:+:CHAPTER 2 Measuring National Output and National Income

posted on 15 Feb 2011 15:36 by marry-dodo


Measuring National Output and National Income


Measures of national income and output

    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), and net national income (NNI). All are especially concerned with counting the total amount of goods and services produced within some "boundary". The boundary may be defined geographically, or by citizenship; and limits on the type of activity also form part of the conceptual boundary; for instance, these measures are for the most part limited to counting goods and services that are exchanged for money: production not for sale but for barter, for one's own personal use, or for one's family, is largely left out of these measures, although some attempts are made to include some of those kinds of production by imputing monetary values to them. Mr. Ian Davies defines development as 'Simply how happy and free the citizens of that country feel.

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, 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 thcs, 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 much as possible from a basis of fact.

Market value 

    In order to count a good or service it is necessary to assign some 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

the economy on an industry-by-industry basis. The expenditure method is based on the idea that all products are bought by somebody or some organisation.

  1. The income method works by summing the incomes of all producers within the boundary.

The output approach 

    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.


    GDP (gross domestic product) at market price = value of output in an economy in a particular year - intermediate consumption

    NNP at factor cost = GDP at market price - depreciation + NFIA (net factor income from abroad) - net indirect taxes

The income approach

    The income approach equates the total output of a nation to the total factor income received by residents of the nation. The main types of factor income are:

  • Employee compensation (= wages + cost of fringe benefits, including unemployment, health, and retirement benefits).
  • Interest received net of interest paid.
  • Rental income (mainly for the use of real estate) net of expenses of landlords.
  • Royalties paid for the use of intellectual property and extractable natural resources.


    NDP at factor cost = Compensation of employees + Net interest + Rental & royalty income + Profit of incorporated and unincorporated firms + Income from self-employment.

    National income = NDP at factor cost + NFIA (net factor income from abroad) - Depreciation.

The expenditure approach

    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, 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 combines all the different areas in which money is spent within the region, and then combining them to find the total output.

GDP = C + I + G + (X - M)

C = household consumption expenditures / personal consumption expenditures
I  = gross private domestic investment
G = government consumption and gross investment expenditures
X = gross exports of goods and services
M = gross imports of goods and services

Note: (X - M) is often written as XN, which stands for "net exports"




    Gross domestic product (GDP) is defined as "the value of all final goods and services produced in a country in 1 year. Gross National Product (GNP) is defined as "the market value of all goods and services produced in one year by labor and property supplied by the residents of a country.

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 highly 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.