PRINCIPLES OF CONCEPTS AND

UNIT 2 SECTION
MACROECONOMICS 2
Unit 2, APPROACHES
Section 2: Concepts
TOand Approaches
NATIONAL to National
INCOME Income Accounting
ACCOUNTING

Dear student, welcome to Section Two of Unit Two. This is a continuation

of the previous section. I hope you understood the key issues discussed. We
are now going to discuss the approaches that are used in estimating GDP or
national income. These approaches were introduced to you in the previous
section and are as follows: product or output approach; income approach;
and expenditure approach. The section will end with brief discussion on
related concepts or variables such as Gross National Product, Gross
National Income, Personal Income, Disposable Personal Income and
Personal Savings.

By the end of this section, you should be able to:

 explain how the various approaches to national income accounting are
used to estimate GDP or national income; and
 define other measures of national income

Recall Circular Flow of Income and Expenditure

Do you recall the circular flow of income and expenditure? From the
circular flow, you can see that the total expenditure is equivalent to the total
value of goods and services. And either the total expenditure or total output
is also equivalent to national income. However this is true in a maize
economy with all the assumptions given in the previous section. Do you
expect this identity between these measures to hold in the real economy like
the Ghanaian economy? In real economies there are a lot of reasons that
make these three measures different from each other. For now you need to
understand that from the circular flow of income and expenditure, the three
main approaches to national income accounting that are discussed below
produce identical estimates of national income.

Figure 2.2.1 Circular Flow of Income and Expenditure

Income (GHC)

Land and Labour

Households Firms

Goods (maize)

Expenditures (GHC)

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Product or Output Approach to National Income Accounting

The product or output approach estimates GDP directly. The GDP is the
value of all final goods and services produced in a country over a period of
time. This approach therefore adds the value of final goods and services
produced in a country over a period of time. There are two main methods
used under this approach. The first is to sum the value of all final goods and
services produced over a period of time. This means that all the cassava and
maize used for banku are not added. So if for example in a period, 100 bags
each of cassava and maize are produced, and 20 bags each were used to
produce banku. The GDP will exclude the 20 bags each of maize and
cassava that were used to prepare banku and rather add the value of banku to
the remaining value of 80 bags each of maize and cassava that were
consumed as final goods.

The second method is to add the value-added at each stage of production.

Using the example above, this method will add all the 100 bags each of
maize and cassava produced. Then only the value-added during the
production of banku will be added. This means that the value of all
intermediate goods used (in this case 20 bags each of maize and cassava)
will be subtracted from the value of banku to arrive at value-added. In
practice, there is a combination of both methods, but more of the value-
added method is used.

Most countries that use the product or output approach to national income
divide the economy into a number of sectors. Ghana uses this approach and
divides the economy into agriculture, industry and services sectors. These
sectors are also further divided into sub-sectors. Below are the GDP
estimations for Ghana using this approach.

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Table 2.2.1 GDP Estimation Using the Product Approach

GDP at current market prices by economic activity in GHC Million
2008 2009 2010 2011* 2012**
1. AGRICULTURE 8,875 11,342 12,910 14,155 15,398
1.01 Crops 6,435 8,425 9,422 10,650 11,477
o.w. Cocoa 706 874 1,392 1,996 2,044
1.02 Livestock 606 729 873 1,004 1,159
1.03 Forestry and Logging 1,072 1,314 1,614 1,549 1,705
1.04 Fishing 762 874 1,001 952 1,057
2. INDUSTRY 5,854 6,775 8,294 14,274 18,580
2.01Mining and Quarrying 693 740 1,013 4,690 5,956
o.w. Crude Oil - - 178 3,746 4,645
2.02 Manufacturing 2,277 2,478 2,941 3,842 4,680
2.03 Electricity 155 167 266 280 329
2.04 Water and Sewerage 229 246 368 467 505
2.05 Construction 2,500 3,144 3,706 4,995 7,110
3. SERVICES 13,935 17,545 22,185 27,423 33,963
3.01 Trade; Repairs of Vehicles, Household Goods 1,710 2,109 2,701 3,282 3,784
3.02 Hotels and Restaurants 1,716 2,196 2,593 3,007 3,611
3.03 Transport and Storage 3,262 3,758 4,578 5,997 7,704
3.04 Information and Communication 622 657 831 989 1,233
3.05 Financial and Insurance Activities 1,089 1,547 2,240 2,466 3,385
3.06 Real Estates, Professional, Administrative & Support
1,185Service1,462
Activities
1,945 2,591 3,279
3.07 Public Administration & Defence; Social Security 1,799 2,479 3,024 3,897 4,871
3.08 Education 1,132 1,506 1,877 2,307 2,732
3.09 Health And Social Work 381 513 674 728 872
3.10 Community, Social & Personal Service Activities 1,039 1,318 1,722 2,159 2,492
4. GROSS DOMESTIC PRODUCT at basic prices 28,664 35,662 43,389 55,852 67,941
Net Indirect Taxes 1,514
5. GROSS DOMESTIC PRODUCT in purchasers' value 30,179 36,598 46,042 59,816 73,109
* Finalized on April 10, 2013
** Revised on April 10, 2013

Source: Ghana Statistical Service, 2013

Income Approach to National Income Accounting

The income approach puts together all forms of payments made by firms to
households. These payments are also known as factor payments. They are
paid to compensate various factors of production engaged in economic
activities. You may recall that there are four factors of production: labour,
land, capital and entrepreneur. The factor payments are therefore divided
into compensation to labour (wages and salaries), compensation to land
(rent), compensation to capital (interest) and compensation to entrepreneur
(profit). When you add all these factor payments together, you arrive at

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national income. Compensation to labour is made up of all wages and

salaries paid to workers in addition to all allowances and other fringe
benefits they are provided with.

Expenditure Approach to National Income Accounting

The expenditure approach concentrates on all expenditures on final goods
and services produced in a country over a period of time. Like the product
or output approach, the sum of all expenditures on final goods and services
yield GDP. In practice, expenditures are categorized into four: consumption
expenditures; investment expenditures; government expenditures; and net
exports.
 Consumption expenditures are made up of all household
expenditures on consumer goods and services. These are often further
categorized into durable goods, non-durable goods and services.
 Investment expenditures consist of all expenditures on capital goods.
It includes the purchase of new housing, plants, equipment, and
inventory by the private sector. They are also further categorized into
non-residential investment, residential investment and changes in
inventories.
 Government expenditures include spending by both central and local
governments for the provision of public services. It includes salaries
of civil and public servants, purchase of weapons for the military and
other investment expenditures by the government.
 Net exports refer to the difference between exports of final goods and
services and imports of final goods and services. Since some of the
goods and services produced in the country are not consumed in the
country but rather exported, it is important that GDP which estimates
the value of all goods and services produced in the country capture
those goods and services exported. In the same vein, not all
expenditures identified above are expenditures on goods and services
produced in the country. Some of those final goods and services might
have been imported and must be deducted.

The table below provide GDP estimates for Ghana using the expenditure
approach of national income accounting.

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Table 2.2.2 GDP Estimation Using Expenditure Approach

GDP at current prices by expenditures in GHC Million

2008 2009 2010 2011* 2012**
1. Household final consumption exp. 25,728.6 28,349.0 35,860.0 36,756.5 44,536.1
2. General government final consumption exp. 3,392.8 4,294.4 4,767.8 9,955.3 9,923.0
3. Gross capital formation 6,474.0 7,565.0 11,833.8 17,722.3 22,579.7
3.1 Gross fixed capital formation 6,474.0 7,216.2 11,353.9 15,317.2 21,219.1
3.2 Change in stock - 348.8 479.9 2,405.1 1,360.7
4. Net exports (Balance of exports and imports) - 5,871.4 - 4,761.7 - 7,562.1 - 3,337.5 - 7,585.1
4.1 Exports of goods and services 7,553.5 10,720.1 13,571.7 26,389.7 33,521.7
4.2 Imports of goods and services 13,424.9 15,481.8 21,133.8 29,727.2 41,106.8
5. Statistical Discrepancies 454.5 1,151.0 1,142.6 - 1,280.2 3,655.4
6. Gross Domestic Product (1+2+3+4+5) 30,178.5 36,597.7 46,042.1 59,816.4 73,109.1
* Finalized on April 10, 2013
** Revised on April 10, 2013
Source: Ghana Statistical Service, 2013

Other Concepts of National Income

The GDP is estimated directly from either the product/output approach or
expenditure approach. Whilst the national income (NY) is estimated directly
using the income approach. When GDP is estimated, other variables can be
estimated. The following are some of the variables that can be computed.
 Gross National Product (GNP) looks at the value of final goods and
services produced by nationals of a country. It is computed by
deducting income earned by foreigners at home from GDP and adding
income earned by nationals abroad to GDP. Alternatively, the
difference between income earned by nationals abroad and those
earned by foreigners at home (called Net Foreign Factor Income or
NFY) is added to GDP to arrive at GNP. Between 2006 and 2010, net
income from abroad or net foreign factor income for Ghana has been
negative and growing. From minus GHC117 million in 2006, the
figure more than quadrupled to minus GHC762.4 million in 2010.
This implies that earnings by foreigners in Ghana have been greater
than earnings by Ghanaians abroad.

GDP + NFY = GNP. For Ghana, NFY is usually negative.

 Net National Product (NNP) equals GNP minus depreciation. This is

the country’s total output minus what is required to maintain the value
of its capital stock.

 Personal Income (PY) is the income received by households after

deducting social insurance.

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 Disposable Personal Income (DPY) is personal income minus

income taxes.

 Personal Savings (PS) is disposable personal income minus personal

consumption expenditures

Review Questions
1. What are the four components of expenditures in national income?
2. Which will be larger for Ghana, GDP or GNP? Explain.
3. Explain why GDP can be computed either by adding expenditures or
by adding values of goods and services produced.
4. What is the difference between GDP and GNP?

Summary
This section started with a recall of the circular flow of income and
expenditure. We then discussed how the three approaches to national
income accounting (product/output, expenditure and income) are used to
compute GDP and national income. We showed some GDP data for Ghana.
We ended with a discussion of other national income measures.

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