CHAPTER 2

MEASURING NATIONAL INCOME

Textbook (Chapter 10)

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GDP - Gross domestic product
GDP: market value of all final goods and
services produced within a given period of time
by factors of production located within a
country

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◦ “Market value” # market quantity?
◦ The economy is producing many goods and services -> use
market prices (the price at which the people are willing to pay for
different goods)
◦ All goods measured in the same units

◦ “all”: all items produced in the economy and sold legally in

markets but exclude (i) tems produced and sold illicitly, such as
illegal drugs … and (ii) items that are produced and consumed at
home
◦ Housework you do at home?
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◦ “final”: Goods and services produced for final use vs “intermediate
goods” (produced by one firm for use in further processing or for
resale by another firm )

◦ “goods and services”: GDP includes both tangible goods (food,

clothing, cars) and intangible services (haircuts, housecleaning,
doctor visits).

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◦ “produced”: GDP includes goods and services currently produced.
It does not include transactions involving items produced in the
past.
Sales of stocks and bonds are not counted as these are transfers of
ownership of assets, either electronically or through paper
exchanges, and do not correspond to current production .

◦ “ within a country”: items are included in a nation’s GDP if they are

produced domestically, regardless of the nationality of the producer.

◦ “in a given period of time”: GDP is reported quarterly or/and yearly

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 Question 1
How is GDP in 2024 changing in the following scenarios:
a. In 2024, Mr Nam bought the house which was built in 2024.
b.In 2024, Mr Nam bought the house which was built in 2022.
c. In 2024, a company buys windows and doors for the house and
Mr Minh bought the house 2024.
d.In 2024, Mr Nam painted the house by himself.
e. In 2024, Mr Nam used free online service to buy stocks of a
construction company.

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Ranking of top 20 provinces/cities in Vietnam in
terms of GDP (2022)

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Source: thuvienphapluat
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The circular flow diagram

◦ An economy’s income is the same as its expenditure because

every transaction has two parties: a buyer and a seller.

◦ Every dollar of spending by some buyer is a dollar of income

for some seller.

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The circular flow diagram

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Factors of production: Inputs into the production process (Land,
labor, and capital).

For an economy as a whole, income must equal expenditure.

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Calculating GDP
◦ The expenditure approach
◦ The income approach
◦ The value added approach

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The Expenditure approach
◦ Measures the total amount spent on all final goods and services
during a given period.

◦ Each dollar of expenditure included in GDP is placed into one of

the four components of GDP, the total of the four components
must be equal to GDP

GDP = Y = C + I + G + X – M

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C – Consumption
◦ The largest component of GDP (60-70%)
◦ three main categories
+ Durable goods, such as automobiles, furniture, and household
appliances, last a relatively long time
+ Nondurable goods, such as food, clothing, and gasoline, are
used up fairly quickly
+ Payments for services—those things we buy that do not involve
the production of physical items—include expenditures for
doctors, lawyers, and educational institutions
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I: private investment
◦ The purchase of new capital—housing, plants, equipment, and
inventory
+ non-residential investment: Expenditures by firms for
machines, tools, plants,
+ residential investment: Expenditures for new houses and
apartment buildings
+ change in business inventories: the amount by which firms’
inventories change during a period
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G: government expenditure
◦ Expenditures by federal, state, and local governments for final
goods (bombs, pencils, school buildings) and services (military
salaries, congressional salaries, school teachers’ salaries).

◦ Government transfer payments (Social Security benefits,

veterans’ disability stipends …. ): are not included in G
because these transfers are not purchases of anything currently
produced.

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X- M = NX: net exports
◦ X: exports
◦ M: imports
◦ NX = net export
◦ NX >0 ? NX <0? NX = 0?

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Net exporters and net importers (2022)
Source: billion US Dollar

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Source: Statista
US’s GDP components (2018)

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China’s GDP components (1960 – 2020)

Source: MacroMicro 20
 Question 2
Identify the change in GDP components in the following:
a. A domestic company bought domestic computer to use.
b. A domestic company produced computer to sell abroad.
c.The government bought the computer which was produced
domestically.
d. A household bought the computer which was produced domestically.
e. A household bought the computer which was produced abroad.
f. Vinfast produced cars worth of $400 million USD, and sold cars
worth of $300 million USD for domestic users.
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 The income approach
GDP = W + R + i + Pr +Te+ Dep
◦ W (wage): largest component
◦ R (rental income): the income received by property owners in the form of
rent
◦ i (net interest): the interest paid by business
◦ Pr (Profit): second largest component, the income of corporations
◦ Te (indirect taxes minus subsidies): includes taxes such as sales taxes,
customs duties, and license fees less subsidies that the government pays for
which it receives no goods or services in return.
◦ Net business transfer payments: net transfer payments by businesses to
others and are thus income of others
◦ surplus of government enterprises: the income of government enterprises 22
National income 2017

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Value added approach
◦ GDP =∑ VAi (i=1,2,3,..,n)
◦ VAi: The value added during some stage of production is the
difference between the value of goods as they leave that stage
of production and the cost of the goods as they entered that
stage

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 Other measures of income
◦ Gross national product (GNP: is the total income earned by a
nation’s permanent residents, It differs from GDP in that it
includes income that our citizens earn abroad and excludes
income that foreigners earn here
GNP = GDP + NFA
NFA: Net factor income from abroad
NFA = income that our citizens earn abroad - income that
foreigners earn domestically
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Other measures of income
◦ Net national product (NNP) the total income of a nation’s residents
(GNP) minus losses from depreciation. Depreciation is the wear
and tear on the economy’s stock of equipment and structures

NNP = GNP – Dep

◦ National income (NI): is the total income earned by a nation’s

residents in the production of goods and services. It is almost
identical to net national product
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Other measures of income
◦ Personal Income (PI): the income that households and
noncorporate businesses receive.

◦ Disposable income (Yd): the income that households and

noncorporate businesses have left after satisfying all their
obligations to the government. It equals personal income minus
per- sonal taxes and certain non-tax payments (such as traffic
tickets).
Yd = Y – T
Yd = C + S 27
Nominal GDP and real GDP
◦ Nominal GDP uses current prices to place a value on the economy’s
production of goods and services
!

GDP!" = % p"# xq"#

#$%
Q: quantity
P: price
T: current period
i : goods i among n goods

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GDP = Total spending
Total spending rises
(1) the economy is producing a larger output of goods and
services,
or
(2) goods and services are being sold at higher prices

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Real GDP
◦ The production of goods and services valued at constant prices
◦ t=0: base year
.

GDP)* = % p/+ xq*+

+,-
Q: quantity
P: price
T: base year price
i : goods i among n goods
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Nominal GDP vs real GDP
◦ Real GDP is a better gauge of economic well-being than is
nominal GDP
◦ When economists talk about the economy’s GDP, they usually
mean real GDP rather than nominal GDP.
◦ When they talk about growth in the economy, they measure
that growth as the percentage change in real GDP from one
period to another.

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 20
00

2E+12
4E+12
6E+12
8E+12
1E+13
2E+13

0
1.2E+13
1.4E+13
1.6E+13
1.8E+13
[Y
R2
20 0 00
01 ]
[Y
R2
20 0 01
02 ]
[Y
R2
20 0 02
03 ]
[Y
R2
20 0 03
04 ]
[Y
R2
20 0 04
05 ]
[Y
R2
20 0 05
06 ]
[Y
R2
20 0 06
07 ]
[Y
R2
20 0 07
08 ]
[Y
R2
20 0 08
09 ]
[Y
R2
20 0 09
10 ]
[Y
R2
20 0 10
11 ]
[Y
R2
20 0 11
]
GDP (constant 2015 US$)
12
[Y
R2
0
China

20 12
13 ]
[Y
R2
20 0 13
14 ]
[Y
R2
20 0 14
15 ]
[Y
R2
GDP (current US$)

20 0 15
16 ]
Nominal GDP vs real GDP

[Y
R2
20 0 16
17 ]
[Y
R2
20 0 17
18 ]
[Y
R2
20 0 18
19 ]
[Y
R2
20 0 19
20 ]
[Y
R2
20 0 20
21 ]
[Y
R2
20 0 21
22 ]
[Y
R2
20 0 22
23 ]
[Y
R2
0 23
]
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 20
00

5E+10
1E+11
2E+11
3E+11
4E+11
5E+11

0
1.5E+11
2.5E+11
3.5E+11
4.5E+11
[Y
R2
20 0 00
01 ]
[Y
R2
20 0 01
02 ]
[Y
R2
20 0 02
03 ]
[Y
R2
20 0 03
04 ]
[Y
R2
20 0 04
05 ]
[Y
R2
20 0 05
06 ]
[Y
R2
20 0 06
07 ]
[Y
R2
20 0 07
08 ]
[Y
R2
20 0 08
09 ]
[Y
R2
20 0 09
10 ]
[Y
R2
20 0 10
11 ]
[Y
R2
20 0 11
]
GDP (constant 2015 US$)
12
[Y
R2
20 0 12
13 ]
[Y
R2
0
Bangladesh

20 13
14 ]
[Y
R2
20 0 14
15 ]
[Y
R2
GDP (current US$)

20 0 15
16 ]
[Y
Nominal GDP vs real GDP

R2
20 0 16
17 ]
[Y
R2
20 0 17
18 ]
[Y
R2
20 0 18
19 ]
[Y
R2
20 0 19
20 ]
[Y
R2
20 0 20
21 ]
[Y
R2
20 0 21
22 ]
[Y
R2
20 0 22
23 ]
[Y
R2
0 23
]
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 20
00

5E+09
1E+10
2E+10
3E+10
4E+10

0
1.5E+10
2.5E+10
3.5E+10
[Y
R2
20 0 00
01 ]
[Y
R2
20 0 01
02 ]
[Y
R2
20 0 02
03 ]
[Y
R2
20 0 03
04 ]
[Y
R2
20 0 04
05 ]
[Y
R2
20 0 05
06 ]
[Y
R2
20 0 06
07 ]
[Y
R2
20 0 07
08 ]
[Y
R2
20 0 08
09 ]
[Y
R2
20 0 09
10 ]
[Y
R2
20 0 10
11 ]
[Y
R2
20 0 11
]
GDP (constant 2015 US$)
12
[Y
R2
20 0 12
13 ]
[Y
Zimbabwe

R2
20 0 13
14 ]
[Y
R2
20 0 14
15 ]
[Y
R2
GDP (current US$)

20 0 15
16 ]
Nominal GDP vs real GDP

[Y
R2
20 0 16
17 ]
[Y
R2
20 0 17
18 ]
[Y
R2
20 0 18
19 ]
[Y
R2
20 0 19
20 ]
[Y
R2
20 0 20
21 ]
[Y
R2
20 0 21
22 ]
[Y
R2
20 0 22
23 ]
[Y
R2
0 23
]
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GDP Deflator
◦ A measure of the price level
012"!
DGDP * = *100
012"#
◦ The value of GDP deflator at base year?

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Inflation rate
Inflation rate in year 2 =
345 789:;<=> ?@ A8;> BC345 489:;<=> ?@ A8;> -
∗ 100%
345 489:;<=> ?@ A8;> -

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 Question 3
2021 2022 2023
P Q P Q P Q
Good A $30 900 $31 1000 $36 1050
Good B $100 192 $102 200 $100 205

A. Calculate nominal GDP in 2021

B. Calculate real GDP in 2022
C. Calculate GDP Deflator in 2023

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 Critics of GDP
◦ Real GDP per capita is the main indicator of the average person’s
standard of living

◦ But GDP is not a perfect measure of well-being.

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GNI per capita

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GDP does not value
◦ The quality of environment
◦ Leisure time
◦ Non market activity such as the child care a parent provides his
or her child at home
◦ An equitable distribution of income

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- Senator Robert Kennedy, 1968
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 Then why do we care about GDP?
◦ Having a large GDP enables a country to afford better schools, a
cleaner environment, health care, etc

◦ Many indicators of the quality of life are positively correlated with

GDP

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GDP and the Quality of Life

Source: Human Development report (2015)

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Keywords
◦ GDP
◦ Nominal GDP
◦ Real GDP
◦ GDP Deflator
◦ The expenditure approach
◦ The income approach
◦ The value added approach
◦ Limitations of GDP
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