1. National Income Accounting
Welcome to the Session
National Income Accounting

2. National Income Accounting
National Income Accounting Defined
Circular Flow of Economic Activity
Measures of Output
GDP/GNP/NDP/NNP/NI/DI/DPI
Nominal GDP vs Real GDP
GDP Per Capita
Inflation and Price Index
Interest Rate and Real Interest Rate
Shortcomings of GDP as a Measure of Economic
Well-Being

3. Measures of Output (Production)
National Income Accounting refers to the measurement of aggregate economic activity, particularly national income and its components.
Aggregate = Total or Gross

4. MARKETS FOR GOODS AND SERVICES MARKETS FOR FACTORS OF PRODUCTION
Revenue (=GDP)
Spending (=GDP)
MARKETS FOR GOODS AND SERVICES
Good and services sold
Good and services bought
HOUSEHOLDS
FIRMS
Land, labor and capital
Inputs for Production
MARKETS FOR FACTORS OF PRODUCTION
Income (=GDP)
Wages, rent, interest and profit (=GDP)
Flow of goods & services
Flow of money: Taka
THE CIRCULAR FLOW DIAGRAM

5. Measures of Output (Production)
Gross Domestic Product is the total monetary value of final output produced within a nations borders in a given time period at current market prices
Gross Domestic Product is also referred to as
Nominal Gross Domestic Product
Current Gross Domestic Product

6. Definition of GDP The market value of good i (Vi) is equal to PiQi
GDP = sum of the market values of all final goods and services produced within the year.

7. Measuring Gross Domestic Product
The Expenditures Approach
C + I + G + (Xn) = GDP
The Flow of Income Approach
Households supply business with the factors of production in return for payment in the form of wages, profits, rent, and interest
The Value Added Approach
Adds the increase in value at each stage of the production and distribution process

8. GDP includes final goods and services only
Final goods - goods and services that are not purchased for the purpose of producing other goods and services or for resale
Eg. Rice (final) and unhusked rice (intermediate product)
Including intermediate goods and final goods will result in “double counting”.

9. Three Approaches for measuring GDP
Expenditure Approach (upper loop) – measures GDP as the sum of expenditures on final goods and services.
Income Approach (lower loop) – measures GDP as the sum of incomes of factors of production (wages, rent, interest and profit.
Value-added Approach – measures GDP as the sum of value added at each stage of production (from initial to final stage)

10. Expenditure Approach Uses the upper loop of the circular flow diagram.
Example: Suppose the economy has only one product, namely, rice.
Good
Price per unit
Q sold
Expenditure
Rice 20
1000
20,000
GDP

11. Income Approach
Uses the lower loop of the circular flow diagram: sum of payments to the various factors of production.
Suppose that in the production of rice the sales and expenses are as follows:
Sales
P 20,000
Expenses:
Wages
8000
Rent
4000
Interest
2000
Total
14,000
Profit
6,000
GDP=Sum of Payments to factors
20,000

12. Value of intermediate good
Value Added Approach
Suppose that rice is the only final product of an economy: It goes through several (3) stages of production.
Stage of Prod’n
Value of intermediate good
Value of Sales
Value-added
Farmer
12,000
Rice Miller -Milled Rice
15,000
3,000
Retailers - Rice
20,000
5,000
GDP= Total Value Added

13. Two Things to Avoid when Compiling GDP
Multiple counting
Only expenditures on final products – what consumers, businesses, and government units buy for their own use belong in GDP
Intermediate goods are not counted
Used goods are not counted
Transfer payments
Transfer payments are not payments for currently produced goods and services
When they are spent for final goods and services they will go into GDP as consumer spending

14. Various Measures of Aggregate Economic Activity
GDP (Gross Domestic Product)
- or + Net Factor Income
GNP
- Depreciation
NNP
- Indirect Business Tax
National Income
- RE + TP
Disposable Income
- Personal Tax
Disposable Personal Income
Indirect Business Taxes are primarily sales taxes and excise taxes; subsidies include payments such as those made to farmers
Earnings not received include social security taxes and corporate profits not paid out as dividends
Receipts not earned include Social Security Benefits plus other government transfer payments

15. Per Capita GDP
Per Capita GDP calculations attempt to give us additional information about how we are doing as an economy.
Per Capita GDP calculations may be a better measure of the standard of living.
For citizens living in the same country over time
For comparing standards of living between citizens of different countries

16. Per Capita Nominal GDP GDP
Per capita GDP =
Population

17. Per capita real GDP = -------------------------------- Population
To compare per capita GDP in one year with that of another year we have to correct for inflation. In other words, we really need to revise our formula
Real GDP
Per capita real GDP =
Population

18. Nominal GDP and Real GDP
Nominal GDP measures the value of output in a given period in the prices of that period, or, as it is sometimes put, in current prices.
Real GDP measures changes in physical output in the economy between different time periods by valuing all goods produced in the two periods at the same prices, or in constant prices.
Nominal GDP
Real GDP =
GDP Deflator

19. The GDP Deflator
GDP deflator is the ratio of nominal GDP in a given year to real GDP of that year.
Nominal GDP
Real GDP =
GDP Deflator

20. Nominal Vs. Real GDP Commodity 2007 NGDP 2008NGDP 2008RGDP Rice
10 at
15 at
15 at
Cloth
20 at
25 at
25 at
5000
7875
6500
GDP Deflator= NGDP/RGDP= 7875/6500=1.21

21. Inflation and Prices Inflation rate = --------------------------------
Inflation is the rate of change in prices, and the price level is the accumulation of past inflations. If Pt-1 represents the price level last year and Pt represents today’s price level, then the inflation rate over the past year can be written as
Pt - Pt-1
Inflation rate =
Pt-1

22. Shortcomings of GDP as a Measure of National Economic Well-being
Problems of GDP Measurement
Non Market Activities (Household production)
Imprecise Pricing of Govt. Activity
Illegal production
The underground economy
Use of Resources to Avoid ‘Bad’
Treatment of leisure time
Quality of Goods