Measures of national income and output

Measures of national income and output are used in economics to estimate the benefit of an economy during totaling the value of goods and services produced in an economy. They use a system of national accounting first developed during the 1940s. The primary measures of national income and output are Gross Domestic Product (GDP), Gross National Product (GNP), Gross National Income (GNI), Net National Product (NNP), and Net National Income (NNI).

Gross domestic product

Gross Domestic Product, or GDP for short, measures the value of a nation's output of goods and services for some period of time, usually a year.

GDP = consumption

+ Investment

+ Government expenditure

+ (Import - Export)

Or

GDP= wages

+ Rents

+ Interest

+ Profit

+ Statistical Adjustment

Growth Rate of GDP

GDP is an excellent index with which to compare the economy at two points in time. That comparison can then be used formulate the growth rate of total output within a nation.

In order to calculate the GDP growth rate, subtract 1 from the value received by dividing the GDP for the first year by the GDP for the second year.

GDP growth rate = [(GDP₁)/ (GDP₂] - 1

Gross National Product

Gross National Product (GNP) is the total dollar value of all final goods and services produced for consumption in society during a particular time period. Its rise or fall measures economic activity based on the labor and production output within a country.

GNP = GDP + net factor payment from aboard

Nominal and real GDP

Nominal GDP is GDP evaluated at current market prices. Therefore, nominal GDP will include all of the changes in market prices that have occurred during the current year due to inflation or deflation.

Inflation the rate at which the prices for goods and services is rising and purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.

Deflation A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending.

Real GDP is GDP evaluated at the market prices of some base year. The prices used in the computation of real GDP are gleaned from a specified base year. By keeping the prices constant in the computation of real GDP, it is possible to compare the economic growth from one year to the next in terms of production of goods and services rather than the market value of these goods and services. In this way, real GDP frees year-to-year comparisons of output from the effects of changes in the price level.

For example

To calculate nominal GDP, we add egg sales and bacon sales. To calculate real GDP, we calculate real egg sales and real bacon sales, and then add them up. Real egg sales are equal to egg sales times the ratio of the price of eggs in the base year to the price of eggs in the current year. Real bacon sales are equal to bacon sales times the ratio of the price of bacon in the base year to the price of bacon in the current year. For example, for 2001, real egg sales = $12 billion times $0.40/$0.50 = $9.60 billion. Overall, the results are:
Year            Egg Sales          Bacon Sales       Nominal GDP            Real GDP
2000             100                        $2                          100                         $4
2001              150                      $4                           140                         $6

The consumer price index

The consumer price index or CPI. It is based on the overall cost of a fixed basket of goods and services bought by a typical consumer, relative to price of the same basket in some base year. By including a broad range of thousands of goods and services with the fixed basket, the CPI can obtain an accurate estimate of the cost of living. It is important to remember that the CPI is not a dollar value like GDP, but instead an index number or a percentage changes from the base year.

The CPI is computed through a four-step process.

1.     The fixed basket of goods and services is defined. This requires figuring out where the typical consumer spends his or her money. The Bureau of Labor Statistics surveys consumers to gather this information.

2.     The prices for every item in the fixed basket are found. Since the same basket of goods and services is used across a number of time periods to determine changes in the CPI, the price for every item in the fixed basket must be found for every point in time.

3.     The cost of the fixed basket of goods and services must be calculated for each time period. Like computing GDP, the cost of the fixed basket of goods and services is found by multiplying the quantity of each item times its price.

4.     A base year is chosen and the index is computed. The price of the fixed basket of goods and services for each comparison year is then divided by the price of the fixed basket of goods in the base year. The result is multiplied by 100 to give the relative level of the cost of living between the base year and the comparison years

Formulae

Gross Domestic Product

GDP = [(quantity of A X price of A) + (quantity of B X price of B) + ... + (quantity of N X price of N)] for every good and service produced within the country GDP = (national income) = Y = (C + I + G + NX)

GDP Growth Rate

GDP growth rate = [(GDP for year N) / (GDP for year N-1)] - 1

GDP Deflator

GDP deflator = [(nominal GDP) / (real GDP)] - 1

GDP Per Capita

GDP per capita = (GDP) / (population)