L3 - Measures of National Income,Output and Expenditure Flashcards
What are the three ways to calculate GDP?
- Income Method
- Output Method
- Expenditure Method
What is the Output Method?
Adds up all output produced by all firms in the economy
What’s one of the Problems of the Output Method?
‘Double Counting’
- Outputs of some firms are inputs of others
How do we work around the Double Counting problem
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
What is Value Added?
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.
What is the Total Value of Firm’s Output?
Gross (No Tax added) value of its output
What definitions do Value Added lead to?
- 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)
What is GVA?
-Gross Value Added
It’s a measure of all final output produced of all final output produced by all productive activity in economy.
How do you find out GVA from GDP?
- GVA (mp) = GDP (bp) + (Taxes - Subsidies)
mp = Market Prices bp = Basic Prices (prices excluding all taxes and subsidies)
What is the Income Method?
Adding up all income produced in the economy.
What are the 3 types of Income within the income method?
1) Compensation of Workers: (Wages)
2) Operating Surplus (OS): (Pre-Tax profits)
3) Mixed Incomes (MI): (Income earned by self-employed)
What’s the problem with the income method?
- Not all income from residents is domestic
- Earn income from overseas
- Some domestic production create factor earning for non-residents
What is Personal Income?
Income paid to individuals before tax.
What is Personal Disposable Income (PDI)?
Personal Income minus Personal Income taxes and National Income Contributions
What is PDI the same as?
Same as GNI
How do you calculate GNI?
GDP + Transfer Earnings
What is the Expenditure Method?
GDP obtained by measuring expenditure on output of firms.
All value produced must be accounted for by claim someone has to that value.
What is Consumption? (Ca)
Done by households (or non-profit organisations) and Govt and involves spending on final goods and services produced during the year.
What are the 3 classes of goods?
- Services (Haircuts, Concerts etc.)
- Non-Durable Goods (flowers)
- Durable Goods (Computers,Cars etc.)
When all three grouped together called Consumption.
What are the 2 main categories of Govt. spending (Ga)?
- Individual Final Govt consumption: Money spent on services consumed by individuals (Health,Education)
- Collective Govt. Final Consumption: Public Goods where spending cannot be attributed to individuals (Street Lighting,Nation Defence)
What is Investment spending defined as?
Spending on the production of goods not for present consumption, but for future use.
These goods are called capital or investment goods
What are the 3 categories of Investment Spending?
- Fixed Capital Formation:
Production of New Capital Goods - Change in Inventories:
Stocks of Inputs and Unsold outputs held by firms - 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
How do you calculate Net Investment?
Gross Investment (Ia) - Replacement Investment (Depreciation) (Dep)
What are Net Exports?
Xa - IMa
What are Exports?
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
What are Imports?
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
Thus, what is the total formula for GDP? (Usual Stuff)
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.
How do you calculate GDP from GVA?
GVA + (T-S) = GDP
How do you calculate GNP?
GDP (mp) + NIA
Where NIA is equal to Net Income Abroad
How do you calculate NNI?
GNP - Depreciation
Where NNI is equal to Net National Income
