Chapter 12 Summary - EKN 120

EKN 120

Chapter 12: Measuring domestic output and national
income
Assessing the Economy’s performance
National Income Accounting
 The techniques used to measure the overall production of the economy and other related
variables for the nation as a whole
 Economy’s aggregate performance analogous to private accounting for individuals

It enables the economists and policy makers to:
 Assess the health of the economy by comparing levels of production at regular intervals
 Track the long-run course of the economy to see whether it has grown, been constant, or
declined
 Formulate policies that will safeguard and improve the economy’s health



GDP vs. GNI
Gross Domestic Product (GDP)
 The total market value of all final goods and services provided in a given year within the
border of a country
 Citizen-supplied or foreign-supplied resources employed within the country

Gross National Income (GNI)
 The total market value of all final goods and services produced in a given year by the
residents or registered business owners from a particular country or anywhere in the world
 Ownership based
 Also, what is earned abroad and repatriated by residents



GDP @ Factor, Basic and Market Prices
Gross value Added @ Factor Cost
 Linked to Income approach
 Plus, other taxes on production
 Less subsidies on production

Gross Value added @ Basic Price
 Plus, taxes on products
 Less subsidies on products
 Gross Value Added @ factor cost +Taxes on production – subsidies on production = GVA
@basic prices

Gross domestic Product @ market Price
 Linked to expenditure approach
 GVA @ basic prices + Taxes on products – Subsidies on products = GDP @ market prices

, Taxes and subsidies on Production
Taxes on Production
 Refers to tax on production not linked to specific goods or services
 Property taxes and UIF
 Gets added to wages, rent, interest and profits for accounting convenience

Subsidies on Production
 Subsidies paid to businesses in order to subsidise the production of a particular commodity
to allow manufacturers to sell at a lower price
 Also gets added to wages, rent, interest and profits for accounting convenience

Taxes on products
 Taxes payable per unit of some good or service
 Vat, Excise Taxes, Business property taxes, license fees, custom duties
 Sin taxes on alcohol and cigarettes
 Propose export tax on scrap metals



Gross Domestic Product (GDP)
 GDP is a measure of the total market value of all final goods and services produced by the
economy in a given year

1.Monetary measure
2.Multiple Counting
 Wrongly including the value of intermediate goods in the GDP; counting the same good or
service more than once
 Intermediate good: Products that are purchases for resale or further processing or
manufacturing
 Most products go through a series of production stages before they reach the final market
 GDP only includes final goods
 Value added measurement

3. Exclude non-production transactions


Two Approaches to GDP
1. Income Approach
 Wages/rental incomes, interest income/profits, concerns income derived or created from
production
 Wages + Rents +Interests + Profits + Statistical Adjustments -net foreign factor income
 Wages:
o Compensation of employees
o Largest share of national income
o Salary supplements also included
o Salary supplements: Payments to social, insurance, pension, health and welfare
funds for workers
 Rents+ Interest:
o Net operating surplus
o Rent from the supply of property resources