# Chapter 20 Measurement of National Income.docx

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11 Apr 2012
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ECON 209 Jan. 16 &18
Chapter 20 Measurement of National Income
Remember from chapter 19
\$100 ice cream = consumers buy it = firms pays inputs, owners, workers
o Product GDP
o Expenditures GDP
o Income GDP
National product = national output = national income
20.1 National Output and Value Added
Production occurs in stages most firms produce outputs that are other firm’s inputs
o Intermediate products
o Final products
Double Accounting: error that would arise in estimating the nation’s output by adding all sales
for all firms
o Intermediate products accounted for more than once
Each firm’s contribution to total output is its value added
Value added = revenues cost of intermediate goods
Value added = payments to factors of production
Summing value added avoids the problem of double counting when measuring total output
Total value added in economy is called Gross Domestic Product (GDP)
20.2 National Income Accounting: The Basics
3 methods for measuring national income
o Total value added from domestic production
o Total expenditures on domestic output
o Total income generated by domestic production
Because of circular flow of income, these three measures yield same GDP
GDP from the Expenditure Side
Consider adding up expenditures needed to purchase the final output produced in any given
year
There are 4 broad expenditure categories
o Consumption
o Investment
o Government purchases
o Net exports
Actual consumption expenditure (Ca) includes expenditure on all final goods during the year
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ECON 209 Jan. 16 &18
Actual investment expenditure (Ia) is expenditure on the production of goods not for present
consumption, including:
o Inventories
o Plant and equipment (capital stock)
o Residential housing
Net investment = gross investment depreciation
When net investment increases capital stock is growing
Ia denotes ACTUAL total investment expendition (Gross)
Actual government purchases (Ga) is the purchase of currently produced goods and services by
government
o Excluding transfer payments
Examples of government purchases
o Street cleaning, firefighting
o Expenditures to send soldiers overseas
o Civil servant to refile papers from now defunct department
Notice: Government output is valued at cost rather than at market value (what is the market
value of law courts?)
Actual net exports (NXa) is difference between exports and imports: NXa = Xa -IMa
Exports are purchases of Canadian-produced goods and services by foreigners
We subtract imports because they are not produced in Canada
GDP from Expenditure Side
Since total domestic output must equal total expenditure on domestic output, we have
o GDP = Ca + Ia + Ga + NXa
GDP from Income Side
GDP is also sum of factor incomes and other claims on the value of output
Factor incomes include
o Wages (pre-tax)
o Interest, and profits
Non-factor payments include
o Indirect taxes (net of subsidies)
o Depreciation of existing physical capital
GDP from income side is therefore equal to
o GDP = Net domestic income + indirect taxes (less subsidies) + depreciation
o Should be the same as GDP from expenditure side!
Net domestic income
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