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Measures of National Income and Output

Measures of National Income and Output

We can see countries are like mega companies when we look at their annual flow of products and services. To measure the economic activity level, we total the value of products and services produced in its economy. Thus, national income and output are important measurements we use commonly in economics.

Measures of National Income and Output Definition

Gross domestic product (GDP) is the main measure used to calculate the national output.

The GDP represents the total value of final goods and services produced in the economy of a country, regardless of producers' nationality.

The gross national product (GNP) is the most comprehensive measure to calculate the national income.

Gross National Product (GNP) is defined as the total value of final goods and services produced by a country's citizens in a year, regardless of their location.

Measures of National Income and Output Explanation

To measure the national output, we use the Gross domestic product (GDP). GDP includes all the products that were produced in the country.

For instance, the GDP includes the production of foreign cars produced in the United States even if the owners of these car firms are outside of the United States. In contrast, the output of U.S. cars in other countries is not included in the U.S. GDP. In other words, GDP covers what is produced in the U.S.

The multiplication of the volume of final products and services produced in the U.S. with their prices gives us the annual GDP in dollar values.

Recording the prices for every single product and service is quite challenging for the government. Thus, they often estimate the GDP quarterly and calculate the annual GDP later.

The other side of the national output is the national income where we look at how much is generated.

GNP is the measure that is widely used to calculate the national income and represents the output generated by a country's firms whether they are located in the country or abroad. In other words, the production location is not important as long as the production is done by the country’s firms.

Measures of National Income and Output Methods

GDP and GNP are the main national output and income methods that are widely used in economic analysis.

Measures of National Output - GDP

GDP measures the output of final products and services and does not include some intermediate products.

Measuring the Nation's Output and Income Car is a final product StudySmarterCar is a final product - Wikipedia Commons

If you buy chocolate from the grocery store to eat yourself or to bake a cake, it is counted towards GDP. However, if a baker buys the chocolate to produce chocolate cakes to be sold to the customers, only the value of the chocolate cake is counted towards GDP. Because it is already a part of the final product: chocolate cake.

If a product is intended for final use by the customer and not combined with other products to make a new product, then it is counted as part of GDP. If it is used to produce another product, then only the value of the final products is included in the GDP calculation.

Second-hand products are also excluded from GDP calculation because there is no new product in the market but the already existing products are transferred between users. Thus, only the original sales are a part of the GDP calculation.

The nonmarket transactions - such as own repair services - or economic activities that are carried out in the underground economy are also excluded from the GDP calculation since their economic value is not considered.

Measuring the Nation's Output and Income Example of a second-hand shop StudySmarterExample of a second-hand shop - Wikipedia Commons

Measures of National Income - GNP

There are several categories of national income. The gross national product (GNP) is the one that is used most commonly and comprehensively to measure the national income in economic analysis.

It is calculated by adding up the dollar value of final products and services produced with labor and property owned by the residents of a country.

Thus, the GNP of the U.S. measures the income of all Americans in a year. It doesn't matter whether the products and services are produced in the U.S. or not.

If we want to calculate GNP using GDP, first we should add all the payments Americans received abroad to GDP and then subtract the payments that foreign businesses received in the U.S.

Other national income measures

Another income measure is the net national product (NNP) which equals GNP less depreciation. Depreciation is the capital consumption allowances and measures the capital worn out during a year.

National income (NI) is another income measure and represents the NNP minus all taxes except corporate profits taxes.

Another measure of income is personal income, which equals the total income that the consumers received before individual income taxes are paid.

The last measure of income is disposable personal income (DPI), which represents the total income that the individuals or households have to spend or save after income taxes are deducted. Even though this income is small in amount compared to other measures, it is important since it signals the actual money individuals have to spend in the market.

Measures of National Income and Output Formulas

The Output-Expenditure Model

We can represent the circular flow of national income and output by the output-expenditure model. The output-expenditure model is a macroeconomic model that shows GDP in terms of the sum of the consumer, investment, government, and foreign sectors.

The output-expenditure model is written as:

Here, C represents the consumption of individuals, I stands for investment, and G stands for government purchases.

The difference X – M stands for the foreign sector’s purchases since it is also called net exports of products and services.

Measures of National Income and Output Difficulties

Even though we live in a very data-centric world nowadays, there are still some difficulties in measuring national income and output.

First of all, there are significant underground economic activities that we cannot account for. Since these activities are not legal and not trackable, they are not, and can not, be counted towards the calculation of national income and output levels. Furthermore, it is not always quite clear to make distinctions between primary, intermediate, and final goods.

The calculation of the value of some products and services might be difficult and not accurate. The lack of adequate statistical data might be another issue in non-developed countries where the bookkeeping system is not regulated systematically.

Measuring the Nation's Output and Income - Key takeaways

  • GDP represents the total value of final goods and services produced in the economy of a country. GDP measures the final output of products and services and does not include intermediate products.
  • Gross National Product (GNP) is defined as the total value of final goods and services produced by a country's citizens in a year, regardless of their location. Thus, the GNP of the U.S. measures the income of all Americans in a year.
  • If a product is intended for final use by the customer and not combined with other products to make a new product, then it is counted as part of GDP.
  • The output-expenditure model is a macroeconomic model that shows GDP in terms of the sum of the consumer, investment, government, and foreign sectors.
  • Even though we live in a very data-centric world nowadays, there are still some difficulties when measuring national income and output.

Frequently Asked Questions about Measures of National Income and Output

To measure the national output, we use the Gross domestic product (GDP) which includes the value of all the final products and services produced in the country. The gross national product (GNP) is the comprehensive measurement of the national income in economic analysis.


GDP measures the output final of products and services and does not include intermediate products.

We should multiply the volume of final products and services produced in the U.S. by their prices.

There 5 measures of national income are gross national product (GNP), net national product (NNP), national income (NI), personal Income (IP), and disposable personal income (DPI).

Gross domestic product (GDP) and gross national product (GNP) are the primary measures. 

The underground economic activities, no clear distinctions between primary, intermediate, and final goods, and the lack of adequate statistical data are some difficulties.


Final Measures of National Income and Output Quiz

Question

What is GNP?

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Answer

Gross National Product (GNP) is defined as the total value of final goods and services produced by a country's citizens in a year, regardless of their location.

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Is GNP a measure of national income?


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Yes GNP is a measure of national income.

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What are the components of GNP?

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Wages, Salaries, Tips, Rent, Interest, Dividends, Proprietor’s income, Corporate income taxes, Retained earnings, Indirect business taxes

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What is difference between GNP and GDP?


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While GDP consists of all production of final goods and services occurring within a nation during one year, regardless of who made it, GNP considers the income of the nation's residents, regardless of where it was earned.

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Which countries experience a wider difference between their GNP and GDP?

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For some nations with large numbers of citizens living and working abroad, such as Mexico and the Philippines, there can be a substantial difference between GDP and GNP. Large differences between GDP and GNP can also be found in poorer nations where much output is generated by foreign-owned companies, meaning that production is counted toward the GNP of the foreign owner, not the GNP of the host nation.

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A $1,000 paycheck for a British citizen living in New York City is included in U.S. GNP or UK GNP?


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UK GNP.

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Ford Motor Company, for instance, has factories throughout Mexico, Europe, and Asia. The output from these Ford factories would be counted toward which country's GNP? 


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The United States' GNP

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What are some other methods that can be used to measure national income?

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GNP is one of the primary forms a country can use to measure its National Income. However, other methods are used to measure the national income of a nation, including Net National Product, National Income, Personal Income, and Disposable Personal Income.


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Explain Net National Income.

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Net National Income is calculated by subtracting depreciation from GNP. Depreciation refers to the loss of the value of capital. So in order to measure the total value of the capital a nation has available, net national income excludes the part of the capital that has worn out.

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Explain National Income.

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National Income is calculated by subtracting all tax expenses (except corporate profit taxes) from Net National Income.


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Explain Personal Income.

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Personal income, which is the fourth method of measuring national income, refers to the total amount of income that individuals receive before paying taxes.

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Explain disposable personal income

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Disposable personal income refers to all the money individuals have in their possession to spend after they have paid income tax.

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What is the purpose of GNP per capita?

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We use the figure per capita to determine how much economic production is created annually on a per person average. 

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What is real value?

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Real value is the value after it has been adjusted for inflation. The real value takes the prices of other market items into account to calculate it.

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What is nominal value?

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The nominal value is the current value, without taking inflation or other market factors into account. It is the face value of the good.

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What is inflation?

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Inflation is an overall increase in price across the entire economy.

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What does CPI stand for and what is it?

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It stands for Consumer Price Index and is a statistical series that measures the changes in prices in a scientifically collected "basket" of goods as weighted averages.

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What are the 3 inputs necessary for calculating real value?

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1. The current CPI of the selected basket of goods.

2. The CPI of the base year.

3. The price of the selected good in the base year.

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What is meant by a basket of goods?

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The basket of goods is a scientifically selected collection of goods made up of items that are frequently used by consumers.

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What is the importance of nominal values?


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Nominal values are important for determining the current value of a good or service. 

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Why are real values important in economics?

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The real values of goods are important when evaluating the health and productivity of the economy. They allow for a more accurate comparison of the prices of goods and services between the past and current values.

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What is the difference between the real value and the nominal value?

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The difference between the real value and the nominal value is that the nominal value is the current price of a good in today's economy whereas the real value takes into consideration the effect of inflation.

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What is the most common use of real and nominal values?

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The most common use of real and nominal values is when we are looking at a nation's gross domestic product (GDP).

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Find the real value of an apple in 2020 when the nominal value is $3.10 per pound. The value of an apple in 2003 was $1.36 per pound. The CPI in 2003 was 137. The current CPI is 203.

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Answer

Real value = $1.36 x (203/137)

Real value = $1.36 x 1.48

Real value = $2.02 per pound

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Find the real value of a bale of hay in 2021 when the nominal value is $27 per bale. The value of a bale in 1998 was $5.50 per bale. The CPI in 1998 was 97. The current CPI is 237.

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Answer

Real value = $5.50 x (237/97)

Real value = $5.50 x 2.44

Real value = $13.44

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Calculate real income when the nominal income is $27,425 and the CPI is 152.

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Real Income = ($27,425/152) x 100

Real Income = 180.43 x 100

Real Income = $18,043

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What is the output expenditure model?

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The output-expenditure model compares aggregate expenditures (total demand) to gross domestic product (real GDP).

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What is real GDP?

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Real GDP represents the total output in the economy. It is the full value of all final goods and services produced within a nation, adjusted for inflation (rising prices).  


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What are the components of aggregate expenditure?

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Consumer spending, investment spending, government expenditure, and net exports

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What does personal consumption consist of?

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Personal consumption expenditures consist of nearly everything consumers purchase, including food, rent, and almost anything else. 

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What does the investment sector entail?

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The investment sector, often known as the business sector, is responsible for the spending of the money generated by the economy on workers, factories, equipment, inventories, and other economic investment items. 

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How does the government spend its money?

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The government allocates its revenue to a wide variety of priorities, such as national defense, social security, interest payments on the national debt, health care, and the construction of highways.

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What does it mean for real GDP to be equal to aggregate expenditure?

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It means that all of the production is consumed.

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Explain the 45 degree line.

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The 45-degree line represents the real GDP, a straight line that starts from the origin and continues outwards

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Why the level of consumption and production is equal through the 45 degree line?

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The reason is that there's as much total production (real GDP) as consumption at every point on the line

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What is the potential GDP line?

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The potential GDP line refers to the total possible production if the economy uses all of its resources. 

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Where is equilibrium real GDP formed?

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At the point where the AE line intersects the 45-degree line forms the equilibrium real GDP in the output expenditure model.

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What happens when the 45 degree line is below AE?

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Answer

When output, represented by the 45-degree income line, is below aggregate expenditures (AE), an inflationary gap occurs due to aggregate demand (synonymous with AE) being greater than supply.

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What happens when the 45 degree line is above AE?

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A recessionary gap occurs due to supply being greater than demand. Firms will restrict their output to avoid an accumulation of unsold inventory.

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What is the marginal propensity to consume?

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The marginal propensity to consume shows the part of income households consume rather than save.

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Why AE line is not always equal to the 45 degree line?

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The reason is that aggregate expenditure depends on the Marginal Propensity to Consume (MPC), meaning that individuals don't consume all their income.

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Question

How national income and output are measured?


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Answer

To measure national output, we use Gross domestic product (GDP), which includes the value of all the final products and services produced in the country. The gross national product (GNP) is the comprehensive measurement of the national income in economic analysis.


Show question

Question

How do you measure national output?


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Answer

GDP measures the output of final products and services and does not include intermediate products.

We should multiply the final products and services produced in the U.S. by their prices.

Show question

Question

What are the 5 measures of national income?


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Answer

The 5 measures of national income are gross national product (GNP), net national product (NNP), national income (NI), personal Income (PI), and disposable personal income (DPI).


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Question

What is the primary measure of a nation's income and output?


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Answer

Gross domestic product (GDP) and gross national product (GNP) are the primary measures. 


Show question

Question

What are the difficulties of measuring national income and output?

Show answer

Answer

The underground economic activities, no clear distinctions between primary, intermediate, and final goods, and the lack of adequate statistical data are some difficulties.


Show question

Question

GNP represents the total value of final goods and services produced in the economy of a country.


Show answer

Answer

true

Show question

Question

The multiplication of the final products and services produced in the U.S. with their prices gives us the annual GDP in dollar values. 


Show answer

Answer

true

Show question

Question

Give an example of the intermediate and final good and whether their value is included in the GDP.

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Answer

If you buy chocolate from the grocery store to eat yourself or to bake a cake, it is counted towards GDP. However, if a baker buys the chocolate to produce chocolate cakes to be sold to the customers, only the value of the chocolate cake is counted towards GDP. Because it is already a part of the final product: chocolate cake.


Show question

Question

Are the final goods included in the GDP calculation?

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Answer

Yes, if a product is intended for final use by the customer and not combined with other products to make a new product, then it is counted as part of GDP.

Show question

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