MEASURING NATIONAL OUTPUT: PART ONE

NATIONAL INCOME ACCOUNTING FORMULAS

Gross National Product (GNP) = C+Gross investment+G+NX

Net National Product (NNP):
(a) NNP = GNP - Depreciation
(b) NNP = C + Net Investment + G +NX

Net Investment = Gross Investment - Depreciation

National Income (NI)
(a) NI = NNP - Indirect business Taxes)
(b) NI = Sum of Factor Payments

Personal Income (PI)
(a) PI = NI - Social Security Contributions - Corporate Income Taxes -
Undistributed Corporate Profits + Transfer payments
(b) PI = Household Income

Personal Disposable Income (DI)
(a) DI = PI - Personal Taxes
(b) DI = After Tax Household Income
(c) DI = Consumption Expenditures + Personal Savings + Interest Payments
to Business

where:

C = household consumption spending

DI = disposable income

G = government spending

GNP = gross national product

NI=national income

NNP = net national product

NX = foreign net export spending

Why are only final goods and services counted in GNP?

• Because all other sales (of intermediate products that are resold within the year) are reflected in the price of final goods.

Why do changes in real GNP better reflect how total output is changing than changes in nominal GNP?

• Changes in real GNP reflect changes in real output only. Nominal GNP changes when prices and/or output changes.

What makes GNP gross and NNP net?

• “Net” refers to subtracting depreciation. “Gross” includes depreciation.

Which national income account best reflects total factor payments?

• NI: National Income.

Which national income account best reflects the income households receive? The after-tax income that households receive?

• PI: Personal Income. DI: Personal Disposable Income.

How do households dispose of disposable income?

• They consume or save it.

In a simple economy without international trade for government, how are investment (I) and savings related?

• I = Savings

With a government sector, how do business and the government in a sense compete for savings?
When we added the government sector, we had :

• Investment + Government Deficit= Savings

Business borrow to finance their investment spending, and the government borrows to finance its deficit. Thus, to the degree that savings are fixed in size, the more the government borrows, the less business can borrow for investment.

Does GNP measure national welfare?

• No. It is a measure of output and spending.

Copyright 2008 by Sujanto Rusli
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