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Chapter Two: National Income Accounting

National income accounting measures total economic output in a country through metrics like GDP. GDP is the total market value of all final goods and services produced within a country in a year. GDP can be calculated through the expenditure, income, and value added approaches, which should all equal the same amount. Real GDP adjusts for inflation to measure true economic growth rather than changes due to price levels. National income accounting provides important information about a country's economic activity and well-being.

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90 views18 pages

Chapter Two: National Income Accounting

National income accounting measures total economic output in a country through metrics like GDP. GDP is the total market value of all final goods and services produced within a country in a year. GDP can be calculated through the expenditure, income, and value added approaches, which should all equal the same amount. Real GDP adjusts for inflation to measure true economic growth rather than changes due to price levels. National income accounting provides important information about a country's economic activity and well-being.

Uploaded by

Menna Elmeslhy
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER TWO

National Income
Accounting
AFTER STUDYING THIS CHAPTER, YOU WILL BE ABLE TO:

 Explain why national income accounting is important.


 Define and Measuring GDP.
 Describe Nominal GDP and Real GDP and explain the limitations of real GDP as a
measure of economic well-being .
 The Circular Flow of Expenditure and Income.
First
National Income Accounting
national income accounting -- a set of rules and
definitions for measuring economic activity in the
aggregate economy -- that is, in the economy as a
whole.
National income accounting is a way of measuring
total, or aggregate production.
Measuring Total Economic Output:
• Gross domestic product (GDP) is the total value of all final goods and
services produced in an economy in a one-year period.
Measuring Total Economic Output:
• Gross domestic product (GDP) is the total
value of all final goods and services produced in
an economy in a one-year period.
• Gross national product (GNP) – the
aggregate final output of citizens and businesses
in an economy in a one-year period.
Second

The GDP and the Circular Flow of


Expenditure and Income
1.Gross Domestic Product
GDP Definition:
GDP or Gross Domestic Product is the market value of
all final goods and services produced in a country in a
given time period.
This definition has four parts:
 Market value…. (Explained in the text book)
 Final goods and services(Explained in the text book)
 Produced within a country(Explained in the text book)
 In a given time period(Explained in the text book)
A final good (or service) is an item bought by its final
user during a specified time period.
Intermediate good, (or service) which is an item that is
produced by one firm, bought by another firm, and
used as a component of a final good or service.
THREE WAYS TO MEASURE
GDP
THERE ARE THREE WAYS OF CALCULATING GDP - ALL OF WHICH IN THEORY
SHOULD SUM TO THE SAME AMOUNT:
THE EXPENDITURE APPROACH = THE INCOME APPROACH = VALUE ADDED
APPROACH

(i) The Expenditure Approach


The expenditure approach measures GDP as the
sum of consumption expenditure, investment,
government expenditure on goods and services, and
net exports.
GDP = C + I + G + (X  M)
THE INCOME APPROACH

The Income Method – adding together factor incomes


It is the sum of the incomes earned through the production of goods and
services. This is:
Gross Domestic product (by sum of factor incomes) =Income from people in
jobs and in self-employment (e.g. wages and salaries) +Profits of private
sector businesses +
Rent income from the ownership of land
In the calculation of GDP by the income approach.
We exclude:
1.Transfer payments e.g. the state pension; income support for
families on low incomes; the Jobseekers’ Allowance for the
unemployed and other welfare assistance such housing benefit and
incapacity benefits
2.Private transfers of money from one individual to another
3. Income not registered with the tax authorities
4. Published figures for GDP by factor incomes will be inaccurate
because much activity is not officially recorded –
VALUE ADDED APPROACH

result of the production process


Value added = value of production - value of intermediate goods
Two Ways of Eliminating Double Counting:
 Calculate only final output.
 Follow the value added approach.
Two adjustments must be made to get GDP:
1.Indirect taxes less subsidies (aids) are added to get
from factor cost to market prices.
2.Depreciation is added to get from net domestic
income to gross domestic income. shows in the next
figure the income approach with data for 2012
8348 x100 = 53.9%
15478
 

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