Measures of national income and output
Encyclopedia
A variety of measures of national income and output are used in economics
to estimate total economic activity in a country or region, including gross domestic product
(GDP), gross national product (GNP
), and net national income
(NNI). All are specially concerned with counting the total amount of goods and services produced within some "boundary". The boundary is usually defined by geography or citizenship, and may also restrict the goods and services that are counted. For instance, some measures count only goods and services that are exchanged for money, excluding bartered goods, while other measures may attempt to include bartered goods by imputing monetary values to them.
Although some attempts were made to estimate national incomes as long ago as the 17th century,
the systematic keeping of national accounts
, of which these figures are a part, only began in the 1930s, in the United States and some European countries. The impetus for that major statistical effort was the Great Depression
and the rise of Keynesian economics
, which prescribed a greater role for the government in managing an economy, and made it necessary for governments to obtain accurate information so that their interventions into the economy could proceed as much as possible from a basis of fact.
Three strategies have been used to obtain the market values of all the goods and services produced: the product (or output) method, the expenditure method, and the income method. The product method looks at the economy on an industry-by-industry basis. The total output of the economy is the sum of the outputs of every industry. However, since an output of one industry may be used by another industry and become part of the output of that second industry, to avoid counting the item twice we use not the value output by each industry, but the value-added; that is, the difference between the value of what it puts out and what it takes in. The total value produced by the economy is the sum of the values-added by every industry.
The expenditure method is based on the idea that all products are bought by somebody or some organisation. Therefore we sum up the total amount of money people and organisations spend in buying things. This amount must equal the value of everything produced. Usually expenditures by private individuals, expenditures by businesses, and expenditures by government are calculated separately and then summed to give the total expenditure. Also, a correction term must be introduced to account for imports and exports outside the boundary.
The income method works by summing the incomes of all producers within the boundary. Since what they are paid is just the market value of their product, their total income must be the total value of the product. Wages, proprieter's incomes, and corporate profits are the major subdivisions of income.
Because of the complication of the multiple stages in the production of a good or service, only the final value of a good or service is included in total output. This avoids an issue often called 'double counting
', wherein the total value of a good is included several times in national output, by counting it repeatedly in several stages of production. In the example of meat production, the value of the good from the farm may be $10, then $30 from the butchers, and then $60 from the supermarket. The value that should be included in final national output should be $60, not the sum of all those numbers, $100. The values added
at each stage of production over the previous stage are respectively $10, $20, and $30. Their sum gives an alternative way of calculating the value of final output.
Formulae:
GDP(gross domestic product) at market price = value of output in an economy in a particular year - intermediate consumption
NNP at factor cost = GDP at market price - depreciation + NFIA (net factor income from abroad) - net indirect taxes
All remaining value added generated by firms is called the residual or profit
. If a firm has stockholders, they own the residual, some of which they receive as dividend
s. Profit includes the income of the entrepreneur
- the businessman who combines factor inputs to produce a good or service.
Formulae:
NDP at factor cost = Compensation of employees + Net interest + Rental & royalty income + Profit of incorporated and unincorporated
NDP at factor cost
Where:
C = household consumption expenditures / personal consumption expenditures
I = gross private domestic investment
G = government consumption and gross investment expenditures
X = gross exports of goods and services
M = gross imports of goods and services
Note: (X - M) is often written as XN, which stands for "net exports"
Note that all three counting methods should in theory give the same final figure.
However, in practice minor differences are obtained from the three methods for several reasons, including changes in inventory levels and errors in the statistics. One problem for instance is that goods in inventory have been produced (therefore included in Product), but not yet sold (therefore not yet included in Expenditure). Similar timing issues can also cause a slight discrepancy between the value of goods produced (Product) and the payments to the factors that produced the goods (Income), particularly if inputs are purchased on credit, and also because wages are collected often after a period of production.
Gross National Product (GNP) is defined as "the market value of all goods and services produced in one year by labour and property supplied by the residents of a country."
As an example, the table below shows some GDP and GNP, and NNI data for the United States:
. Countries with higher GDP may be more likely to also score highly on other measures of welfare, such as life expectancy
. However, there are serious limitations to the usefulness of GDP as a measure of welfare:
Because of this, other measures of welfare such as the Human Development Index
(HDI), Index of Sustainable Economic Welfare
(ISEW), Genuine Progress Indicator
(GPI), gross national happiness
(GNH), and sustainable national income
(SNI) are used.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
to estimate total economic activity in a country or region, including gross domestic product
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
(GDP), gross national product (GNP
GNP
Gross National Product is the market value of all products and services produced in one year by labor and property supplied by the residents of a country...
), and net national income
Net National Income
Net national income is an economics term used in national income accounting. It can be defined as the net national product minus indirect taxes...
(NNI). All are specially concerned with counting the total amount of goods and services produced within some "boundary". The boundary is usually defined by geography or citizenship, and may also restrict the goods and services that are counted. For instance, some measures count only goods and services that are exchanged for money, excluding bartered goods, while other measures may attempt to include bartered goods by imputing monetary values to them.
National accounts
Arriving at a figure for the total production of goods and services in a large region like a country entails a large amount of data-collection and calculation.Although some attempts were made to estimate national incomes as long ago as the 17th century,
the systematic keeping of national accounts
National accounts
National accounts or national account systems are the implementation of complete and consistent accounting techniques for measuring the economic activity of a nation. These include detailed underlying measures that rely on double-entry accounting...
, of which these figures are a part, only began in the 1930s, in the United States and some European countries. The impetus for that major statistical effort was the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
and the rise of Keynesian economics
Keynesian economics
Keynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...
, which prescribed a greater role for the government in managing an economy, and made it necessary for governments to obtain accurate information so that their interventions into the economy could proceed as much as possible from a basis of fact.
Market value
In order to count a good or service it is necessary to assign some value to it. The value that the measures of national income and output assign to a good or service is its market value – the price it fetches when bought or sold. The actual usefulness of a product (its use-value) is not measured – assuming the use-value to be any different from its market value.Three strategies have been used to obtain the market values of all the goods and services produced: the product (or output) method, the expenditure method, and the income method. The product method looks at the economy on an industry-by-industry basis. The total output of the economy is the sum of the outputs of every industry. However, since an output of one industry may be used by another industry and become part of the output of that second industry, to avoid counting the item twice we use not the value output by each industry, but the value-added; that is, the difference between the value of what it puts out and what it takes in. The total value produced by the economy is the sum of the values-added by every industry.
The expenditure method is based on the idea that all products are bought by somebody or some organisation. Therefore we sum up the total amount of money people and organisations spend in buying things. This amount must equal the value of everything produced. Usually expenditures by private individuals, expenditures by businesses, and expenditures by government are calculated separately and then summed to give the total expenditure. Also, a correction term must be introduced to account for imports and exports outside the boundary.
The income method works by summing the incomes of all producers within the boundary. Since what they are paid is just the market value of their product, their total income must be the total value of the product. Wages, proprieter's incomes, and corporate profits are the major subdivisions of income.
The output approach
The output approach focuses on finding the total output of a nation by directly finding the total value of all goods and services a nation produces.Because of the complication of the multiple stages in the production of a good or service, only the final value of a good or service is included in total output. This avoids an issue often called 'double counting
Double counting (accounting)
Double counting in accounting is an error whereby a transaction is counted more than once, for whatever reason. But in social accounting it also refers to a conceptual problem in social accounting practice, when the attempt is made to estimate the new value added by Gross Output, or the value of...
', wherein the total value of a good is included several times in national output, by counting it repeatedly in several stages of production. In the example of meat production, the value of the good from the farm may be $10, then $30 from the butchers, and then $60 from the supermarket. The value that should be included in final national output should be $60, not the sum of all those numbers, $100. The values added
Value added
In economics, the difference between the sale price and the production cost of a product is the value added per unit. Summing value added per unit over all units sold is total value added. Total value added is equivalent to Revenue less Outside Purchases...
at each stage of production over the previous stage are respectively $10, $20, and $30. Their sum gives an alternative way of calculating the value of final output.
Formulae:
GDP(gross domestic product) at market price = value of output in an economy in a particular year - intermediate consumption
NNP at factor cost = GDP at market price - depreciation + NFIA (net factor income from abroad) - net indirect taxes
The income approach
The income approach equates the total output of a nation to the total factor income received by residents or citizens of the nation. The main types of factor income are:- Employee compensation (= wages + cost of fringe benefits, including unemployment, health, and retirement benefits);
- Interest received net of interest paid;
- Rental income (mainly for the use of real estate) net of expenses of landlords;
- Royalties paid for the use of intellectual property and extractable natural resources.
All remaining value added generated by firms is called the residual or profit
Profit (accounting)
In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...
. If a firm has stockholders, they own the residual, some of which they receive as dividend
Dividend
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
s. Profit includes the income of the entrepreneur
Entrepreneur
An entrepreneur is an owner or manager of a business enterprise who makes money through risk and initiative.The term was originally a loanword from French and was first defined by the Irish-French economist Richard Cantillon. Entrepreneur in English is a term applied to a person who is willing to...
- the businessman who combines factor inputs to produce a good or service.
Formulae:
NDP at factor cost = Compensation of employees + Net interest + Rental & royalty income + Profit of incorporated and unincorporated
NDP at factor cost
The expenditure approach
The expenditure approach is basically an output accounting method. It focuses on finding the total output of a nation by finding the total amount of money spent. This is acceptable, because like income, the total value of all goods is equal to the total amount of money spent on goods. The basic formula for domestic output takes all the different areas in which money is spent within the region, and then combines them to find the total output.
Where:
C = household consumption expenditures / personal consumption expenditures
I = gross private domestic investment
Gross private domestic investment
Gross private domestic investment is the measure of investment used to compute GDP. This is an important component of GDP because it provides an indicator of the future productive capacity of the economy. It includes replacement purchases plus net additions to capital assets plus investments in...
G = government consumption and gross investment expenditures
X = gross exports of goods and services
M = gross imports of goods and services
Note: (X - M) is often written as XN, which stands for "net exports"
Definitions
The names of the measures consist of one of the words "Gross" or "Net", followed by one of the words "National" or "Domestic", followed by one of the words "Product", "Income", or "Expenditure". All of these terms can be explained separately.- "Gross" means total product, regardless of the use to which it is subsequently put.
- "Net" means "Gross" minus the amount that must be used to offset depreciation – ie., wear-and-tear or obsolescence of the nation's fixed capital assets. "Net" gives an indication of how much product is actually available for consumption or new investment.
- "Domestic" means the boundary is geographical: we are counting all goods and services produced within the country's borders, regardless of by whom.
- "National" means the boundary is defined by citizenship (nationality). We count all goods and services produced by the nationals of the country (or businesses owned by them) regardless of where that production physically takes place.
- The output of a French-owned cotton factory in Senegal counts as part of the Domestic figures for Senegal, but the National figures of France.
- "Product", "Income", and "Expenditure" refer to the three counting methodologies explained earlier: the product, income, and expenditure approaches. However the terms are used loosely.
- "Product" is the general term, often used when any of the three approaches was actually used. Sometimes the word "Product" is used and then some additional symbol or phrase to indicate the methodology; so, for instance, we get "Gross Domestic Product by income", "GDP (income)", "GDP(I)", and similar constructions.
- "Income" specifically means that the income approach was used.
- "Expenditure" specifically means that the expenditure approach was used.
Note that all three counting methods should in theory give the same final figure.
However, in practice minor differences are obtained from the three methods for several reasons, including changes in inventory levels and errors in the statistics. One problem for instance is that goods in inventory have been produced (therefore included in Product), but not yet sold (therefore not yet included in Expenditure). Similar timing issues can also cause a slight discrepancy between the value of goods produced (Product) and the payments to the factors that produced the goods (Income), particularly if inputs are purchased on credit, and also because wages are collected often after a period of production.
GDP and GNP
Gross domestic product (GDP) is defined as "the value of all final goods and services produced in a country in 1 year".Gross National Product (GNP) is defined as "the market value of all goods and services produced in one year by labour and property supplied by the residents of a country."
As an example, the table below shows some GDP and GNP, and NNI data for the United States:
| Period Ending | 2003 |
|---|---|
| Gross national product | 11,063.3 |
| Net U.S. income receipts from rest of the world | 55.2 |
| U.S. income receipts | 329.1 |
| U.S. income payments | -273.9 |
| Gross domestic product | 11,008.1 |
| Private consumption of fixed capital | 1,135.9 |
| Government consumption of fixed capital | 218.1 |
| Statistical discrepancy | 25.6 |
| National Income | 9,679.7 |
- NDP: Net domestic product is defined as "gross domestic product (GDP) minus depreciation of capital", similar to NNP.
- GDP per capita: Gross domestic product per capita is the mean value of the output produced per person, which is also the mean income.
National income and welfare
GDP per capita (per person) is often used as a measure of a person's welfareQuality of life
The term quality of life is used to evaluate the general well-being of individuals and societies. The term is used in a wide range of contexts, including the fields of international development, healthcare, and politics. Quality of life should not be confused with the concept of standard of...
. Countries with higher GDP may be more likely to also score highly on other measures of welfare, such as life expectancy
Life expectancy
Life expectancy is the expected number of years of life remaining at a given age. It is denoted by ex, which means the average number of subsequent years of life for someone now aged x, according to a particular mortality experience...
. However, there are serious limitations to the usefulness of GDP as a measure of welfare:
- Measures of GDP typically exclude unpaid economic activity, most importantly domestic work such as childcare. This leads to distortions; for example, a paid nanny's income contributes to GDP, but an unpaid parent's time spent caring for children will not, even though they are both carrying out the same economic activity.
- GDP takes no account of the inputs used to produce the output. For example, if everyone worked for twice the number of hours, then GDP might roughly double, but this does not necessarily mean that workers are better off as they would have less leisure time. Similarly, the impact of economic activity on the environment is not measured in calculating GDP.
- Comparison of GDP from one country to another may be distorted by movements in exchange rates. Measuring national income at purchasing power parityPurchasing power parityIn economics, purchasing power parity is a condition between countries where an amount of money has the same purchasing power in different countries. The prices of the goods between the countries would only reflect the exchange rates...
may overcome this problem at the risk of overvaluing basic goods and services, for example subsistence farming. - GDP does not measure factors that affect quality of life, such as the quality of the environment (as distinct from the input value) and security from crime. This leads to distortions - for example, spending on cleaning up an oil spill is included in GDP, but the negative impact of the spill on well-being (e.g. loss of clean beaches) is not measured.
- GDP is the mean (average) wealth rather than median (middle-point) wealth. Countries with a skewed income distribution may have a relatively high per-capita GDP while the majority of its citizens have a relatively low level of income, due to concentration of wealth in the hands of a small fraction of the population. See Gini coefficientGini coefficientThe Gini coefficient is a measure of statistical dispersion developed by the Italian statistician and sociologist Corrado Gini and published in his 1912 paper "Variability and Mutability" ....
.
Because of this, other measures of welfare such as the Human Development Index
Human Development Index
The Human Development Index is a composite statistic used to rank countries by level of "human development" and separate "very high human development", "high human development", "medium human development", and "low human development" countries...
(HDI), Index of Sustainable Economic Welfare
Index of Sustainable Economic Welfare
The Index of Sustainable Economic Welfare is an economic indicator intended to replace the gross domestic product.Rather than simply adding together all expenditures like the gross domestic product, consumer expenditure is balanced by such factors as income distribution and cost associated with...
(ISEW), Genuine Progress Indicator
Genuine Progress Indicator
The genuine progress indicator is an alternative metric system which is an addition to the national system of accounts that has been suggested to replace, or supplement, gross domestic product as a metric of economic growth...
(GPI), gross national happiness
Gross national happiness
The assessment of gross national happiness was designed in an attempt to define an indicator that measures quality of life or social progress in more holistic and psychological terms than only the economic indicator of gross domestic product .-Origins and meaning:The term...
(GNH), and sustainable national income
Sustainable National Income
Sustainable national income, is an indicator for environmental sustainability.The national income of a country is an estimate of the yearly production of goods and services. The loss of possible uses of the non-human made physical surroundings, named environmental functions, on which humanity is...
(SNI) are used.
Difficulties in Measurement of National Income
There are many difficulties when it comes to measuring national income, however these can be grouped into conceptual difficulties and practical difficulties.Conceptual Difficulties
- Inclusion of Services: There has been some debate about whether to include services in the counting of national income, and if it counts as output. Marxian economists are of the belief that services should be excluded from national income, most other economists though are in agreement that services should be included.
- Identifying Intermediate Goods: The basic concept of national income is to only include final goods, intermediate goods are never included, but in reality it is very hard to draw a clear cut line as to what intermediate goods are. Many goods can be justified as intermediate as well as final goods depending on their use.
- Identifying Factor Incomes: Separating factor incomes and non factor incomes is also a huge problem. Factor incomes are those paid in exchange for factor services like wages, rent, interest etc. Non factor are sale of shares selling old cars property etc., but these are made to look like factor incomes and hence are mistakenly included in national income.
- Services of Housewives and other similar services: National income includes those goods and services for which payment has been made, but there are scores of jobs, for which money as such is not paid, also there are jobs which people do themselves like maintain the gardens etc., so if they hired someone else to do this for them , then national income would increase, the argument then is why are these acts not accounted for now, but the bigger issue would be how to keep a track of these activities and include the in national income.
Practical Difficulties
- Unreported Illegal Income: Sometimes, people don't provide all the right information about their incomes to evade taxes so this obviously causes disparities in the counting of national income.
- Non Monetized Sector: In many developing nations, there is this issue that goods and services are traded through barter, i.e. without any money. Such goods and services should be included in accounting of national income, but the absence of data makes this inclusion very difficult.
See also
- Chained volume seriesChained volume seriesA Chained volume series is a series of economic data from successive years, put in real terms by computing the production volume for each year in the prices of the preceding year, and then 'chain linking' the data together to obtain a time-series of production figures from which the effects...
- Compensation of employeesCompensation of employeesCompensation of employees is a statistical term used in national accounts, balance of payments statistics and sometimes in corporate accounts as well...
- European System of AccountsEuropean System of AccountsThe European System of Accounts is the system of national accounts and regional accounts used by members of the European Union. It was most recently updated in 1995 ....
- Gross National Product
- Gross domestic productGross domestic productGross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
- Gross national happinessGross national happinessThe assessment of gross national happiness was designed in an attempt to define an indicator that measures quality of life or social progress in more holistic and psychological terms than only the economic indicator of gross domestic product .-Origins and meaning:The term...
(GNH)
- Gross national income in the European UnionGross national income in the European UnionGross national income at market prices in the of 27 Member States ' amounted to EUR 25000 per inhabitant in 2008. In 2009 GNI in EU-27 fell by -5.5% over the year 2008....
- Gross outputGross OutputGross output is an economic concept used in national accounts such as the United Nations System of National Accounts and the US National Income and Product Accounts...
- Input-output modelInput-output modelIn economics, an input-output model is a quantitative economic technique that represents the interdependencies between different branches of national economy or between branches of different, even competing economies. Wassily Leontief developed this type of analysis and took the Nobel Memorial...
- Intermediate consumptionIntermediate consumptionIntermediate consumption is an economic concept used in national accounts, such as the United Nations System of National Accounts , the US National Income and Product Accounts and the European System of Accounts .Conceptually, the aggregate "intermediate consumption" is equal to the amount of the...
- National accountsNational accountsNational accounts or national account systems are the implementation of complete and consistent accounting techniques for measuring the economic activity of a nation. These include detailed underlying measures that rely on double-entry accounting...
- National Income and Product AccountsNational Income and Product AccountsThe National Income and Product Accounts are part of the national accounts of the United States. They are produced by the Bureau of Economic Analysis of the Department of Commerce...
- Net outputNet outputNet output is an accounting concept used in national accounts such as the United Nations System of National Accounts and the NIPAs, and sometimes in corporate or government accounts. The concept was originally invented to measure the total net addition to a country's stock of wealth created by...
- Penn World TablePenn World TableThe Penn World Table is a set of national-accounts data developed and maintained by scholars at the University of Pennsylvania to measure real GDP from the corresponding relative price levels across countries and over time...
- United Nations System of National Accounts (UNSNA)
- Wealth (economics)
- Capital formationCapital formationCapital formation is a concept used in macroeconomics, national accounts and financial economics. Occasionally it is also used in corporate accounts. It can be defined in three ways:...