A variety of measures of national income and output are used in economics to estimate total economic activity in a country or region, including gross domestic product (GDP), gross national product (GNP), net national income (NNI), and adjusted national income (NNI adjusted for natural resource depletion – also called as NNI at factor cost). All are specially concerned with counting the total amount of goods and services produced within the economy and by various sectors. The boundary is usually defined by geography or citizenship, and it is also defined as the total income of the nation and also restrict the goods and services that are counted. For instance, some measures count only goods & services that are exchanged for money, excluding bartered goods, while other measures may attempt to include bartered goods by imputing monetary values to them. [1]
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Chapter 7•Measuring Domestic Output and National income•Julie Russell
Transcription
What I want to do in this video is take an expenditure view of GDP, so that we can think about how GDP can be accounted for, how it can be measured, and how we can see how active the different parts of an economy actually are. So GDP, market value of all final goods and services produced, not just changed hands, produced within a country in a given period. And the symbol we use for GDP, and I don't know why, but the symbol is Y. Y is GDP. And so let's think about it from an expenditure point of view, to think about what are all the pieces. Well, if we're thinking about expenditure, who are all of the players that might have spent money on the goods and services, on final goods and services, produced in our country? Who are all the people that might have done it? Well, you could have your firms. The firms might have spent money on these goods and services produced in a country. You also have your households. They obviously could've spent some money on goods and services produced in this country. Then you also have in most countries, in fact in all countries, you have the government. The government could have spent some of the money on the goods and services produced in this country. And if we assume that we're trading with other countries, there are other countries that might have spent money on goods and services. Other, outside, so let's just write foreign. People outside of the country might have spent money on goods and services, so foreign purchases. And another way to think about this would have been this is exports. Our country is exporting it to people outside of the country and they are purchasing it. Now, this is almost complete. But if we looked at all of the money that firms are spending and all the money that households are spending and all the money that governments are spending, some of what they're spending might not be on goods and services that are produced in this country. They might be spending some of their stuff on things that are produced outside of this country. So we would have to subtract it out if we really want to have the goods and services produced within the country. So what we're going to want to do is subtract out foreign products. Or another way, the more typical way of thinking about it, we would subtract out imports. So if we think about all of the goods and services that meet this classification, the final goods and services produced in a country in a given time, that firms spent money on, and add that to all the goods and services that households spent money on, and add that to all the goods and services that government spent on, and all the goods and services that were purchased by foreigners, the exports, and then make sure we're not counting the goods and services that other countries produce-- so we subtract those out-- this would give you a pretty good measure of all of the goods and services produced within a country. And this is pretty close to the way the economists actually do measure it. So what they do is they say Y is equal to investment. And we saw in a previous video, investment in the macroeconomics term isn't quite what it means in the everyday term. It really essentially means the spending by firms. So pretty much everything that a firm spends in theory, you're spending that money to make future goods and services, or to make the goods and services-- so that's all considered investment. And then a little bit of the household spending is considered investment. And that is just new houses. But the bulk of household spending is considered to be consumption. And then everything that the government spends on, whether it's the military and all the salaries for police people and whatever they do, you know, the groundskeeping at the White House, whatever else, if we thinking about the US, that goes straight to G, government spending. And this thing right over here, you have foreign purchases, exports, minus foreign imports. So you have exports minus imports. So you could view this as net exports. If this number is positive, the net exports are positive. We're exporting more than we're importing. If this number is negative, net exports is negative. That means we are importing more than we are exporting. But in traditional expenditure view of GDP, this whole part right over here will be referred to as net exports. And so you sum up these things, which are very closely related to maybe the slightly more intuitive versions that we started off with, and you essentially have broken down the expenditure view of GDP in the traditional sense. Then in the next few videos, I'm going to start thinking of a bunch of different examples. And we'll think about which bucket it would fall into or how it would affect one of these buckets.
National accounts
Arriving at a figure for the total production of goods and services in a large region like a country entails a large amount of data-collection and calculation. Although some attempts were made to estimate national incomes as long ago as the 17th century,[2] the systematic keeping of national accounts, of which these figures are a part, only began in the 1930s, in the United States and some European countries. The impetus for that major statistical effort was the Great Depression and the rise of Keynesian economics, which prescribed a greater role for the government in managing an economy, and made it necessary for governments to obtain accurate information so that their interventions into the economy could proceed as well-informed as possible.
Market value
In order to count a good or service, it is necessary to assign value to it. The value that the measures of national income and output assign to a good or service is its market value – the price it fetches when bought or sold. The actual usefulness of a product (its use-value) is not measured – assuming the use-value to be any different from its market value.
Three strategies have been used to obtain the market values of all the goods and services produced: the product (or output) method, the expenditure method, and the income method. The product method looks at the economy on an industry-by-industry basis. The total output of the economy is the sum of the outputs of every industry. However, since an output of one industry may be used by another industry and become part of the output of that second industry, to avoid counting the item twice we use not the value output by each industry, but the value-added; that is, the difference between the value of what it puts out and what it takes in. The total value produced by the economy is the sum of the values-added by every industry.
The expenditure method is based on the idea that all products are bought by somebody or some organisation. Therefore, we sum up the total amount of money people and organisations spend in buying things. This amount must equal the value of everything produced. Usually, expenditures by private individuals, expenditures by businesses, and expenditures by government are calculated separately and then summed to give the total expenditure. Also, a correction term must be introduced to account for imports and exports outside the boundary.
The income method works by summing the incomes of all producers within the boundary. Since what they are paid is just the market value of their product, their total income must be the total value of the product. Wages, proprietor's incomes, and corporate profits are the major subdivisions of income.
Methods of measuring national income
Output
The output approach focuses on finding the total output of a nation by directly finding the total value of all goods and services a nation produces.
Because of the complication of the multiple stages in the production of a good or service, only the final value of a good or service is included in the total output. This avoids an issue often called 'double counting', wherein the total value of a good is included several times in national output, by counting it repeatedly in several stages of production. In the example of meat production, the value of the good from the farm may be $10, then $30 from the butchers, and then $60 from the supermarket. The value that should be included in final national output should be $60, not the sum of all those numbers, $100. The values added at each stage of production over the previous stage are respectively $10, $20, and $30. Their sum gives an alternative way of calculating the value of final output.
Key formulae are:
GDP at market price = value of output in the economy - intermediate consumption
NNP at factor cost = GDP at market price - net indirect taxes - depreciation + net factor income from abroad
NDP at factor cost = compensation of employees + net interest + rental & royalty income + profit of incorporated and unincorporated NDP at factor cost
Expenditure
The expenditure approach is basically an output accounting method. It focuses on finding the total output of a nation by finding the total amount of money spent. This is acceptable to economists, because, like income, the total value of all goods is equal to the total amount of money spent on goods. The basic formula for domestic output takes all the different areas in which money is spent within the region, and then combines them to find the total output.
where:
C = Consumption (economics) (Household consumption expenditures / Personal consumption expenditures)
I = Investment (macroeconomics) / Gross private domestic investment
G = Government spending (Government consumption / Gross investment expenditures)
X = Exports (Gross exports of goods and services)
M = Imports (Gross imports of goods and services)
Note: (X - M) is often written as XN or less commonly as NX, both stand for "net exports"
The names of the measures consist of one of the words "Gross" or "Net", followed by one of the words "National" or "Domestic", followed by one of the words "Product", "Income", or "Expenditure". All of these terms can be explained separately.
- "Gross" means total product, regardless of the use to which it is subsequently put.
- "Net" means "Gross" minus the amount that must be used to offset depreciation – ie., wear-and-tear or obsolescence of the nation's fixed capital assets. "Net" gives an indication of how much product is actually available for consumption or new investment.
- "Domestic" means the boundary is geographical: we are counting all goods and services produced within the country's borders, regardless of by whom.
- "National" means the boundary is defined by citizenship (nationality). We count all goods and services produced by the nationals of the country (or businesses owned by them) regardless of where that production physically takes place.
- The output of a French-owned cotton factory in Senegal counts as part of the Domestic figures for Senegal, but the National figures of France.
- "Product", "Income", and "Expenditure" refer to the three counting methodologies explained earlier: the product, income, and expenditure approaches. However, the terms are used loosely.
- "Product" is the general term, often used when any of the three approaches was actually used. Sometimes the word "Product" is used and then some additional symbol or phrase to indicate the methodology; so, for instance, we get "Gross Domestic Product by income", "GDP (income)", "GDP(I)", and similar constructions.
- "Income" specifically means that the income approach was used.
- "Expenditure" specifically means that the expenditure approach was used.
All three counting methods should in theory give the same final figure. However, in practice, minor differences are obtained from the three methods for several reasons, including changes in inventory levels and errors in the statistics. One problem for instance is that goods in inventory have been produced (therefore included in Product), but not yet sold (therefore not yet included in Expenditure). Similar timing issues can also cause a slight discrepancy between the value of goods produced (Product) and the payments to the factors that produced the goods (Income), particularly if inputs are purchased on credit, and also because wages are collected often after a period of production.
Gross domestic product and gross national product
Gross domestic product (GDP) is defined as "the value of all final goods and services produced in a country in 1 year".[3]
Gross national product (GNP) is defined as "the market value of all goods and services produced in one year by labour and property supplied by the residents of a country."[4]
As an example, the table below shows some GDP and GNP, and NNI data for the United States:[5]
| Period ending | 2003 |
|---|---|
| Gross national product | 11,063.3 |
| Net U.S. income receipts from rest of the world | 55.2 |
| U.S. income receipts | 329.1 |
| U.S. income payments | -273.9 |
| Gross domestic product | 11,008.1 |
| Private consumption of fixed capital | 1,135.9 |
| Government consumption of fixed capital | 218.1 |
| Statistical discrepancy | 25.6 |
| National income | 9,679.7 |
- NDP: Net domestic product is defined as "gross domestic product (GDP) minus depreciation of capital",[6] similar to NNP.
- GDP per capita: Gross domestic product per capita is the mean value of the output produced per person, which is also the mean income.
National income and welfare
GDP per capita (per person) is often used as a measure of a person's welfare. Countries with higher GDP may be more likely to also score high on other measures of welfare, such as life expectancy. However, there are serious limitations to the usefulness of GDP as a measure of welfare:
- Measures of GDP typically exclude unpaid economic activity, most importantly domestic work such as childcare. This leads to distortions; for example, a paid nanny's income contributes to GDP, but an unpaid parent's time spent caring for children will not, even though they are both carrying out the same economic activity.
- GDP takes no account of the inputs used to produce the output. For example, if everyone worked for twice the number of hours, then GDP might roughly double, but this does not necessarily mean that workers are better off as they would have less leisure time. Similarly, the impact of economic activity on the environment is not measured in calculating GDP.
- Comparison of GDP from one country to another may be distorted by movements in exchange rates. Measuring national income at purchasing power parity may overcome this problem at the risk of overvaluing basic goods and services, for example subsistence farming.
- GDP does not measure factors that affect quality of life, such as the quality of the environment (as distinct from the input value) and security from crime. This leads to distortions - for example, spending on cleaning up an oil spill is included in GDP, but the negative impact of the spill on well-being (e.g. loss of clean beaches) is not measured.
- GDP is the mean (average) wealth rather than median (middle-point) wealth. Countries with a skewed income distribution may have a relatively high per-capita GDP while the majority of its citizens have a relatively low level of income, due to concentration of wealth in the hands of a small fraction of the population. See Gini coefficient.
Because of this, other measures of welfare such as the Human Development Index (HDI), Index of Sustainable Economic Welfare (ISEW), Genuine Progress Indicator (GPI), gross national happiness (GNH), and sustainable national income (SNI) are used.[7]
See also
- Capital formation
- Chained volume series
- Compensation of employees
- European System of Accounts
- Green national product
- Gross domestic product
- Gross national income
- Gross national happiness (GNH)
- Gross national income in the European Union
- Gross output
- Input–output model
- Intermediate consumption
- National accounts
- National Income and Product Accounts
- Net economic welfare
- Net output
- Penn World Table
- Savings identity
- United Nations System of National Accounts (UNSNA)
- Wealth (economics)
References
- ^ Australian Bureau of Statistics, Concepts, Sources and Methods, Chap. 4, "Economic concepts and the national accounts", "Production", "The production boundary". Retrieved November 2015.
- ^ E.g., William Petty (1665), Gregory King (1688); and, in France, Boisguillebert and Vauban. Australia's National Accounts: Concepts, Sources and Methods, 2000. Chapter 1; heading: Brief history of economic accounts (retrieved November 2009).
- ^ Australian Council of Trade Unions, APHEDA, Glossary Archived 2008-04-15 at the Wayback Machine, accessed November 2009.
- ^ United States, of the United States], p 5; retrieved November 2009.
- ^ U.S Federal Reserve, the link appears to be dead as of late 2009
- ^ "Penn State Glossary". Archived from the original on 2008-05-06. Retrieved 2008-03-11.
- ^ England, R. W. (1998). Measurement of social well-being: alternatives to gross domestic product. Ecological Economics, 25(1), 89-103.
Bibliography
- Australian Bureau of Statistics, Australian National Accounts: Concepts, Sources and Methods, 2000. This fairly large document has a wealth of information on the meaning of the national income and output measures and how they are obtained.
External links
- Historicalstatistics.org: Links to historical national accounts and statistics for different countries and regions
- World Bank's Development and Education Program Website
- Quandl - GDP by country - data available in CSV, Excel, JSON or XML formats
This page was last edited on 21 March 2024, at 10:23