MEASURING NATIONAL OUTPUT AND NATIONAL INCOME

GROSS DOMESTIC PRODUCT (GDP) versus GROSS NATIONAL PRODUCT (GNP) 1.GDP It is the market value for all final goods and services produced within a given period of time by factors of production located within the country. a. GDP is concerned only with new and current production. b. GDP also excludes output produced abroad by domestically owned factors of production. c. Intermediate goods (those goods that are produced by one firm for use in further processing by another firm) are not counted in the GDP.

2. GNP Is the total market value of all final goods and services produced within a given period by factors of production owned by a country’s citizens regardless of where the output is produced.

CALCULATING GROSS DOMESTIC PRODUCT (GDP) 1.EXPENDITURE APPROACH GDP = C + I + G + (EX – IM) where: C = Personal Consumption expenditures – household spending on consumer goods I = Gross Domestic Investment – spending by firms and households on new capital, plant, equipment, inventory and new residential structures G = government consumption and investment EX – IM = net exports – net spending by rest of the world or exports minus imports

C = PERSONAL CONSUMER EXPENDITURES CATEGORIES 1. Durable goods – goods that last a relatively long time such as cars and household appliances 2. Nondurable goods – goods that are used up fairly quickly such as food and clothing 3. Services – things we buy that do not involve the production of physical things such as legal and medical services and education

I = GROSS PRIVATE DOMESTIC INVESTMENT TYPES OF INVESTMENT 1. Gross Private Investment – total investment in capital, it is the purchase of new housing, equipment and plants by private sector 2. Nonresidential Investment – expenditures by firms for machines, tools, plants and so on 3. Residential Investment – expenditures by firms and on new houses and buildings 4. Change in Business Inventories – amount by which firms inventories change during a period, inventories are goods that firms produce now but intend to sell later

GOVERNMENT CONSUMPTION AND INVESTMENT refers to federal, state and local governments for final goods and services. NET EXPORTS (EX – IM) is the difference between exports and imports, figure can be negative or positive

2. INCOME APPROACH GDP = National Income + Depreciation + (indirect taxes – Subsidies) + Net factor payments to the rest of the world

A. NATIONAL INCOME Is the total income earned by the factors of production owned by country’s citizen a. Compensation of employees – includes wages, salaries and various supplements b. Proprietor’s income – income of unincorporated businesses c. Corporate profits – income of corporate businesses d. Net interest – interest paid by business e. Rental income – income received by property owners in from of rent

B. DEPRECIATION is the amount by which asset’s value falls in a given period C. INDIRECT TAXES are taxes like sales tax, customs duties and license fee D. SUBSIDIES are payments made by the government for which it receives no goods or services in return E. NET FACTOR PAYMENTS TO THE REST OF THE WORLD payments of factor income to the rest of the world minus receipt of factor income from the rest of the world

GNP AND OTHER NATIONAL INCOME ACCOUNTS NET NATIONAL PRODUCT Gross national product minus depreciation; a nation’s total product minus what is required to maintain the value of its capital stock PERSONAL INCOME The income received by households after paying social insurance taxes but before paying personal income taxes.

DISPOSABLE PERSONAL INCOME Personal income minus personal income taxes PERSONAL SAVING The amount of disposable income that is left after total personal spending in a given period PERSONAL SAVING RATE Percentage of disposable personal income that is saved. If personal saving rate is low households are spending a large amount relative to their incomes, if it is high households are spending cautiously.

GDP, GNP, NNP, National Income, Personal Income and Disposable Income GDP Plus: receipts of factor income from the rest of the world Less: payments of factor income to the rest of the world Equals: GNP Less: depreciation Equals: NNP Less: indirect taxes minus subsidies plus other Equals: National Income Less: corporate profits minus dividends Less: social insurance payments Plus: personal interest income received from government and consumers Plus: transfer payments to persons Equals: personal income Less: personal taxes Equals: disposable personal income

Other Accounts: DEPRECIATION – normal wear and tear of a specific product by reason of time INDIRECT TAXES- tax imposed on goods before they reach the customer who ultimately pays for them not as tax but as part of the purchase price like sales tax SUBSIDIES- payments made by the government for which it receives no goods or services in return

TRANSFER PAYMENTS – payments made by the government to people who do not supply goods or services in exchange like welfare payments SOCIAL INSURANCE PAYMENTS – taxes levied at a flat rate on wages and salaries, proceeds support government-administered social benefit programs including SSS and unemployment benefits system

NOMINAL VERSUS REAL GROSS DOMESTIC PRODUCT 1.NOMINAL GDP GDP measured in current price or pesos – all components of GDP valued at their current prices. Example: Burger Year 1 – (Price = 20pesos, Quantity = 100pcs) Year2 – (Price = 30pesos, Quantity = 100pcs)

2. REAL GDP Nominal GDP adjusted for price changes is called Real GDP. All the main issues in computing real GDP can be discussed using the simple three-good economy for 2 years provided by the table below.

A THREE GOOD ECONOMY Production Yr 1 Yr 2 Q1 Q2 Price/ Unit Yr 1 Yr 2 P1 P2 GDP in Yr1 in Yr1 Prices P1 x Q1 GDP in Yr2 in Yr1 Prices P1 x Q2 GDP in Yr 1 in Yr 2 Prices P2 x Q1 GDP in Yr 2 in Yr 2 Prices P2 x Q2 Good X Good Y Good Z nominal GDP in Yr Real GDP in Yr Real GDP in Yr nominal GDP in Yr 2

REAL GDP: Percentage Change ( )/12.10 x 100 =.587 x 100 = 58.7 percent

PER CAPITA GDP/GNP A country’s GDP or GNP divided by its population. It is a better measure of well-being for the average person than total GDP or GNP. NOTES: Switzerland has the highest per capita GNP of $40,630, followed by Japan $39,640 and Norway $31,250. Philippines has a per capita GDP/GNP of $1,050. Mozambique has a per capita GDP/GNP of $80.

LIMITATIONS OF THE GDP CONCEPT 1.GDP is not always reflective of increases in social welfare Example: a. Decrease in crime rate – not considered as increase in output and is not reflected in GDP b. Increase in leisure – may be associated with decrease in GDP (less time is spent on producing output)

2. GDP seldom reflects losses or social ills. GDP accounting rules DO NOT ADJUST for production that POLLUTES the environment. Thus: THE MORE PRODUCTION there is, the LARGER the GDP, regardless of how much pollution results in the process.

ASSIGNMENT:  Group by 5  Pick two countries (one first world (ex: USA) and another third world or developing country (ex: Philippines)  Look into their GDP and GNP for the past 10 years (cite sources)  Use current and constant figures  Give one paragraph analysis of their trends and identify factors contributing to their output growth.

3. GDP does not measure the effects of redistributive policies It does not distinguish between in which most output goes to a few people and the case in which output is evenly divided among all people. 4. GDP is also neutral about the kinds of goods an economy produces