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National Income Accounting

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Macro Economy

National Income Accounting

Measures of Output

The array of goods and services we produce is truly massive, all these goods and services are part of our total output; the problem is to find a summary measure.

To organize annual output data into a more manageable summary, the mechanism we use is price. Each good and service produced and brought to market has a price. That price serves as a measure of value for calculating total output.


The total dollar value of final output produced each year is called gross domestic product (GDP). GDP is simple the sum of all final goods and services produced for the market in a given time period, with each good or service valued at its market price.

We conclude that our GDP is $1,200 million

The use of prices to value market output allows us to summarize output activity and to compare the output of one period with that another


Gross national product (GNP) refers to the output produced by domestic-owned factors of production regardless of where they're located.

Gross domestic product (GDP) refers to output produced within domestic borders.

In an increasingly global economy, where factors of production and ownership move easily across international borders, the calculations of GNP became ever more complex. It also became a less dependable measure of the nation's economic health. GDP is geographically focused, including all output produced within a nation's borders regardless of whose factors of production are used to produce it.

The geographic focus of GDP facilitates international comparisons of economic activity. Is japans' output as large as that of the United States? How could you tell? United state GDP is higher by 3 times than Japan's; we can interpret that united state economy (output) is greater than Japan.

GDP per Capita

International comparisons of total output are even more vivid in per capita terms. GDP per capita relates the total value of annual output to the number of people who share that output; it refers to the average GDP per person.

In 2006, America's total GDP of $13 trillion was shared by 300 million citizens. Hence, our average, or per capita, GDP was more than $43,000. By contrast, the average GDP for the rest of the world's inhabitants was less than $10,000.

Per capita GDP isn't a measure of what every citizen is getting. Although Per capita GDP in Kuwait is three times larger than that of Brazil's, we can't conclude that the typical citizen of kuwait is three times as well off as the typical Brazilian.

The only thing these figures tell us is that the average kuwaiti could have almost three times as many goods and services each year as the average brazilian if GDP were distributed in the same way in both countries. Measures of per capita GDP tell us nothing about the way GDP is actually distributed or used: they're only a statistical average.

Measurement Problems

1- Nonmarket Activities, GDP measures exclude most goods and services that are produced but not sold in the market. For example house maker who cleans, washes, gardens, shops, and cooks definitely contributes to the output of goods and services. Because she's not paid a market wage for these services, however, her efforts are excluded from the calculation of GDP.

2- Unreported Income, The GDP statistics also fail to capture market activities that aren't reported to tax or census authorities. Many people work "off the books", getting paid in unreported cash. This so-called underground economy is motivated by tax avoidance and the need to conceal illegal activities.

Value Added

Not every reported market transaction gets included at full value in GDP statistics. If it did, the same output would get counted over and over. The problem here is that the production of goods and services typically involves a series of distinct stages.

Notice that each of the four stages of production depicted in the table involves a separate market transaction. If we added up the separate value of each market transaction, we'd come to the conclusion that $1.75 of output had been produced. In fact, though, only one bagel has been produced, and it's worth only 0.75. Hence, we should increase GDP- the value of output- only by $0.75.

To get accurate measure of GDP we must distinguish between intermediate goods and final goods. Intermediate goods, are goods purchased for use as input in further stages of production. Final goods are the goods produced at the end of the production sequence for use by consumer (or other market participants).

We can compute the value of final output in one of two ways. The easiest way would be to count only market transactions entailing final sales. Another way to calculate GDP is to count only the value added at each stage of production.

Real Vs. Nominal GDP

Change in GDP brought about by changes in the price level give us a distorted view of real economic activity. To distinguish increase in the quantity of goods and services from increase in their prices, we must construct a measure of GDP that takes into account price level changes. We do so by distinguishing between real GDP and nominal GDP. Nominal GDP is the value of final output measured in current prices. Where real GDP is the value of output measured in constant prices. To calculate real GDP, we adjust the market value of goods and services for changing prices. Thus the distinction between nominal and real GDP is important whenever the price level changes.

Consider the GDP statistics for 2005 and 2006, as displayed below

The first row shows nominal GDP in each year. (Second row) Nominal GDP increased by $789 billion between 2005 and 2006.

This is 6.3% increase looks impressive. However some of that gain was fuelled by higher prices, not increases output. Row 3 indicates that the price level rose by 3.3% during that same period.

Row 4 in adjusts the GDP comparison for the change in prices. We deflate the 2006 nominal GDP by factoring out the 3.3% price increase. Simple division is all we need to compute real GDP in 2006 as being $12,822 billion. Hence, real GDP increased by only $366 billion in 2006 (row 5) not by the larger



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