Home > Lecture 2: National Income Accounting
Lecture 2:
National Income Accounting
Reference
- Chapter 5
Learning
Objectives
5.1 What
gross domestic product (GDP) is, and how to measure it.
5.2
Other measures of a nation’s production of goods and services.
5.3
The distinction between nominal GDP and Real GDP
5.4
The shortcomings of GDP as a measure of domestic output and well-being.
National
Income Accounting
National income
accounting is the technique used to measure the overall production of
the economy and other related variables for the nation as a whole.
Gross Domestic
Product (GDP)
GDP is the total market value of all final goods and services produced in a given year within the boundaries of a country.
Three Approaches
to Measure GDP
Approach
The product
approach defines a nation’s GDP as the market value of final goods
and services newly produced within a nation during a fixed period of
time.
- Public Transfer Payments
- Private Transfer Payments
- Stock-market Transactions
2) Expenditures
Approach
The expenditures
approach defines GDP as the sum of all the money spent in buying final
goods and services.
- GDP = Consumption (C) +
Gross Investment (Ig) +
Government Purchases (G) +
Net
Exports (Xn)
GDP= $656.2+196.8+251.6+50.3=1154.9
Personal
Consumption Expenditures (C)
C are
the expenditures of households for durable and non-durable consumer
goods and services.
Gross Investment
(Ig)
Ig are the expenditures for newly produced capital goods and for additions to inventories.
Depreciation
Government
Purchases (G)
G are the expenditures
for goods and services that government consumes in providing public
services.
Net Exports
( Xn)
Net Exports (Xn) = Exports (X) –
Imports (M)
-GDP records
all spending on goods and services produced in Canada, including spending
on Canadian output by people abroad (exports).
- Canadians
spend a great deal of money on imports- goods and services produced
abroad. That spending shows up in some other nation’s GDP. So, we
must subtract the value of imports from GDP to avoid overstating total
production in Canada.
- In 2002,
net exports were a positive $50.3 billion.
3) The Income
Approach
The income
approach defines GDP in terms of the income derived or created from
producing final goods and services.
Net Domestic Income at factor cost =
Wages, Salaries, and Supplementary Labour Income+
Profits of Corporations and Govt. Enterprises before taxes +
Interest and Investment Income +
Net Income from Farms and Unincorporated Businesses +
Taxes less
subsidies on factors of production
Net Domestic Income at market prices =
Net Domestic Income at factor cost +
Indirect
taxes less subsidies
Gross Domestic Product (GDP) at market prices =
Net Domestic Income at market prices +
Capital Consumption Allowances +
Statistical
Discrepancy
OTHER National
Accounts
Gross National Product (GNP) =
Gross Domestic Product (GDP) +
Net Investment from Non-residents
= 1154.9 – 84.9 = 1070
Example –
The production of cars in the Honda factory in Alliston, Ontario is
included in both Canadian GDP and GNP. But GNP excludes profit
sent to foreign shareholders of Honda, but this profit is included in
Canadian GDP.
Net Domestic Product (NDP) =
GNP – Depreciation
= 1070–155 = 915
Net National Income at Basic Prices (NNI)=
NDP-
Taxes less subsidies on factors of production -
Indirect taxes less subsidies
= 915 – 53.8 – 84.4
= 776.8
Personal Income = NNI – Undistributed Corporate Profits + Govt. Transfer Payments
= 776.8 – 49.0 +71.3
= 848.1
Disposable Income = PI – PersonalTaxes
= 848 – 152.2
= 695.9
GNP
NDP
NNI
PI
DI
Nominal GDP
Vs Real GDP
Price Index
An alternative
Method
GDP Deflator
Chain Weighted
Index
Shortcomings of GDP
Income Approach
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