unadjusted GDP is known as the nominal GDP.

Nominal GDP Gross domestic product measured in current dollars

(the current prices that one pays for goods).

It is affected by:
1- the produced amount of final goods and services.
2- the prices of these goods and services (the price level “inflation”).
So, It is not a good measure of production growth.

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Real GDP nominal GDP adjusted for price change. So, we can determine the
actual growth in GDP over time. So, real GDP is a good measure of
production growth.

• In an inflationary environment, the nominal GDP is greater than the real

GDP.

• In a recession period, the nominal GDP is smaller than the real GDP.

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 The GDP Deflator

The GDP deflator is one measure of the overall price level.

➢If nominal GDP> real GDP  GDP deflator>100

➢If nominal GDP< real GDP  GDP deflator<100
➢If nominal GDP= real GDP  GDP deflator=100

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 The inflation rate
The inflation is a sustained increase in the general price level of goods and
services in an economy over a period of time.

The inflation rate between two years=

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 Question (final exam 2013/2014):
Study the following table, then answer the questions below:

Year Nominal GDP Real GDP GDP deflator

(billions of $) (billions of $)

2010 14000 13000 -----

2011 ------- 15000 120
2012 22000 ------- 130

1. Fill in the missing data in the table.

2. Calculate the inflation rate between the last two years.

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Solution:
Year Nominal GDP Real GDP GDP deflator
(billions of $) (billions of $)

2010 14000 13000 107.69

2011 18000 15000 120
2012 22000 16923 130

2. the inflation rate between the last two years=

[(130-120)/120]*100= 8.3%

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Problem: The following table contains nominal and real GDP data, in billions of dollars for
2008 and 2009, and the GDP deflator and for the percent increase in price level. The
data is listed per quarter, and the real GDP data was calculated using 2005 as the base
year. Fill in the missing data ??

Quarter Nominal GDP Real GDP GDP deflator

2008q1 14,373.9 13,366.9 ?

2008q2 14,497.8 13,415.3 ?

2008q3 14,546.7 ? 109.17

2008q4 ? 13,141.9 109.17

2009q1 14,178.0 12,925.4 ?

2009q2 14,151.2 12,901.5 ?

2009q3 14,242.1 ? 109.78

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 Answer
Quarter Nominal GDP Real GDP GDP deflator

2008q1 14,373.9 13,366.9 107.53

2008q2 14,497.8 13,415.3 108.07

2008q3 14,546.7 13,324.6 109.17

2008q4 14,347.3 13,141.9 109.17

2009q1 14,178.0 12,925.4 109.69

2009q2 14,151.2 12,901.5 109.69

2009q3 14,242.1 12,973.0 109.78

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 Limitations of the GDP Concept
1. GDP measures the growth in economic activities of any country,
but not the social welfare of this society.
- Society is better off when crime decreases; however, a decrease in
crime or pollution is not reflected in GDP.
- An increase in leisure is an increase in social welfare, but not
counted in GDP.
2. Most nonmarket and domestic activities, such as housework and
childcare, are not counted in GDP even though they amount to real
production.

3. 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.
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Which of the following transactions would not be counted in GDP? Explain your
answers

a. General Motors issues new shares of stock to finance the construction of a

plant.
b. General Motors builds a new plant.
c. Company A purchases all the assets of company B.
d. Your grandmother wins $10 million in the lottery.
e. You buy a new copy of Case& Fair Economic book.
f. You buy a used copy of Case& Fair Economic book.
g. Luigi’s Pizza buys 30 pounds of mozzarella cheese and uses it to make pizza
(which it sells).
h. You spend the weekend cleaning your apartment.
i. A drug dealer sells $500 worth of illegal drugs.
j. The government pays out Social Security benefits.

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