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Class 1 National Output

The document discusses different measures and approaches to calculating national output and income, including Gross Domestic Product (GDP) and Gross National Income (GNI). It explains the product, expenditure, and income approaches to measuring GDP and defines key terms like nominal and real GDP. The document also outlines some shortcomings of using GDP as a measure of economic well-being.

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Arefin Sheikh
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36 views14 pages

Class 1 National Output

The document discusses different measures and approaches to calculating national output and income, including Gross Domestic Product (GDP) and Gross National Income (GNI). It explains the product, expenditure, and income approaches to measuring GDP and defines key terms like nominal and real GDP. The document also outlines some shortcomings of using GDP as a measure of economic well-being.

Uploaded by

Arefin Sheikh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Class 1

Measures of National Output


Circular flow
diagram of a closed
economy.
1. Closed Economy: An economy which
doesn’t trade with other nations because it
is completely self-reliant.
Economic Agents (Closed Economy):
I. Households (Producers of labor in the
market for factors of production (FOP) &
consumers of commodities in market for
goods & services (G&S))
II. Firms (Producers of commodities in market
for G&S & consumers of labor in market for
FOP)
III. Government (Could act as both)
For open economies there is one more
economic agent: Foreign economies.
Factors of Production:
Broadly there are 4 factors of production in economics:
1. Land: Cost of land is the rents paid to the landowner.
2. Labor: Cost of labor is the wages & salaries paid to the employees.
3. Capital: Cost of using capital is the rents paid to the owner of
capital.
4. Entrepreneurship: Entrepreneur is a person who organizes land,
labor and capital to earn a profit. Usually, in economics we define
cost and revenue from the perspective of an entrepreneur.
Measures of National Output/Income
Gross Domestic Product (GDP) Gross National Income (GNI)

• GDP is the total ‘market value’ • GNI is the ‘market value’ of all
of all ‘final goods and services’ the ‘final goods and services’
‘newly produced’ in a given ‘newly produced’ in a given ‘time
‘time period (usually a year)’ period (usually 1 year)’ by the
within the ‘boundaries of a ‘factors of production’ ‘owned
country’. by the citizens’ of a country.
Relation between GDP & GNP:
GNI = GDP + Net income from abroad
Net Income from abroad = Inward Remittance – Outward Remittance
Keywords
1. Market Value: GDP is a monetary measure. All goods and services (G&S) are measured in
their respective prices so that they can be aggregated under a single unit or currency.
2. Final G&S: To avoid double counting the market value of only the final goods are taken
(not the intermediary goods).
3. Time Period: GDP is measured as a flow variable. All G&S are not produced
simultaneously at a single point in time and there is a cost of surveying for GDP
accounting. Thus, we consider a time interval of GDP (usually 1 year). This interval may
differ from country to country (i.e., quarterly data in US).
4. Newly Produced: The market value of G&S produced in 2022 (i.e., secondhand products)
will not be included in GDP accounting for 2023.
5. Boundary of a country: The output of any individual or any firm within the Bangladeshi
borders whether domestic or foreign will be included in the GDP of Bangladesh.
Nominal vs. Real GDP

Nominal/Money GDP Real GDP


• Nominal GDP is measured by • Real GDP is measured by adding
adding the product of quantity the product of quantity of each
of each good or service and their good and service and their
corresponding price in the corresponding price in the
market in the current period. market in the base period.
• It includes price fluctuations • Its purpose was to remove the
from period to period. effects of price fluctuations.
• Mathematically: • Mathematically:
Exercise (Calculating Nominal & Real GDP)

Year Product X P P1X1 P0X1 NGDP RGDP


Mangoes 30 20
2015 (Base
Year) Tangerines 40 40
Apples 35 10
Mangoes 35 55
2023 (Current
Year) Tangerines 50 80
Apples 40 40
Exercise (Calculating Nominal & Real GDP)

Year Product X P P1X1 P0X1 NGDP RGDP


Mangoes 30 20 600 600
2015 (Base 2550 2550
Year) Tangerines 40 40 1600 1600
Apples 35 10 350 350
Mangoes 35 55 1925 700
2023 (Current 7525 3100
Year) Tangerines 50 80 4000 2000
Apples 40 40 1600 400
Approaches to measuring GDP:

There are 3 approaches to measuring GDP:

1. Product/Value Added Approach

2. Expenditure Approach

3. Income Approach
Product or Value-
Added Approach
In this approach GDP is the summation of the
total market value of all newly produced
final G&S in a given period within the
boundaries of an economy.
According to the International
Standard for Industrial Classification (ISIC)
rev. 3, the economy of a country can be
divided into 15 sectors. If we take the sum of
the market value of the newly-produced final
products produced by each of these 15
sectors inside Bangladesh for a given year
and add the tax received from these sectors
while subtracting the subsidies provided to
these sectors, we receive the GDP of
Bangladesh for that year.
Source: BBS, National Accounts Statistics (2020), Tab. 15
How does including the
market value of final products
remove double-counting
errors?

Selling Value
Stage Product
price added
Mining Zinc Blende 10 10

Roasting Zinc Calcine 25 15

Refining Zinc Block 40 15

Fabrication Batteries 60 20

Gross Value Added (GVA) 60


Expenditure
Approach
The expenditure approach takes the sum of 4 components. They
are:
1. Consumption Expenditure (C)
2. Investment Expenditure (I)
3. Government Expenditure (G)
4. Net Exports (X - M)
Therefore, if Y = GDP,

According to the table,


C = BDT 17,468 billion [1.1.1]
I = BDT 5,986 billion [1.2.1]
Source: BBS, National Accounts Statistics (2020), Tab. 15
G = BDT 3,635 billion [1.1.2 + 1.2.2]
X = BDT 3,896 billion [2.1]
M = BDT 5,450 billion [2.2]
Therefore, Y = BDT 25,535 billion [3]
Income Approach
According to the income approach the GDP of an economy is the sum of income derived from newly-
produced G&D produced by households & firms inside a country as well as the government of that
country within a certain period. There are four components in this approach as well. They are:

1. Compensation of Employees (w): Wages, Salaries & Supplementary Income


2. Gross Operating Surplus (π): Profits of Corporations & Government Enterprises before taking account
of rent liabilities, interest liabilities and taxes.

3. Informal Income (In): Income of farms and unincorporated business or economic activities such of the
informal sector.

4. Taxes less Subsidies (T-Sub): Tax is a form of government income or revenue. Taxes paid by firms or
individual entrepreneurs on the factors of production and imported goods are added while subsidies
received by these firms and individual entrepreneurs are subtracted.
Shortcomings of GDP
Measurement Issues Well-being Issues
1. Non-market Goods & Services: Mothers 1. Environmental Pollution: Costs of
cooking meals, educating their children etc. environmental degradation or pollution due
2. Underground Economy: Trade of illegal to economic activities is not incorporated.
commodities such as illegal drugs, weed etc. 2. Composition and Distribution of Income:
3. Imputed Values: Wage & Salaries are Whether an economy produces weapons
imputed to measure the market value of relatively more than books won’t matter if
services. both have the same price in the market.
Such an economy may be prone to higher
4. Exclusion of Quality: Improvement in violence or may advocate violence in the
quality of goods & services not world.
incorporated.
3. Intangible Sources of Well-being: Crime
5. Exclusion of Leisure & Effort: Increment in reduction, peaceful international relations,
leisure due to less stressing work less domestic violence etc. are not
environment or the effort of individuals incorporated in GDP measurement.
doing the same activity is not incorporated.

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