L3 - Measures of National Income,Output and Expenditure

Question 1

What are the three ways to calculate GDP?

Answer 1

• Income Method
• Output Method
• Expenditure Method

Question 2

What is the Output Method?

Answer 2

Adds up all output produced by all firms in the economy

Question 3

What’s one of the Problems of the Output Method?

Answer 3

‘Double Counting’

- Outputs of some firms are inputs of others

Question 4

How do we work around the Double Counting problem

Answer 4

1st: Have to distinguish….
- Intermediate Transactions in goods and services (Outputs of some firms used as inputs by others)

• Transactions in final goods and services (Outputs not used in inputs)

This allows the problem to be solved via concept of VALUE ADDED

Question 5

What is Value Added?

Answer 5

Each firm’s value added is:
Value of its Output - Value of Inputs purchased from other firms

e.g: Steel Mill: Value of its Output - Value of Ore,Electricity etc.

Question 6

What is the Total Value of Firm’s Output?

Answer 6

Gross (No Tax added) value of its output

Question 7

What definitions do Value Added lead to?

Answer 7

• Value Added measures each firms own contribution to total output
  i. e Amount of market value produced by that firm
• Sum of All Values added to an economy is measure of country’s total output (GVA)

Question 8

What is GVA?

Answer 8

-Gross Value Added

It’s a measure of all final output produced of all final output produced by all productive activity in economy.

Question 9

How do you find out GVA from GDP?

Answer 9

• GVA (mp) = GDP (bp) + (Taxes - Subsidies)

mp = Market Prices
bp = Basic Prices (prices excluding all taxes and subsidies)

Question 10

What is the Income Method?

Answer 10

Adding up all income produced in the economy.

Question 11

What are the 3 types of Income within the income method?

Answer 11

1) Compensation of Workers: (Wages)
2) Operating Surplus (OS): (Pre-Tax profits)
3) Mixed Incomes (MI): (Income earned by self-employed)

Question 12

What’s the problem with the income method?

Answer 12

• Not all income from residents is domestic
• Earn income from overseas
• Some domestic production create factor earning for non-residents

Question 13

What is Personal Income?

Answer 13

Income paid to individuals before tax.

Question 14

What is Personal Disposable Income (PDI)?

Answer 14

Personal Income minus Personal Income taxes and National Income Contributions

Question 15

What is PDI the same as?

Answer 15

Same as GNI

Question 16

How do you calculate GNI?

Answer 16

GDP + Transfer Earnings

Question 17

What is the Expenditure Method?

Answer 17

GDP obtained by measuring expenditure on output of firms.

All value produced must be accounted for by claim someone has to that value.

Question 18

What is Consumption? (Ca)

Answer 18

Done by households (or non-profit organisations) and Govt and involves spending on final goods and services produced during the year.

Question 19

What are the 3 classes of goods?

Answer 19

• Services (Haircuts, Concerts etc.)
• Non-Durable Goods (flowers)
• Durable Goods (Computers,Cars etc.)

When all three grouped together called Consumption.

Question 20

What are the 2 main categories of Govt. spending (Ga)?

Answer 20

1. Individual Final Govt consumption: Money spent on services consumed by individuals (Health,Education)
2. Collective Govt. Final Consumption: Public Goods where spending cannot be attributed to individuals (Street Lighting,Nation Defence)

Question 21

What is Investment spending defined as?

Answer 21

Spending on the production of goods not for present consumption, but for future use.

These goods are called capital or investment goods

Question 22

What are the 3 categories of Investment Spending?

Answer 22

1. Fixed Capital Formation:
   Production of New Capital Goods
2. Change in Inventories:
   Stocks of Inputs and Unsold outputs held by firms
3. Net Acquisition of Valuables:
   Some productive activity creates goods that are neither consumed nor used in the production process. e.g. jewellery, art

Combining these three categories gives Actual Total Investment (Ia). Called Gross Investment

Question 23

How do you calculate Net Investment?

Answer 23

Gross Investment (Ia) - Replacement Investment (Depreciation) (Dep)

Question 24

What are Net Exports?

Answer 24

Xa - IMa

Question 25

What are Exports?

Answer 25

goods and services produced by UK resident firms and sold abroad. Because the buyers are foreign, these expenditures are not included in Ca, Ia or Ga.

Denoted as Xa

Question 26

What are Imports?

Answer 26

consumption and investment goods purchased by UK residents but produced overseas. Imports are not part of domestic production and so must NOT be included as part of domestic production (GDP).

Denoted as IMa

Question 27

Thus, what is the total formula for GDP? (Usual Stuff)

Answer 27

GDP (mp) = Ca+ Ia + Ga + NXa

Says GDP spending is identically equal to the sum of private consumption, investment, government consumption and net export spending on currently produced goods and services.

Question 28

How do you calculate GDP from GVA?

Answer 28

GVA + (T-S) = GDP

Question 29

How do you calculate GNP?

Answer 29

GDP (mp) + NIA

Where NIA is equal to Net Income Abroad

Question 30

How do you calculate NNI?

Answer 30

GNP - Depreciation

Where NNI is equal to Net National Income