Measuring Domestic Output and National Income

7 Key excerpts on "Measuring Domestic Output and National Income"

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  eBook - ePub

  A Primer on Macroeconomics, Second Edition, Volume I

  Elements and Principles

  • Thomas M. Beveridge(Author)
  • 2018(Publication Date)
  • Business Expert Press

    (Publisher)

  CHAPTER 3 Measuring the Macroeconomy

  Chapter Preview: This chapter deals with national income accounting

  , the method used by economists to calculate the total value of production within the macroeconomy. We will encounter many definitions. Our main measure of production and the primary focus of this chapter is

  gross domestic product

  (GDP), but other useful measures are introduced. As with any measure, though, GDP is imperfect and its limitations must be kept in mind when interpreting it. In addition, we will encounter a useful device of segmenting the economy—the

  circular flow diagram —and conclude by examining the series of economic fluctuations in GDP known as the business cycle.

    By the end of this chapter, you will be able to:

  • Define gross domestic product (GDP) and its components and use the expenditure approach to calculate GDP.
  • List those transactions that are excluded from GDP calculations and explain the reason for the exclusion.
  • Describe the circular flow diagram and explain its implication for national income accounting.
  • Outline the process through which investment and saving are made equal.
  • Distinguish the various national income accounts.
  • Outline the limitations of GDP as a measure of social well-being.
  • Distinguish between real GDP and nominal GDP and explain why real GDP is the preferred measure of production.
  • Describe the behavior of the business cycle and distinguish its four phases.
  • Describe the significance of the Conference Board’s Leading Economic Index.

   

  Every day, the government publishes a great many economic statistics. Most of these are highly technical and of interest only to professional economists and other financial analysts and to policy makers. A few numbers, however, are widely reported, closely analyzed, and hotly debated by pundits in the media. The unemployment rate and the inflation rate, for example, may be of profound political significance, and unexpected or unwelcome changes in these values can trigger substantial changes in the stock market, which may affect our 401ks or other financial assets. The economic growth rate is chief among these highly significant numbers published by the government. To determine how rapidly economic production is growing, the government must first determine the level of economic production. It does this through national income accounting—the topic of our current chapter.

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  eBook - ePub

  The Trader's Guide to the Euro Area

  Economic Indicators, the ECB and the Euro Crisis

  • David J. Powell(Author)
  • 2013(Publication Date)
  • Bloomberg Press

    (Publisher)

  Chapter 2

  Gross Domestic Product

  GDP is the most commonly cited comprehensive indicator of economic activity. It is the total market value of the goods and services produced within a nation or, in the case of the euro area, a monetary union. It can also be described as the total income of the geographic area.

  The first word of the term – gross – indicates that depreciation of equipment and factories used in the production process is excluded from the calculation.1 For example, the decline in the value of an aging computer is ignored in this measure of national output.

  The second word of the term – domestic – indicates the inclusion of all production within the region’s borders irrespective of the country of origin of the producer.2 For example, if a Mercedes is produced in a plant constructed by the German company in the U.S., the car is included in U.S. GDP and excluded from German GDP. If the car is produced in Germany and shipped to the U.S., it is included in German GDP and excluded from U.S. GDP.

  Three methods of measuring GDP exist: expenditure, output and income. In theory, all three methods should produce the same figure. In practice, measurement problems normally lead to discrepancies.

  The Expenditure Approach

  The expenditure approach is based on the final or end use of the produced goods and services. This method has historically been used most frequently by national statistical agencies. In a report from 1996 of 18 member countries, the OECD calculated that all of them reported GDP using the expenditure approach. Sixteen of them also tallied the figure using the output method and 10 used the income approach as well.3 These numbers have since risen to 18, 17 and 16, respectively.4

  The accounting identity used to calculate GDP under the expenditure approach states that GDP equals consumption plus investment plus net exports. Consumption is broken down into private consumption and government consumption and investment consists of gross fixed capital investment and the change in inventories. The sum of consumption and investment equals domestic demand. Net exports equals exports minus imports.

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  eBook - ePub

  Principles of Economics in a Nutshell

  • Lorenzo Garbo, Dorene Isenberg, Nicholas Reksten(Authors)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  size of the economy, and such measure is provided by two fundamental concepts of national income accounting you have probably already heard of a million times:

  Gross Domestic Product (GDP)

  : market value of all the final goods/services produced in a given period of time (usually the calendar year) within national borders.

  Gross National Product (GNP)

  : market value of all the final goods/services produced in a given period of time (usually the calendar year) by domestically owned factors of production.

  Note : domestic (the “D” in GD P) is linked to the concept of borders , and thus includes production by domestic and foreign firms within the borders of the country; and national (the “N” in GN P) is linked to the concept of nationality of factors of production, and thus includes production performed only by domestic firms, independently of whether such production occurs within or outside national borders.

  Two key parts of these definitions require careful examination:

  1. Final Goods and Services
  2. Market Value

  a. Final goods and services: the concept of

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  Getting the Measure of Money: A Critical Assessment of UK Monetary Indicators

  A Critical Assessment of UK Monetary Indicators

  • Anthony J. Evans(Author)
  • 2018(Publication Date)
  • London Publishing Partnership

    (Publisher)

  111

  Figure 20 Multi-factor productivity, 1997–2014

  There are three alternative approaches: output, income and expenditure. One of the main differences between them is the speed of data compilation, since the output approach provides the first estimate. Crucially, it is based on the concept of ‘value added’, which focuses on the difference between gross output and intermediate consumption at each stage of production.112 The income approach (or GDI) measures the sum of income generated by various groups of producers (for example, corporations, employees, the self-employed). The expenditure approach measures the amount of money spent across all sectors of the economy (i.e. consumption, investment, government spending and net exports). National income accounting is a relatively new phenomenon and its emergence coincided with the command economy of wartime, because ‘planning for the war effort required information on production and spending by type of product and purchaser’ (Landefield et al. 2008: 195).

  Perhaps the biggest problem with national income accounting is the difficulty in finding a common unit to provide a basis for measurement. Using the cash value of an exchange glosses over the fact that (i) people only exchange when the marginal value is greater than the marginal cost, therefore the exchange price only provides a lower bound of value creation, not an estimate; and (ii) focusing on the monetary value is only a notional measure. The sole reason for engaging in indirect exchange (i.e. using money) is to buy goods and services in the future. Thus, money is merely a ‘loose joint’ that fails to provide a common unit to compare, for example, apples and pears. The classic critique stems from the originator of national income accounting, with Simon Kuznets famously stating that ‘the welfare of a nation [can] scarcely be inferred from a measure of national income’ (Kuznets 1934: 7). But we can split these limitations into two separate critiques.

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  eBook - ePub

  Business Economics: Theory and Application

  • Neil Harris(Author)
  • 2007(Publication Date)
  • Routledge

    (Publisher)

  This measure of the value of real GDP is the income method. NI is calculated by the total of all incomes earned by the owners of the four factors of production. This will be by households as wages and salaries, from both employed and self-employed sources, and by businesses as profits. Rent from land and interest on capital are also included. Since the value of all the national product must be distributed to the owners of the inputs which have produced it, then national income must equal national product.

  National Expenditure (NE)

  The third way to measure real GDP is the expenditure method. It is estimated by the total expenditure on goods and services during the same period of time. We include expenditure by foreigners on domestically produced goods, i.e. UK exports, but deduct expenditure by our citizens on foreign produced goods, i.e. UK imports. Since the income earned by households and businesses is spent on producer and consumer goods and services either currently, or in the future as household savings or retained earnings by businesses, then national expenditure must equal national product.

  So, we find that NP is equal to NI is equal to NE.

  Problems with Valuing GDP

  First, there is the problem of how to classify output. We have already given an example of this with a computer; it may be regarded as a consumer durable if used for domestic/family purposes, or a producer good if used by the same person for work purposes. Therefore, we must look at its end use to decide what it is.

  The Product Method

  The main problem here relates to what is called double counting. When we value the output of an economy we can do so by estimating the value of the final product or good. For example, we take the total value of a car. However, it contains an engine and five wheels (counting the spare). If we count the value of the engine and wheels when produced, and also in the final value of the car we are counting them twice, and hence overestimating the output produced by the economy. This is double counting. To get round this problem we have two options.

  1  Added value at each stage. Here we value the engine and the wheels as they are produced. When we calculate the value of the car we include only the value added by the assembly of all the components, rather than the value of the components themselves. So, if the components are valued individually at £5000, and the car is valued at £8000, then the added value from assembling the car is £3000. (Value Added Tax, or VAT, is, of course, based on precisely this principle. As the name suggests, the Inland Revenue taxes the value added at each stage of the production process.) Therefore, GDP from this activity is £5000 + £3000 = £8000.

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  Foundations of Macroeconomics

  Its Theory and Policy

  • Frederick S. Brooman(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  i.e., the overall level of activity in the economy. Of course, the full set of accounts for a modern economy is more complicated than this simple example indicates, but the concepts are the same.

  In the United States, the basic source of information about the performance of the economy as a whole is the National Income and Product Accounts prepared by the Office of Business Economics of the U.S. Department of Commerce,1 and this discussion follows the U.S. statistical procedure. In place of the “producing units’ and “individuals” in the simplified economy introduced above, the Depai tissent of Commerce defines four sectors: business, households (the personal sector ), government, and the rest-of-the-world (foreign sector). Estimates of the economic activity occurring in each of these sectors are combined or “aggregated” to produce the income and product accounts for the economy as a whole.

  In the pages to follow, the concept of production and the different methods for measuring aggregate output are taken up first. Next, the estimation of expenditure is considered. As noted below, the term “aggregate expenditure” is not used in the U.S. national account summaries, but the concept is central to macroeconomics and thus is emphasized below. Finally, the estimation of national income is discussed along with other income concepts that are important in macroeconomic analysis.

  2. What is “Production”?

  The first concept to be defined is that of aggregate output. Up to this point, this has been taken to be the whole mass of commodities produced in the economy over a given period of time, added together in terms of their money values. But what exactly are “commodities,” and what is production? This seems a trivial question as long as one thinks only in terms of steel plates, loaves of bread, and other tangible objects that can be easily recognized and counted. But there are many parts of the economy whose activity is not so easy to classify. For example, can banks really be said to “produce”? If so, what are they producing? What about railroad systems, hospitals, colleges, TV stations, and barbershops? These are cases where it is obviously difficult to identify and measure the amount of “production,” yet where useful though intangible services are being rendered; that they are useful is indicated by the fact that someone is willing to pay for them to be carried on. Such payment would not be made if the various services were not wanted; accordingly, it seems reanational sonable to regard as “productive” any activity that in some way satisfies the individual or collective wants

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  World on the Move

  Consumption Patterns in a More Equal Global Economy

  • Paolo Mauro, Tomas Hellebrandt, Jan Zilinsky(Authors)
  • 2016(Publication Date)
  • Peterson Institute for International Economics

    (Publisher)

  3

  Measuring Income Distribution within Countries

  The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little.

  —Franklin D. Roosevelt

  In many countries, large and growing domestic income disparities have pushed their way to the top of the list of citizens’ concerns. To many people, the growing gap between the haves and the have-nots indicates a failure of the political and economic system to treat all citizens with equal concern and respect. The moral issue is reason enough to pay close attention to how inequality is measured, how it compares across countries, and how it evolves over time.

  There is also a practical reason to focus on the measurement of inequality. Unpacking the detail hiding behind macroeconomic measures of national well-being—focusing on people rather than countries—requires information on how living standards are distributed among a country’s citizens. Measuring inequality within countries is crucial for estimating global inequality. Moreover, estimates of domestic distributions and judgments about how they are likely to evolve in the future will influence the projected evolution of the gap between the global rich and the global poor, as well as the global consumption of various categories of goods and services.

  This chapter examines how economists measure inequality. It discusses the challenges posed by survey data and explains a novel method of reconciling surveys with national account measures of household consumption. This method results in higher estimates of inequality within countries than indicated by survey data alone. The chapter then discusses recent trends in inequality within countries and the cross-country relationship between inequality and the level of development. The results can be used to inform projections of within-country inequality into the future.

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