Economics
Measuring Domestic Output and National Income
Measuring domestic output and national income involves quantifying the total value of goods and services produced within a country's borders over a specific period. This is typically done using methods such as the expenditure approach, income approach, and production approach. The resulting data provides crucial insights into a country's economic performance and is used for policy-making and economic analysis.
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9 Key excerpts on "Measuring Domestic Output and National Income"
eBook - PDF- Bradley A. Hansen(Author)
- 2006(Publication Date)
- Greenwood(Publisher)
Two Measuring the Performance of the American Economy The British politician Benjamin Disraeli once declared that there are three kinds of lies: ‘‘Lies, damn lies, and statistics.’’ To avoid being lied to with economic statistics, it is necessary to understand how economic performance is measured. It is easy to measure what is happening in a particular market. The price of gas at the station around the corner from my house is $2.09 today. Measuring the performance of the entire economy is not as straightforward because we are looking at millions of different goods and services. The objective of this chapter is to provide an introduction to how production, employment, and prices are measured for the economy as a whole. MEASURING TOTAL PRODUCTION Measuring the total production of an economy is called national in- come and product accounting. In the United States, the Bureau of Eco- nomic Analysis of the Commerce Department is responsible for national income and product accounts. They are called income and product accounts because in a market economy we can measure the total amount of pro- duction either by counting the flow of payments in the market for goods and services produced or by counting the flow of income in the market for resources. Total production and total income have to be nearly equal be- cause there are two sides to every sale. Every payment by a buyer is income to a seller. The total amount of production is the Gross Domestic Product (GDP), and the total amount of income is national income. Measuring Gross Domestic Product The most widely used measure of economic performance is GDP. In 2003 the GDP of the United States was $10,987,900,000,000. That is, GDP was more than $10 trillion. GDP is defined as the market value of final goods and services produced in a country during a specific period of time.
eBook - PDF- Kevin D. Hoover(Author)
- 2011(Publication Date)
- Cambridge University Press(Publisher)
Part II The National Accounts 2 The National Accounts and the Structure of the Economy Before we can understand the economy, we need to know how to describe and mea-sure it. In this chapter we focus on gross domestic product (GDP), the most central quantity in macroeconomics. What is it? How is it created? How do we measure it? What is its relationship to other important quantities? How does it change over time? 2.1 How Big Is the Economy? Since ancient days, bad times have followed good, and good times have fol-lowed bad. Since ancient days, people have looked to their leaders to pro-mote the good times and soften the bad. In the Bible, Joseph predicts seven fat years to be followed by seven lean years, and advises Pharaoh to store grain against the coming famine. When agriculture dominated economies, the cycle of good and bad times mostly reflected the cycle between fair weather and drought or flood. In modern industrial economies, the causes of the cycle are not so readily visible. An important object of macroeconomics is to help us to understand these causes and to learn what policies might promote the good times and soften the bad. Economists may start with the-ories, but to apply those theories to actual economies and to judge whether they are really working as intended, we need some method of keeping score: how rich is the country (or how large is the economy)? How fast is it growing? The news media constantly quote statistics that aim to answer these ques-tions: The U.S. economy (i.e., the gross domestic product or GDP) fell by 5.4 percent per year in the first quarter of 2008. The U.S. economy in 2008 was 3.3 times larger than the Japanese economy (i.e., U.S. GDP was $14,260 bil-lion and Japanese GDP was $4,329 billion). Most people understand that GDP and its growth rate report the economic score, yet few actually under-stand what they really mean. They are, in fact, the central quantities in macroeconomics.
- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
Other Ways to Measure the Economy Besides GDP, there are several different but closely related ways of measuring the size of the economy. We mentioned above that we can think of GDP as total production and as total purchases. We can also think of it as total income since anything one produces and sells yields income. One of the closest cousins of GDP is the gross national product (GNP). GDP includes only what country produces within its borders. GNP adds what domestic businesses and labor abroad produces, and subtracts any payments that foreign labor and businesses located in the United States send home to other countries. In other words, GNP is based more on what a country's citizens and firms produce, wherever they are located, and GDP is based on what happens within a certain county's geographic boundaries. For the United States, the gap between GDP and GNP is relatively small; in recent years, only about 0.2%. For small nations, which may have a substantial share of their population working abroad and sending money back home, the difference can be substantial. We calculate net national product (NNP) by taking GNP and then subtracting the value of how much physical capital is worn out, or reduced in value because of aging, over the course of a year. The process by which capital ages and loses value is called depreciation. We can further subdivide NNP into national income, which includes all income to businesses and individuals, and personal income, which includes only income to people. For practical purposes, it is not vital to memorize these definitions. However, it is important to be aware that these differences exist and to know what statistic you are examining, so that you do not accidentally compare, say, GDP in one year or for one country with GNP or NNP in another year or another country. To get an idea of how these calculations work, follow the steps in the following Work It Out feature.
eBook - PDF- David Shapiro, Daniel MacDonald, Steven A. Greenlaw(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
We mentioned above that we can think of GDP as total production and as total purchases. We can also think of it as total income since anything one produces and sells yields income. One of the closest cousins of GDP is the gross national product (GNP). GDP includes only what country produces within its borders. GNP adds what domestic businesses and labor abroad produces, and subtracts any payments that foreign labor and businesses located in the United States send home to other countries. In other words, GNP is based more on what a country's citizens and firms produce, wherever they are located, and GDP is based on what happens within a certain county's geographic boundaries. For the United States, the gap between GDP and GNP is relatively small; in recent years, only about 0.2%. For small nations, which may have a substantial share of their population working abroad and sending money back home, the difference can be substantial. We calculate net national product (NNP) by taking GNP and then subtracting the value of how much physical capital is worn out, or reduced in value because of aging, over the course of a year. The process by which capital ages and loses value is called depreciation. We can further subdivide NNP into national income, which includes all income to businesses and individuals, and personal income, which includes only income to people. The gross national income (GNI) includes the value of all goods and services produced by people from a country—whether in the country or not. Unlike the other methods, GNI essentially measures the wealth of a nation because it focuses on income, not output. As you will see in the discussion regarding global economic diversity, the World Bank now uses GNI to classify nations according to economic status. For practical purposes, it is not vital to memorize these definitions.
eBook - PDF- Steven A. Greenlaw, David Shapiro, Daniel MacDonald(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
This is why the terms GDP and national income are sometimes used interchangeably. The total value of a nation’s output is equal to the total value of a nation’s income. The Problem of Double Counting We define GDP as the current value of all final goods and services produced in a nation in a year. What are final goods? They are goods at the furthest stage of production at the end of a year. Statisticians who calculate GDP must avoid the mistake of double counting, in which they count output more than once as it travels through the production stages. For example, imagine what would happen if government statisticians first counted the value of tires that a tire manufacturer produces, and then counted the value of a new truck that an automaker sold that contains those tires. In this example, the statisticians would have counted the value of the tires twice- because the truck's price includes the value of the tires. To avoid this problem, which would overstate the size of the economy considerably, government statisticians count just the value of final goods and services in the chain of production that are sold for consumption, investment, government, and trade purposes. Statisticians exclude intermediate goods, which are goods that go into producing other goods, from GDP calculations. From the example above, they will only count the Ford truck's value. The value of what businesses provide to other businesses is captured in the final products at the end of the production chain. The concept of GDP is fairly straightforward: it is just the dollar value of all final goods and services produced in the economy in a year. In our decentralized, market-oriented economy, actually calculating the more than $21 trillion-dollar U.S. GDP—along with how it is changing every few months—is a full-time job for a brigade of government statisticians. 19.1 • Measuring the Size of the Economy: Gross Domestic Product 457
eBook - PDFEconomic Environment NQF4 SB
TVET FIRST
- D Bekker, M Richards, FHB Serfontein, A Smith(Authors)
- 2013(Publication Date)
- Macmillan(Publisher)
Use the circular flow model to explain what would happen to the flow of spending, production and income in the economy in the following circumstances: a) More goods and services are exported. b) More is spent on imported goods and less on domestic produced goods. Domestic production: production that takes place inside the borders of a country Words & Terms 43 2.2 Gross domestic product An important measure of the level of economic activity (that is the level of production) in a country is its gross domestic product (GDP). The gross domestic product tells us what is happening to the level of domestic production in a country. An increase in the gross domestic product means that we are producing more goods and services and are better off than before. A decline in the gross domestic product indicates that we are producing fewer goods and services than before and we are therefore worse off. Module 2: Measure the macro economy Gross domestic product can be defined as the value of all final goods and services produced within the border of a country during a certain period. This period is usually a year. There are a number of important terms in this definition that we must take into account when we use the gross domestic product as a measure of economic activity. Only final goods and services are included. Final goods and services refer to those goods and services that are consumed by households and firms. Final goods are things such as television sets, clothes, chairs, bookcases, hats, and so on, and services are things such as those provided by lawyers, doctors, teachers, plumbers, beauticians, and so forth. In the production of the final goods and services, intermediate goods are used. Intermediate goods are purchased to be used as inputs in producing other goods before they are sold to end users.
eBook - PDF- Manzur Rashid, Peter Antonioni(Authors)
- 2015(Publication Date)
- For Dummies(Publisher)
In short, people tend to want to move to countries with high levels of capital and not many people, because their MPL will be high, assuring a relatively high real wage. 61 Chapter 4: Gross Domestic Product Calculating GDP: Assessing an Economy’s Health GDP is probably the single most useful statistic in appraising the health of an economy, so calculating it accurately is vitally important. Unfortunately, working out a country’s GDP is no simple matter. In this section we look at how GDP is calculated in the UK, why it’s not always 100 per cent accurate and also how to take into account improvement in the quality of goods. Other developed economies calculate GDP in a similar way. Introducing the basics In the UK, the Office for National Statistics (ONS) is responsible for calculat‑ ing GDP. It does so on a quarterly basis (every three months) by using three different ways of measuring GDP: ▶ ✓ Calculating total income: Basically adding up everyone’s income in the UK, including people’s wages from work and firms’ profits paid out as dividends to their owners/shareholders. This figure is estimated by using data on firms’ profits, individuals’ weekly earnings, employer surveys and data from the UK tax authority (HMRC). ▶ ✓ Calculating total output: Working out the value of all final goods that firms produce. This is done by surveying thousands of firms to obtain a detailed picture of exactly what they’re producing, in what quantities, using what inputs and for what price. To avoid double counting, only the value added by each firm is included. For this reason, this measure is often called gross value added (GVA). (See the section ‘Adding up total value added’ earlier in the chapter.) ▶ ✓ Calculating total expenditure: Adding up the amount of money that consumers, firms, the government and overseas buyers spend on final goods and services in an economy.
eBook - PDF- William Boyes, Michael Melvin(Authors)
- 2015(Publication Date)
- Cengage Learning EMEA(Publisher)
3. Other measures of output and income include gross national product (GNP), net national product (NNP), national income (NI), personal income (PI), and disposable personal income (DPI). National Income Accounts GDP ¼ consumption þ investment þ government spending þ net exports GNP ¼ GDP þ receipts of factor income from the rest of the world — payments of factor income to the rest of the world NNP ¼ GNP capital consumption allowance NI ¼ NNP statistical discrepancy PI ¼ NI income earned but not received þ income received but not earned DPI ¼ PI personal taxes disposable personal income (DPI) Personal income minus personal taxes. 5. What is the difference between nominal and real GDP? nominal GDP A measure of national output based on the current prices of goods and services. real GDP A measure of the quantity of final goods and services produced, obtained by eliminating the influence of price changes from the nominal GDP statistics. Chapter 5 National Income Accounting 93 Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Because we prefer more goods and services to higher prices, it is better to have nominal GDP rise because of higher output than because of higher prices. We want nominal GDP to increase as a result of an increase in real GDP. Consider a simple example that illustrates the difference between nominal GDP and real GDP. Suppose a hypothetical economy produces just three goods: oranges, coconuts, and pizzas. The dollar value of output in three different years is listed in Figure 7.
eBook - ePub- P Mohr, D Yu, S Adendorff(Authors)
- 2020(Publication Date)
- Van Schaik Publishers(Publisher)
At the very least, an adjustment has to be made for the size of the population. In other words, GDP has to be expressed on a per capita basis before comparisons can be made (see Box 3-3 in Chapter 3). But even per capita data may be misleading because the distribution of income differs from country to country and can also change over time. Even when GDP growth is sluggish, some sections of the economy and society might be booming. For example, on 3 August 1996 The Economist reported sharp increases in the sales of luxury goods and services in Britain at a time when annual GDP growth was estimated at a mere 1,8%. Among these goods and services were luxury motorcars, expensive country houses, exotic holidays, chauffeur services, pedigree dogs and cosmetic surgery. At that stage there thus appears to have been a significant redistribution of income and wealth in Britain in favour of those at the top end of the income scale. The measurement of the distribution of income is discussed in Section 8.5. 34 2.8 GROSS NATIONAL INCOME (GNI) As explained earlier, GDP is a geographic concept – the adjective domestic indicates that the production occurred within the geographic boundaries of the country. It does not matter who produces the goods or who owns the factors of production. It could be a British, Japanese or any other firm. Nor does it matter to whom the goods are sold. They could be sold locally or exported to another country. As long as the production takes place on South African soil it forms part of South African GDP. But economists also want to know what happens to the income of all South African citizens or permanent residents of the country. To answer this question, all income earned by foreign-owned factors of production in South Africa (ie all primary income to the rest of the world) has to be subtracted from GDP. In this way the South African element of GDP can be ascertained
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