A variety of measures of national income and output are used in
economics
Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and intera ...
to estimate total economic activity in a country or region, including
gross domestic product
Gross domestic product (GDP) is a money, monetary Measurement in economics, measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjec ...
(GDP),
gross national product
The gross national income (GNI), previously known as gross national product (GNP), is the total domestic and foreign output claimed by residents of a country, consisting of gross domestic product (GDP), plus factor incomes earned by foreign ...
(GNP),
net national income In national income accounting, net national income (NNI) is net national product (NNP) minus indirect taxes. Net national income encompasses the income of households, businesses, and the government. Net national income is defined as gross domestic ...
(NNI), and adjusted national income (NNI adjusted for natural
resource depletion
Resource depletion is the consumption of a resource faster than it can be replenished. Natural resources are commonly divided between renewable resources and non-renewable resources (see also mineral resource classification). Use of either ...
– also called as NNI at factor cost). All are specially concerned with counting the total amount of goods and services produced within the economy and by various sectors. The boundary is usually defined by geography or citizenship, and it is also defined as the total income of the nation and also restrict the goods and services that are counted. For instance, some measures count only goods & 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 or national account systems (NAS) 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 ...
, of which these figures are a part, only began in the 1930s, in the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
and some
European countries
The list below includes all entities falling even partially under any of the regions of Europe, various common definitions of Europe, geographical or political. Fifty generally recognised sovereign states, Kosovo with limited, but substantial, ...
. The impetus for that major statistical effort was the
Great Depression
The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
and the rise of
Keynesian economics
Keynesian economics ( ; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output an ...
, 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 well-informed as possible.
Market value
In order to count a good or service, it is necessary to assign 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, proprietor's incomes, and corporate profits are the major subdivisions of income.
Methods of measuring national income
Output
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 the 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.
Key formulae are:
GDP at market price = value of output in the economy -
intermediate consumption
Intermediate consumption (also called "intermediate expenditure") is an economic concept used in national accounts, such as the United Nations System of National Accounts (UNSNA), the US National Income and Product Accounts (NIPA) and the Europea ...
NNP at factor cost = GDP at market price - net indirect taxes - depreciation + net factor income from abroad
NDP at factor cost = compensation of employees + net interest + rental & royalty income + profit of incorporated and unincorporated NDP at factor cost
Expenditure
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 to economists, 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 =
Consumption (economics)
Consumption is the act of using resources to satisfy current needs and wants. It is seen in contrast to investing, which is spending for acquisition of ''future'' income. Consumption is a major concept in economics and is also studied in many o ...
(Household consumption expenditures / Personal consumption expenditures)
I =
Investment (macroeconomics) In macroeconomics, investment "consists of the additions to the nation's capital stock of buildings, equipment, software, and inventories during a year" or, alternatively, investment spending — "spending on productive physical capital such as mach ...
/
Gross private domestic investment
Gross private domestic investment is the measure of physical investment used in computing GDP in the measurement of nations' economic activity. This is an important component of GDP because it provides an indicator of the future productive capaci ...
G =
Government spending (Government consumption / Gross investment expenditures)
X =
Exports
An export in international trade is a good produced in one country that is sold into another country or a service provided in one country for a national or resident of another country. The seller of such goods or the service provider is an ...
(Gross exports of goods and services)
M =
Imports
An import is the receiving country in an export from the sending country. Importation and exportation are the defining financial transactions of international trade.
In international trade, the importation and exportation of goods are limited ...
(Gross imports of goods and services)
Note: (X - M) is often written as X
N or less commonly as NX, both stand for "net exports"
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.
Gross domestic product and gross national product
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:
*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
welfare
Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specificall ...
. Countries with higher GDP may be more likely to also score high on other measures of welfare, such as
life expectancy
Life expectancy is a statistical measure of the average time an organism is expected to live, based on the year of its birth, current age, and other demographic factors like sex. The most commonly used measure is life expectancy at birth ...
. 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 parity
Purchasing power parity (PPP) is the measurement of prices in different countries that uses the prices of specific goods to compare the absolute purchasing power of the countries' currency, currencies. PPP is effectively the ratio of the price of ...
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 coefficient.
Because of this, other measures of welfare such as the
Human Development Index
The Human Development Index (HDI) is a statistic composite index of life expectancy, education (mean years of schooling completed and expected years of schooling upon entering the education system), and per capita income indicators, whi ...
(HDI),
Index of Sustainable Economic Welfare
The Index of Sustainable Economic Welfare (ISEW) is an economic indicator intended to replace the gross domestic product (GDP), which is the main macroeconomic indicator of System of National Accounts (SNA).
Rather than simply adding together all ...
(ISEW),
Genuine Progress Indicator (GPI),
gross national happiness
Gross National Happiness (GNH), sometimes called Gross Domestic Happiness (GDH), is a philosophy that guides the government of Bhutan. It includes an index which is used to measure the collective happiness and well-being of a population. Gross Nat ...
(GNH), and
sustainable national income
Sustainable national income, (SNI) is an indicator for environmental sustainability, which gives an estimate of the production level at which - with the technology in the year of calculation - environmental functions remain available ‘for ever’ ...
(SNI) are used.
[England, R. W. (1998). Measurement of social well-being: alternatives to gross domestic product. ''Ecological Economics'', ''25''(1), 89-103.]
See also
*
Capital formation
Capital 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:
*It is a specific statistical concept, also known as net inve ...
*
Chained volume series A chained volume series is a series of economic data (such as GDP, GNP or similar kinds of data) from successive years, put in real (or constant, i.e. inflation- and deflation-adjusted) terms by computing the production volume for each year in the ...
*
Compensation of employees {{no footnotes, date=April 2010
Compensation of employees (CE) is a statistical term used in national accounts, balance of payments statistics and sometimes in corporate accounts as well. It refers basically to the total gross (pre-tax) wages paid ...
*
European System of Accounts The European System of Accounts (ESA) is the system of national accounts and regional accounts used by members of the European Union. It was most recently updated in 2010 (ESA 2010).
The ESA 95 is fully consistent with the United Nations System of ...
*
Green national product
The green national product is an economic metric that seeks to include environmental features such as environmental degradation and resource depletion with a country's national product.
Criticism of gross national product
The gross national p ...
*
Gross domestic product
Gross domestic product (GDP) is a money, monetary Measurement in economics, measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjec ...
*
Gross national product
The gross national income (GNI), previously known as gross national product (GNP), is the total domestic and foreign output claimed by residents of a country, consisting of gross domestic product (GDP), plus factor incomes earned by foreign ...
*
Gross national happiness
Gross National Happiness (GNH), sometimes called Gross Domestic Happiness (GDH), is a philosophy that guides the government of Bhutan. It includes an index which is used to measure the collective happiness and well-being of a population. Gross Nat ...
(GNH)
*
Gross national income in the European Union
Gross national income at market prices in the European Union of 27 Member States (GNI) amounted to EUR 44.778 per inhabitant in 2020.
In 2007, the highest per capita GNI measured i purchasing power standards (PPS)was recorded for Luxembourg (mor ...
*
Gross output
In economics, gross output (GO) is the measure of total economic activity in the production of new goods and services in an accounting period. It is a much broader measure of the economy than gross domestic product (GDP), which is limited mainly t ...
*
Input-output model
In computing, input/output (I/O, or informally io or IO) is the communication between an information processing system, such as a computer, and the outside world, possibly a human or another information processing system. Inputs are the signals ...
*
Intermediate consumption
Intermediate consumption (also called "intermediate expenditure") is an economic concept used in national accounts, such as the United Nations System of National Accounts (UNSNA), the US National Income and Product Accounts (NIPA) and the Europea ...
*
National accounts
National accounts or national account systems (NAS) 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 ...
*
National Income and Product Accounts
The national income and product accounts (NIPA) are part of the national accounts of the United States. They are produced by the Bureau of Economic Analysis of the Department of Commerce. They are one of the main sources of data on general econ ...
*
Net economic welfare
*
Net output
Net output is an accounting concept used in national accounts such as the United Nations System of National Accounts (UNSNA) and the National Income and Product Accounts, NIPAs, and sometimes in corporate or government accounts. The concept was or ...
*
Penn World Table The Penn World Table (PWT) is a set of national-accounts data developed and maintained by scholars at the University of California, Davis and thGroningen Growth Development Centreof the University of Groningen to measure real GDP across countries a ...
*
Savings identity
*
United Nations System of National Accounts (UNSNA)
The System of National Accounts (often abbreviated as SNA; formerly the United Nations System of National Accounts or UNSNA) is an international standard system of national accounts, the first international standard being published in 1953. Handbo ...
*
Wealth (economics)
Wealth is the abundance of Value (economics), valuable financial assets or property, physical possessions which can be converted into a form that can be used for financial transaction, transactions. This includes the core meaning as held in the ...
References
Bibliography
* Australian Bureau of Statistics
''Australian National Accounts: Concepts, Sources and Methods'' 2000. This fairly large document has a wealth of information on the meaning of the national income and output measures and how they are obtained.
External links
Historicalstatistics.org: Links to historical national accounts and statistics for different countries and regionsWorld Bank's Development and Education Program Website*
Quandl GDP by country- data available in CSV, Excel, JSON or XML formats
{{Authority control
Gross domestic product
National accounts