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Chapter 6. Measuring Total Output and Income. GDP and GNP. Gross national product (GNP) is the total value of final goods and services produced during a particular period P. with factors of. production owned by the residents of a. particular country. GNP. =. GDP. -.
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Chapter 6 Measuring Total Output and Income Hossain: MSMC
GDP and GNP • Gross national product (GNP) is the total value of final goods and services produced during a particular period • P with factors of production owned by the residents of a particular country GNP = GDP - Income earned by Foreign Factors + Income earned by Domestic Factors Net Factor Earning from abroad = GDP +
Expenditure Approach to GDP • Recall, GDP is the market value of outputs (goods and services) produced in an economy (within geographic boundary) in a particular time period (typically a year) • To measure this, BEA uses a shortcut. It counts expenditures of all major spenders in the economy on • Newly produced final goods and services • That are produced in that economy and in that year • We called this Expenditure Approach to GDP
Expenditure Approach to GDP • This approach assumes that Expenditure automatically captures the market value • In the Expenditure Approach major spenders are grouped under four categories. Do you remember them? • Consumers or Consumption (C) • Businesses or Investment (I) • Government or Government’s Purchase (G) • ROW or Net Export (Xn) • Therefore, under Expenditure Approach, • GDP = C + I + G + Xn
Income Approach to GDP • Recall, someone’s Expenditure must be someone else’s Income • Therefore, if Expenditure captures total market value, Income should also capture total market value in the economy • Under Income Approach, we will count the incomes of all major income earners in the economy • We will use a new identity called GDI or Gross Domestic Income
Income Approach to GDP • GDI is the total income generated in an economy by the production of final goods and services during a particular time period. • The major income earners include • Employee Compensation • Profit • Rental Income • Net Interest • Depreciation • Indirect Taxes
GDI to GDP (2008) GDI Components GDP Components Employee Compensation:8,089.8 Consumption (C): 10,169.5 Profit: 2,226.7 Investment (I): 2,013.6 Rental Income: 63.1 Government Expenditure and Investment (G): 2,943.9 Net Interest: 903.8 Depreciation: 1,899.7 Net Export (Xn): 706.5 Indirect Taxes: 1,076.9 Total GDI: 14,260.0 Total GDP: 14,420.5 Statistical Discrepancy: 160.5 Total GDP: 14,420.5
GDP to DPI Start with GDP + Net Factor Earning from Abroad = GNP Depreciation Net National Product (NNP) Statistical Discrepancy National Income (NI) Income Earned, But Not Received Personal Income Personal Income Taxes Disposable Personal Income (DPI)
Income Earned, But Not Received • Taxes on production and imports • Social security payroll taxes • Corporate profit taxes • Retained earnings • Transfer payments
Measurement Problems in Real GDP • There are two measurement problems, other than those associated with adjusting for price level changes, in using real GDP to assess domestic economic performance. • Revisions • The Service Sector
Conceptual Problems with Real GDP • A second set of limitation or real GDP stems from problems inherent in the indicator itself. • Household Production • Underground and Illegal Production • Leisure • The GDP Accounts Ignore “Bads” (e.g. crime spending, negative externalities, environmental pollution) • More GDP cannot necessarily be equated with more human happiness.
International Comparisons of Real GDP and GNP • Per capita real GNP or GDP is a country’s real GNP or GDP divided by its population. • Comparing one country’s output to another presents additional challenges. • When the data suggest huge disparities in levels of GNP per capita, we do observe real differences in living standards.