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 countrys 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 countrys citizen
a. Compensation of employees includes wages,
salaries and various supplements
b. Proprietors 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

assets 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
nations 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

GDP in Yr1
in Yr1
Prices

GDP in Yr2
in Yr1
Prices

GDP in Yr 1
in Yr 2
Prices

GDP in Yr 2
in Yr 2
Prices

Production

Price/ Unit

Yr 1
Q1

Yr 2
Q2

Yr 1
P1

Yr 2
P2

Good X

11

.50

.40

3.00

5.50

2.40

4.40

Good Y

.30

1.00

2.10

1.20

7.00

4.00

Good Z

10

12

.70

.90

7.00

8.40

9.00

10.80

15.10
Real GDP
in Yr2

18.40
Real GDP
in Yr1

19.20
nominal
GDP
in Yr 2

P1 x Q1

12.10
nominal
GDP
in Yr 1

P1 x Q2

P2 x Q1

P2 x
Q2

REAL GDP: Percentage Change

(19.20-12.10)/12.10 x 100 = .587 x 100 =

58.7 percent

PER CAPITA GDP/GNP

A countrys 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