MEASURING NATIONAL INCOME

ACCOUNTS
National Income is a measure of the money value of the
total flow of goods and services produced in an economy
over a specific period of time. It is used as a basis in
determining the capabilities of an economy.

National income consists of the following:

Wages or Salary – those generated labor.
Interest- those generated by leaders of funds.
Rent – those generated by owners of real estate.
Profit – those generated by entrepreneurs.
Net Factor – income from abroad.
Gross Domestic Product (GDP) definition:
GDP is a measure of the total flow and services
produced by the economy over a particular time
period. The factors of production must be in the
domestic economy regardless of who owns them. The
owners of the factor of production consist of citizens of
the local economy and those foreign countries.
Gross Domestic Product (GDP) the market value of
all final goods and services produced within a country
in a given period if time.
Components of GDP:
GDP (Y) can be divided into four components:
consumption ©, investment (I), government purchases
(G), and net exports (NX)
Y = C + I + G + NX
Consumption spending on good s and services by
households, with the exception of purchases of new
housing.

Investment spending of capital equipment and

structures, including household purchases of new
housing.
 government purchases spending on goods and services by local,
state and federal government.
1. Salaries of government workers are counted as part of the
government purchase component of GDP.
2. Transfer payments are not included as part of the government
purchases component of GDP.
> Net exports spending on domestically produced goods by foreigners
(export) minus spending on foreign goods by domestic residents
(imports).
- equal the value of goods and services produced domestically and
sold abroad (exports) minus the value of goods and services produced
abroad and sold domestically (imports).
Real Versus Nominal GDP
Nominal GDP uses current prices to value the economy’s
production of goods and services.
Real GDP uses constant base-year prices to value the
economy’s production of goods and services.in the economy.

There are two possible reasons for total spending to rise from
one year to the next.
1. The economy may be producing a larger output of goods
and services.
2. Goods and services could be selling at higher prices
When studying the GDP over time, economists would
like to know if output has changed ( not prices). Thus,
economic measures real GDP by valuing output using a
fixed set of prices. It is Aa numerical.
 Two goods are being produced: hot dogs and burgers.

Year Price of Hot Quantity of Price of Quantity of

Dogs Hot Dogs Hamburgers Hamburgers

2001 P1 100 P2 50

2002 P2 150 P3 100

2003 P3 200 P4 150

Definition of Nominal GDP: the production of goods
and services valued at current prices:

Nominal GDP for 2001 = ( P1 x 100) + ( P 2 x 50) = P200.

Nominal GDP for 2002 = (P2 x 150) + ( P3 x 100) = P600.

Nominal GDP for 2003 = ( P3 x 200) + (P x 150) = P1,200.

Definition of Real GDP: the production of goods and
services valued at constant prices.
Let’s assume that the base year is 2001.
Real GDP for 2001 = (P1 x100) + (P2 x50) = P200
Real GDP for 2002 = (P1 x 150) + (P2 x 100) =P350.
Real GDP for 2003 = (P1 x 200) + (P2 x 150) = P500.
Table 1: The farmers produce two goods rice and vegetables. Below is
the table showing price and quantities of output for three years:

Quantity
Year Price of Quantity Price of of
rice of rice Vegetable Vegetable

Year 1 P10 120 P12 200

Year 2 P12 200 P15 300
Year 3 P14 180 P18 275
Table 1 show the hypothetical prices and quantities of rice
and vegetable. Nominal or real GDP is solved by simply
multiplying the Price (P) by the quantity (Q) for the year. Thus,
from the data, the values or figures nominal are as follows:

Nominal GDP in Year 1 = (P10 x120) + (P12 x 200) = P3,600

Nominal GDP in Year 2 = (P12 x 200) + (P15 x 300) = P6,900
Nominal GDP in Year 3 = (P14 x 180) + (P18 x 275) = P 7470
Using Year 1 as the base year:
Real GDP in Year 1 = (P10 x 120) + (P12 x 200) = P3,600
Real GDP in Year 2 = (P10 x 200) + (P12 x 300) = P5,600
Real GDP in Year 3 = (P10 x 180) + (P12 x 275) = P 5,100
(Note that nominal GDP rises from Year 2 to Year 3, but
the real GDP falls)
GDP deflator for Year 1 = (P3,600/P3,600) x 100 = 1
x100 =100

GDP deflator for Year 2 = (P6,900/P5,600) x 100 =

1.2321 x 100 = 123.21

GDP deflator for Year 3 = (P7,470/P5,100) x 100 =

1.4647 x 100 = 146.47
Nominal GDP and real GDP are equal in the base
year. This implies that the GDP deflator for the
base year will always is always 100.
For an economy, total income must equal to total expenditure.

1. If someone pays else P 100 to mow a lawn, the expenditure on

the lawn service (P100.) is exactly equal to the income earned from
the production of the lawn service (P100).

2. We can also use the circular flow diagram to show why total
income and total expenditure must be equal.
a. Households buy goods and services from firms use this money
to pay for resources purchased from households.
b. In this simple economy described by this circular flow diagram,
calculating the GDP could be done by adding up the total
purchases by firms. However, because a transaction always has
a buyer and a seller, total expenditure in the economy must be
equal to total income.

c. Note that the simple diagram is somewhat unrealistic as it omits

saving, taxes, government purchases and investment purchases by
firms. However, because a transaction always has a buyer and a
seller, total expenditure in the economy must be equal to total
income.
GDP and Economic Well Being
GDP measures both an economy’s total income and its total
expenditure on good and services.
GDP per person tells us the income and expenditure level of
the average person in the economy.
GDP, however, may not be a very good measure of the
economic wellbeing of an individual.

GDP is a good measure of economic well-being because people prefer

higher income to lower incomes. But it is not a perfect measure of
well-being. For example, GDP excludes the value of leisure and the
value of a clean environment.
Gross National Product (GNP) is a measure of market value of
the final goods and services produced by nationals or citizens
of a country in a particular time period. This includes
production within and outside the country under
considerations of production.

GNP Purpose:
GNP reflects the value of the economy’s production since it
also includes the value of products from the low stages of
production.
GNP figures show the structure of production according to
end use and factor contribution.
Approaches to National Income Estimation
Expenditure Approach
Expenditure Approach – a way of estimating national
income which involves the calculation of the sum of all
expenditures on final goods.
To calculate for the GNP using the Expenditure
Approach:
GNP= C + I + G + (X-M)
Income Approach
Current production is made possible through the use of
economic resources of land, labor, capital and
entrepreneurship. The owners of these resources receive
earnings in the form of rent, wages and salaries, interests and
dividends, and profit. When the total amount of earnings of
the owners is aggregated into single amount, the objective of
determining the national income is achieved.

To calculate for the GNP using the Income Approach:

GNP = NI + (IT -S) + DA
Current vs. Real Gross National Product
Current GNP is a value using current prices, whereas
Real GNP uses a base or constant price.
Real GNP is computed from Current using a price
coefficient since direct consumption poses practical
problems and unwieldiness.
The difference is illustrated by the following equations:
Current GNP = Pc Qc
Real GNP = Pb Qc