Chapter 20: The measurement of national income
20.1 National output and value added
The central topic of macroeconomics is the overall level of economic activityaggregate output and the income
that is generated by its production.
Production occurs in stages: some firms produce outputs that are used as inputs by other firms, and these
other firms, in turn, produce outputs that are used as inputs by yet other firms.
The error that would arise in estimating the nations output by adding all sales of all firms is called double
The problem of double counting could in principle be solved by distinguishing between teo tyes of output.
intermediate goods: all outputs that are used as inputs by other producers in a further stage of production
Final goods: goods that are not used as inputs by other firms but are produced to be sold for consumption,
investments,, government or exports during the period under consideration.
In general, it is extremely difficult if not impossible to successfully distinguish final from intermediate goods.
To avoid double counting, economist use the concept of value added: the value of a firms output minus the
value of the inputs that it purchases from other firms.
An individual firms value added is
Value added= Revenue Cost of intermediate goods
Payments made to factors of production, such as the wages paid to the workers or the prophets into the
owners, are not purchases from other firms and hence are not subtracted from the firms revenue when
computing value added. But since the firms revenue must be equal to the cost of intermediate goods plus these
payments to factors of production, it follows that value added is exactly equal to the sum of these factors
Value added= payments of factors of production
Value added is the correct measure of each firms contribution to total outputthe amount of market value
that is produced by the firm.
The firms value added is the net value of its output. It is this net value that is the firms contribution to the
nations total output, representing the firms own efforts that add to the value of what it takes in as inputs.
The sum of all values added in an economy is a measure of the economys total output.
20.2 National Income Accounting: The Basics
The measure of national income and national product that are used in Canada derive from an accounting system
called the national income and expenditure accounts (NIEA), which are produced by Statistic Canada.
Figure below shows the overall flows of national income and expenditure and also how government, the
financial system, and foreign countries enter the flows.
The key from the circular flow is as follows: The value of domestic output is equal to the value of the
expenditure on the output and it also equal to the income claims generated bvy producing that output. The circular flow income suggests three different ways the Russian National income. The first is simply to add up
the value of all goods and services produced in the economy. This requires the concept from the added. The
remaining two approaches corresponds to the two halves of the circle are flow income. One approach is to
add up the total flow of expenditure on final domestic production. All three measures yield the same total,
which is called the gross Domestic Products (GDP): the total value of goods and services produced in the
economy during a given period.
When it is calculated by adding up the total value added in the economy, it is call GDP by value added.
When it is calculated by adding of total expenditure for each of the main components of final output, the result
is called GDP on the expenditure side.
When it is calculated by adding up all the income claims generated by the act of production, it is called GDP on
the income side
The conventions of double entry bookkeeping require that all value produced must be accounted for by a claim
that someone has to that value. Therefore, the two values calculated from the income and the expenditure
sides are identical conceptually and can differ in practical measurements only because of errors of
Both calculations are of interest, however, because each gives a different and useful breakdown.
GDP from the expenditure side
GDP for a given year is calculated from the expenditure site by adding up all the expenditures needed to
purchase the final output produced in that year.
A total expenditure on final output is the sum of four broad categories of expenditure: consumption,
investments, government purchases, and net exports.
1. Consumption expenditure: household expenditure on all goods and services. Represented by the symbol C
Actual measured consumption expenditure is denoted by the symbol Ca
2. Investment expenditure: expenditure on the production of goods not for present consumption. Represented
by the symbol I. Including inventories; capital goods such as factories, machines, and warehouses; and