TOPICTOPIC

Measuring National Output Measuring National Output and National Incomeand National Income

• Is it because of the resources they haveIs it because of the resources they have

- Japan hardly has any natural resources- Japan hardly has any natural resources

• Is is because of the money they haveIs is because of the money they have

- paper money can be made- paper money can be made

• Is is due to the real wealth they generate.Is is due to the real wealth they generate.

- what then is real wealth.- what then is real wealth.

Why are countries rich or poorWhy are countries rich or poor

Real Wealth or IncomeReal Wealth or Income

• Real wealth is the wealth generated by a country Real wealth is the wealth generated by a country in terms of the goods and services it produces.in terms of the goods and services it produces.

• Paper money is nominal wealth and goods and Paper money is nominal wealth and goods and services generated is real wealth.services generated is real wealth.

National Income AccountingNational Income Accounting

• National income accounting National income accounting – a – a set of rules and definitions for set of rules and definitions for measuring economic activity in the measuring economic activity in the aggregate economy – that is, in the aggregate economy – that is, in the economy as a whole.economy as a whole.

• National income accounting is a way National income accounting is a way of measuring total, or aggregate of measuring total, or aggregate production.production.

National income accounting includes the National income accounting includes the following conceptsfollowing concepts::

• Gross Domestic Product (GDP) and Gross National Gross Domestic Product (GDP) and Gross National Product (GNP) Product (GNP)

• Net National Product or Net National Income (NNP)Net National Product or Net National Income (NNP)

• GDP/GNP at market price and factor cost GDP/GNP at market price and factor cost

• Personal income (PI) and Personal Disposable income Personal income (PI) and Personal Disposable income (PDI)(PDI)

• Personal Consumption Expenditure and Personal savingsPersonal Consumption Expenditure and Personal savings

• Real and Nominal IncomeReal and Nominal Income

• Per capita income (PCI)Per capita income (PCI)

Gross Domestic ProductGross Domestic Product

• Gross domestic product (GDP)Gross domestic product (GDP) is the is the current market value of the current market value of the total final total final goods and servicesgoods and services produced within a produced within a given period by factors of production given period by factors of production located within a country.located within a country.

• The term The term final goods and servicesfinal goods and services refers to refers to goods and services produced for final use.goods and services produced for final use.

• Intermediate goodsIntermediate goods are goods produced by are goods produced by one firm for use in further processing by one firm for use in further processing by another firm. These are not used in the another firm. These are not used in the computation of GDP.computation of GDP.

Value AddedValue Added

• Value addedValue added is the difference between is the difference between the value of goods as they leave a the value of goods as they leave a stage of production and the cost of the stage of production and the cost of the goods as they entered that stage.goods as they entered that stage.

• In calculating GDP, we can either sum up In calculating GDP, we can either sum up the value added at each stage of the value added at each stage of production, or we can take the value of final production, or we can take the value of final sales. We do not use the value of total sales. We do not use the value of total sales in an economy to measure how much sales in an economy to measure how much output has been producedoutput has been produced..

Value AddedValue Added

Value Added in the Production of an AutomobileValue Added in the Production of an Automobile

Stage Of ProductionStage Of Production Value at End of Each Value at End of Each Stage of ProductionStage of Production

Value Added by Each Value Added by Each Stage of ProductionStage of Production

(1)(1) Iron and other raw Iron and other raw materialsmaterials

$$ 600600 $$ 600600

(2)(2) Pig iron and other Pig iron and other processed materialsprocessed materials

1,2001,200 600600

(3)(3) Steel ingots, etcSteel ingots, etc 2,4002,400 1,2001,200

(4)(4) Sheet steel, etcSheet steel, etc 5,5005,500 3,1003,100

(5)(5)

(6)(6)

(7)(7)

Automobile partsAutomobile parts

AssemblyAssembly

Automobile delivered at Automobile delivered at showroomshowroom

8,0008,000

11,50011,500

16,90016,900

46,10046,100

2,5002,500

3,5003,500

5,4005,400

16,90016,900

GDP Versus GNPGDP Versus GNP

• GDP is the value of output produced by factors of GDP is the value of output produced by factors of production production located within a countrylocated within a country. (deals with . (deals with location)location)

• Gross National Product (GNP)Gross National Product (GNP) measures the output utput produced by a country’s produced by a country’s citizenscitizens, regardless of where , regardless of where the output is producedthe output is produced. . (deals with ownership of (deals with ownership of resources)resources)

• GNP = GDP + value of goods & services produced by GNP = GDP + value of goods & services produced by the country’s owned resources abroad – value of goods the country’s owned resources abroad – value of goods & services produced by foreign resources in the country& services produced by foreign resources in the country

GNP= GDP + NFIA (Net Factor Income Earned From Abroad)GNP= GDP + NFIA (Net Factor Income Earned From Abroad)

Calculating GDPCalculating GDP

GDP can be computed in two/three ways:GDP can be computed in two/three ways:

• The expenditure approachThe expenditure approach: A method of : A method of computing GDP that measures the amount spent on computing GDP that measures the amount spent on all final goods and services during a given period. all final goods and services during a given period. (Y= C+I+G+(X-M) )(Y= C+I+G+(X-M) )

• The income approachThe income approach: A method of computing : A method of computing GDP that measures the income—wages, rents, GDP that measures the income—wages, rents, interest, and profits—received by all factors of interest, and profits—received by all factors of production in producing final goods. (Y = W+R+I +P )production in producing final goods. (Y = W+R+I +P )

• The Output/ Value added approachThe Output/ Value added approach: In some : In some cases value of final output generated or value added cases value of final output generated or value added by each producer is taken as a method to compute by each producer is taken as a method to compute national income (Y= value of final goods & national income (Y= value of final goods & services/value added in the primary, secondary and services/value added in the primary, secondary and tertiary sectors)tertiary sectors)

Factorpayments

Factorpayments

The circular flow of income: The inner flow

The circular flow of income: The inner flow

Firms

Households

Factor Services

Goods and services

Price of goods and services

Factorpayments

Factorpayments

Consumption ofdomestically

produced goodsand services (Cd)

Consumption ofdomestically

produced goodsand services (Cd)

Investment (I)Investment (I)

Governmentexpenditure (G)

Governmentexpenditure (G)

Exportexpenditure (X)

Exportexpenditure (X)

BANKS, etc

Netsaving (S)

Netsaving (S)

GOV.

Nettaxes (T)

Nettaxes (T)

ABROAD

Importexpenditure (M)

Importexpenditure (M)

The circular flow of incomeThe circular flow of income

WITHDRAWALS

INJECTIONS

The Income ApproachThe Income Approach

• National income is the total income earned by the productive resources owned by a country’s citizens.

• The The income approachincome approach to to GDPGDP breaks down breaks down GDPGDP into four components: into four components:

GDPmp = national income + depreciation + (indirect taxes – subsidies) + net factor income from rest of the world + other

National Income = Compensation of employees +Proprietors Compensation of employees +Proprietors income + Corporate profitsincome + Corporate profits + Net interest+ Net interest+ Rental income+ Rental income

The Income ApproachThe Income Approach

Components of GDP, 1999: The Income ApproachComponents of GDP, 1999: The Income Approach

BILLIONS OFBILLIONS OFDOLLARSDOLLARS

PERCENTAGEPERCENTAGEOF GDPOF GDP

Gross domestic productGross domestic product 9,299.29,299.2 100.0100.0

National incomeNational income 7,469.77,469.7 80.380.3

Compensation of employeesCompensation of employees 5,299.85,299.8 57.057.0

Proprietors’ incomeProprietors’ income 663.5663.5 7.17.1

Corporate profitsCorporate profits 856.0856.0 9.29.2

Net interestNet interest 507.1507.1 5.55.5

Rental incomeRental income 143.4143.4 1.51.5

DepreciationDepreciation 1,161.01,161.0 12.512.5

Indirect taxes minus subsidiesIndirect taxes minus subsidies 689.7689.7 7.47.4

Net factor payments to the rest of the worldNet factor payments to the rest of the world 11.011.0 0.10.1

OtherOther 32.232.2 0.30.3Source:Source: See Table 17.2. See Table 17.2.

From GDP to Disposable IncomeFrom GDP to Disposable Income

GDP, GNP, NNP, National Income, Personal Income, and Disposable Personal Income, GDP, GNP, NNP, National Income, Personal Income, and Disposable Personal Income, 19991999

DOLLARSDOLLARS(BILLIONS)(BILLIONS)

GDPGDP 9,299.29,299.2Plus: receipts of factor income from the rest of the worldPlus: receipts of factor income from the rest of the world + 305.9+ 305.9Less: payments of factor income to the rest of the worldLess: payments of factor income to the rest of the world 316.9316.9

Equals: Equals: GNPGNP 9,288.29,288.2Less: depreciation (capital consumption allowance)Less: depreciation (capital consumption allowance) 1,161.01,161.0

Equals: Equals: net national product (NNP)net national product (NNP) 8,127.18,127.1Less: indirect taxes minus subsidies plus otherLess: indirect taxes minus subsidies plus other 675.5675.5

Equals: Equals: national incomenational income 7,469.77,469.7Less: Undistributed profits Less: Undistributed profits 485.7485.7Less: social insurance paymentsLess: social insurance payments 662.1662.1Plus: personal interest income received from the government and consumersPlus: personal interest income received from the government and consumers + 456.6+ 456.6Plus: transfer payments to personsPlus: transfer payments to persons +1,011.0+1,011.0

Equals: Equals: personal incomepersonal income 7,789.67,789.6Less: personal taxesLess: personal taxes 1,152.01,152.0

Equals: Equals: disposable personal incomedisposable personal income 6,637.76,637.7Source:Source: See Table 17.2. See Table 17.2.

From GNP to NNPFrom GNP to NNP

• Net national productNet national product equals gross national product equals gross national product minus depreciation; a nation’s total product minus what is minus depreciation; a nation’s total product minus what is required to maintain the value of its capital stock.required to maintain the value of its capital stock.

• Capital consumption allowance (depreciation) represents Capital consumption allowance (depreciation) represents the amount of depreciation and obsolescence in the the amount of depreciation and obsolescence in the GNP. GNP.

NNP = GNP – Depreciation (capital consumption allowance)NNP = GNP – Depreciation (capital consumption allowance)

From NNP to National Income (NI)From NNP to National Income (NI)

Alternative measuresAlternative measures

Total productive resource costs of the goods and Total productive resource costs of the goods and services produced by the economyservices produced by the economy

The income earned by the owners of productive The income earned by the owners of productive resources in producing GDPresources in producing GDP

NI = NNPmp – (Indirect business taxes + Subsidies) NI = NNPmp – (Indirect business taxes + Subsidies)

+ statistical discrepancy = NNPfc+ statistical discrepancy = NNPfc

National income accounting: a summaryNational income accounting: a summary

GNP(andGNI)

atmarketprices

GDPat

marketprices

NYA

C

X - Z

I

NYA

G

NNP at

marketprices

Deprec'n

NationalIncome

or NNP at

factor cost

Net Indirect taxes

Wagesand

salaries

Self-employment

Profits,rents

From GDP to Personal IncomeFrom GDP to Personal Income

• Personal incomePersonal income is the total income of households. is the total income of households.

•

Transfer paymentsTransfer payments

A payment of money in return for which no current goods or A payment of money in return for which no current goods or services are producedservices are produced

• The current income received by persons from all The current income received by persons from all sources:sources: Wages, salaries, proprietors’ incomes, rental income, Wages, salaries, proprietors’ incomes, rental income,

interest income, dividend income, and transfer paymentsinterest income, dividend income, and transfer payments

= (national income) - (undistributed corporate profits) – = (national income) - (undistributed corporate profits) – (social security payments) + interest income received from(social security payments) + interest income received from the government and households +Transfer payments).the government and households +Transfer payments).

From Disposable Personal Income to From Disposable Personal Income to Personal SavingPersonal Saving

Disposable Personal Income and Personal Saving, 1999Disposable Personal Income and Personal Saving, 1999

DOLLARSDOLLARS(BILLIONS)(BILLIONS)

Disposable personal incomeDisposable personal income 6,637.76,637.7 Less:Less:

Personal consumption expendituresPersonal consumption expenditures 6,268.76,268.7Interest paid by consumers to businessInterest paid by consumers to business 194.8194.8Personal transfer payments to foreignersPersonal transfer payments to foreigners 26.626.6

Equals: personal savingEquals: personal saving 147.6147.6Personal savings as a percentage of disposable personal income:Personal savings as a percentage of disposable personal income: 2.2%2.2%Source:Source: See Table 17.2. See Table 17.2.

Personal Consumption Exp. = PDI – Personal savingsPersonal Savings = PDI – Personal Consumption Exp.

Disposable Personal Income and Disposable Personal Income and Personal SavingPersonal Saving

• Disposal personal incomeDisposal personal income is the is the personal income minus personal taxes.personal income minus personal taxes.

• The The personal saving ratepersonal saving rate is the is the percentage of disposable personal income percentage of disposable personal income that is saved. If the personal saving rate that is saved. If the personal saving rate is low, households are spending a large is low, households are spending a large amount relative to their incomes; if it is amount relative to their incomes; if it is high, households are spending cautiously.high, households are spending cautiously.

GDP at market and factor price GDP at market and factor price

• GDP at Market price = GDP at factor cost + GDP at Market price = GDP at factor cost + Indirect Taxes – subsidiesIndirect Taxes – subsidies

• GDP at factor cost = GDP at Market price - GDP at factor cost = GDP at Market price - Indirect Taxes + subsidiesIndirect Taxes + subsidies

GDPGDP

Plus: receipts of factor income from the rest of the worldPlus: receipts of factor income from the rest of the world

Less: payments of factor income to the rest of the worldLess: payments of factor income to the rest of the world

Equals: Equals: GNPGNP

Less: depreciation (capital consumption allowance)Less: depreciation (capital consumption allowance)

Equals: Equals: net national product (NNP)net national product (NNP)

Less: indirect taxes minus subsidies plus otherLess: indirect taxes minus subsidies plus other

Equals: Equals: national income (NNP at factor cost)national income (NNP at factor cost)

Less: Undistributed profits Less: Undistributed profits

Less: social security paymentsLess: social security payments

Plus: personal interest income received from the government and consumersPlus: personal interest income received from the government and consumers

Plus: transfer payments to personsPlus: transfer payments to persons

Equals: Equals: personal incomepersonal income

Less: personal taxes (Income tax, wealth tax, etc)Less: personal taxes (Income tax, wealth tax, etc)

Equals: Equals: disposable personal incomedisposable personal income

Less Personal consumption expendituresLess Personal consumption expenditures

Interest paid by consumers to businessInterest paid by consumers to business

Personal transfer payments to foreignersPersonal transfer payments to foreigners

Equals: personal savingEquals: personal saving

GDP by Expenditure methodGDP by Expenditure method

Four major componentsFour major components

ConsumptionConsumption

InvestmentInvestment

Net exportsNet exports

GovernmentGovernment

GDP = C+I +G + (X-M)GDP = C+I +G + (X-M)

Personal Consumption Expenditures (C)Personal Consumption Expenditures (C)

• Personal consumption expenditures (Personal consumption expenditures (CC) ) are expenditures by consumers on the are expenditures by consumers on the following:following:

• Durable goodsDurable goods: Goods that last a relatively : Goods that last a relatively long time, such as cars and appliances.long time, such as cars and appliances.

• Nondurable goodsNondurable goods: Goods that are used up : Goods that are used up fairly quickly, such as food and clothing.fairly quickly, such as food and clothing.

• ServicesServices: Things that do not involve the : Things that do not involve the production of physical things, such as legal production of physical things, such as legal services, medical services, and education.services, medical services, and education.

Gross Private Domestic Investment (I)Gross Private Domestic Investment (I)

• InvestmentInvestment refers to the purchase of refers to the purchase of new capital.new capital.

• Total investment by the private Total investment by the private sector is called sector is called gross private gross private domestic investmentdomestic investment. It includes . It includes the purchase of new housing, plants, the purchase of new housing, plants, equipment, and inventory by the equipment, and inventory by the private sector.private sector.

Gross Private Domestic InvestmentGross Private Domestic Investment

• Nonresidential investmentNonresidential investment includes includes expenditures by firms for machines, tools, expenditures by firms for machines, tools, plants, and so on.plants, and so on.

• Residential investmentResidential investment includes includes expenditures by households and firms on expenditures by households and firms on new houses and apartment buildings.new houses and apartment buildings.

• Change in inventoriesChange in inventories computes the computes the amount by which firms’ inventories change amount by which firms’ inventories change during a given period. Inventories are the during a given period. Inventories are the goods that firms produce now but intend to goods that firms produce now but intend to sell later.sell later.

Gross Private Domestic InvestmentGross Private Domestic Investment

• Remember that GDP is not the Remember that GDP is not the market value of total sales during a market value of total sales during a period—it is the market value of total period—it is the market value of total production.production.

• The relationship between total The relationship between total production and total sales is:production and total sales is:

GDP = final sales + change in business inventories

Gross InvestmentGross Investmentversus Net Investment (G)versus Net Investment (G)

• Gross investmentGross investment is the total value of all is the total value of all newly produced capital goods (plant, newly produced capital goods (plant, equipment, housing, and inventory) equipment, housing, and inventory) produced in a given period.produced in a given period.

• DepreciationDepreciation is the amount by which an is the amount by which an asset’s value falls in a given period.asset’s value falls in a given period.

• Net investmentNet investment equals gross investment equals gross investment minus depreciation.minus depreciation.

capitalend of period = capitalbeginning of period + net investment

Government ConsumptionGovernment Consumptionand Gross Investmentand Gross Investment

• Government Government consumption and gross consumption and gross investment (Ginvestment (G) counts ) counts expenditures by federal, expenditures by federal, state, and local state, and local governments for final governments for final goods and services.goods and services.

Net Exports (X-M)Net Exports (X-M)

• Net exports (EX – IM)Net exports (EX – IM) is the is the difference between exports and difference between exports and imports. The figure can be positive imports. The figure can be positive or negative.or negative.

• Exports (EX)Exports (EX) are sales to foreigners of are sales to foreigners of U.S.-produced goods and services.U.S.-produced goods and services.

• Imports (IM)Imports (IM) are U.S. purchases of are U.S. purchases of goods and services from abroad). goods and services from abroad).

Exclusions of Used GoodsExclusions of Used Goodsand Paper Transactionsand Paper Transactions

• GDP ignores all transactions in GDP ignores all transactions in which money or goods change which money or goods change hands but in which no new hands but in which no new goods and services are goods and services are produced.produced.

Calculating GDP: Some ExamplesCalculating GDP: Some Examples

• Selling your two-year-old car to a Selling your two-year-old car to a neighbor does not add to GDP.neighbor does not add to GDP.

• Selling your car to a used car dealer Selling your car to a used car dealer who then sells your car to someone who then sells your car to someone else for a higher price, adds to GDP.else for a higher price, adds to GDP.

• The value of the dealer's services is The value of the dealer's services is added to GDP.added to GDP.

Calculating GDP: Some ExamplesCalculating GDP: Some Examples

• Selling a stock or bond does not add Selling a stock or bond does not add to GDP.to GDP.

• The stock broker's commission from the sales The stock broker's commission from the sales does add to GDP.does add to GDP.

Calculating GDP: Some ExamplesCalculating GDP: Some Examples

• Social security payments, welfare Social security payments, welfare payments, and veterans' benefits, are not payments, and veterans' benefits, are not included in GDP – transfer paymentsincluded in GDP – transfer payments

• Only the cost of transferring is included in Only the cost of transferring is included in GDP.GDP.

Calculating GDP: Some ExamplesCalculating GDP: Some Examples

• The work of unpaid housespouses The work of unpaid housespouses does not appear in GDP does not appear in GDP calculations.calculations.

• GDP only measures market activities so GDP only measures market activities so unpaid value added is not included in unpaid value added is not included in GDP.GDP.

The National Income Accounting The National Income Accounting IdentityIdentity

• The equality of output/income and The equality of output/income and expenditure is an accounting identity expenditure is an accounting identity in the national income accounts.in the national income accounts.

• The identity can be seen in the The identity can be seen in the circular flow of income in an circular flow of income in an economy.economy.

The Circular FlowThe Circular Flow

Goods

Other countriesOther countries

Financial marketsFinancial markets

GovernmentGovernmentFirms

(production)HouseholdTaxes

Factor services

SavingsImports

Government

Spending

Wages, rents, interest, profits

Exports

Investment

Personal consumption

Nominal versus Real GDPNominal versus Real GDP

• Nominal GDP is GDP measured in Nominal GDP is GDP measured in current dollarscurrent dollars, or the current prices , or the current prices we pay for things. Nominal GDP we pay for things. Nominal GDP includes all the components of GDP includes all the components of GDP valued at their current prices.valued at their current prices.

• When a variable is measured in When a variable is measured in current dollars, it is described in current dollars, it is described in nominal termsnominal terms..

Changes in the Price LevelChanges in the Price Level

Nominal GDPNominal GDP

The market value in current rupees/dollars of the total The market value in current rupees/dollars of the total goods and services currently produced by the economygoods and services currently produced by the economy

GDP implicit price deflatorsGDP implicit price deflators

An index that converts GDP from current-dollar/rupee An index that converts GDP from current-dollar/rupee figures to constant-dollar/rupee figures, taking into account figures to constant-dollar/rupee figures, taking into account some changes in the quality of various productssome changes in the quality of various products

Real GDPReal GDP

The gross domestic product as expressed in constant The gross domestic product as expressed in constant rupee/dollars termsrupee/dollars terms

Calculating Real GDPCalculating Real GDP

A Three-Good EconomyA Three-Good Economy

(1)(1) (2)(2) (3)(3) (4)(4) (5)(5) (6)(6) (7)(7) (8)(8)

GDP INGDP IN GDP INGDP IN GDP INGDP IN GDP INGDP IN

YEAR 1YEAR 1 YEAR 2YEAR 2 YEAR 1YEAR 1 YEAR 2YEAR 2

ININ ININ ININ ININ

PRODUCTIONPRODUCTION PRICE PER UNITPRICE PER UNIT CURRENT CURRENT YEARYEAR

YEAR 1YEAR 1 YEAR 2YEAR 2 CURRENT CURRENT YEARYEAR

YEAR 1YEAR 1 YEAR 2YEAR 2 YEAR 1YEAR 1 YEAR 2YEAR 2 PRICESPRICES PRICESPRICES PRICESPRICES PRICESPRICES

QQ11 QQ22 PP11 PP22 PP11 x x QQ11 PP11 x x QQ22 PP22 x x QQ11 PP22 X X QQ22

Good Good AA 66 1111 $.50$.50 $ .40$ .40 $3.00$3.00 $5.50$5.50 $2.40$2.40 $4.40$4.40

Good Good BB 77 44 .30.30 1.001.00 2.102.10 1.201.20 7.007.00 4.004.00

Good Good CC 1010 1212 .70.70 .90.90 7.007.00 8.408.40 9.009.00 10.8010.80

TotalTotal $12.10$12.10 $15.10$15.10 $18.40$18.40 $19.20$19.20

Nominal GDPNominal GDPin year 1in year 1

Nominal GDPNominal GDPin year 2in year 2

Exhibit 3: A Price Index (base year = 2000)Exhibit 3: A Price Index (base year = 2000)

Price of Bread Price of Breadin Current Year in Base Year Price Index

Year (1) (2) (3) = (1)/(2)x100

2000 $1.25 $1.25 100

2001 1.30 1.25 104

2002 1.40 1.25 112

For base year 2000, we divide the base price of bread by itself, $1.25 / $1.25 price index for 2000 equals 1 100 = 100 the price index in the base year is always 100. The price index for 2001 is $1.30 / $1.25 = 1.04, which when multiplied by 100 = 104, and for 2002 it is 112.

Thus, the index is 4% higher in 2001 than in the base year, and 12% higher in 2002 than in the base year.

Per Capita GDP/GNPPer Capita GDP/GNP

• Per capita GDPPer capita GDP or or GNPGNP measures a measures a country’s GDP or GNP divided by its country’s GDP or GNP divided by its population.population.

• Per capita GDP is a better measure Per capita GDP is a better measure of well-being for the average person of well-being for the average person that its total GDP or GNP.that its total GDP or GNP.

Changes in Population SizeChanges in Population Size

Real per capita disposable incomeReal per capita disposable income

The best measure of the average amount of The best measure of the average amount of goods and services received per persongoods and services received per person

Per capita disposable income adjusted for Per capita disposable income adjusted for changes in the price levelchanges in the price level

Provides measure of changes in the Provides measure of changes in the standard of livingstandard of living

Per Capita GDP/GNPPer Capita GDP/GNP

Per Capita GNP for Selected Countries, 1998Per Capita GNP for Selected Countries, 1998

COUNTRYCOUNTRY U.S. DOLLARSU.S. DOLLARS COUNTRYCOUNTRY U.S. DOLLARSU.S. DOLLARSSwitzerlandSwitzerland 40,08040,080 PortugalPortugal 10,69010,690NorwayNorway 34,33034,330 ArgentinaArgentina 8,9708,970DenmarkDenmark 33,26033,260 South KoreaSouth Korea 7,9707,970JapanJapan 32,38032,380 Czech RepublicCzech Republic 5,0405,040United StatesUnited States 29,34029,340 BrazilBrazil 4,5704,570AustriaAustria 26,85026,850 MexicoMexico 3,9703,970GermanyGermany 25,85025,850 TurkeyTurkey 3,1603,160SwedenSweden 25,62025,620 South AfricaSouth Africa 2,8802,880BelgiumBelgium 25,38025,380 ColombiaColombia 2,6002,600FranceFrance 24,94024,940 JordanJordan 1,5201,520NetherlandsNetherlands 24,76024,760 RomaniaRomania 1,3901,390FinlandFinland 24,11024,110 PhilippinesPhilippines 1,0501,050United KingdomUnited Kingdom 21,40021,400 ChinaChina 750750AustraliaAustralia 20,30020,300 IndonesiaIndonesia 680680ItalyItaly 20,25020,250 PakistanPakistan 480480CanadaCanada 20,02020,020 IndiaIndia 430430IrelandIreland 18,34018,340 RwandaRwanda 230230IsraelIsrael 15,94015,940 NepalNepal 210210SpainSpain 14,08014,080 EthiopiaEthiopia 100100GreeceGreece 11,65011,650

Source: The World Bank Atlas, 2000.Source: The World Bank Atlas, 2000.

http://www.indexmundi.com/g/r.aspx?c=mr&v=67http://www.indexmundi.com/g/r.aspx?c=mr&v=67

GDP as a Measure of GDP as a Measure of Economic WelfareEconomic Welfare

Types of goods and services producedTypes of goods and services produced

Nature of goods being produced eg consumer goods, military Nature of goods being produced eg consumer goods, military

goods or other public goodsgoods or other public goods

Treatment of durable goodsTreatment of durable goods

Contribution of services from durable goods (eg cars, washing Contribution of services from durable goods (eg cars, washing

machines, refrigerator, etc) in subsequent years are not included in machines, refrigerator, etc) in subsequent years are not included in

the GDP computation.the GDP computation.

External or social costsExternal or social costs

Pollution, environmental degradation are not costed into the GDPPollution, environmental degradation are not costed into the GDP

Value of leisureValue of leisure

Working hours, holidays and vacation time are not considered in Working hours, holidays and vacation time are not considered in

GDP computationGDP computation

Value of Nonmonetary TransactionsValue of Nonmonetary Transactions

GDP for the most part takes into account only GDP for the most part takes into account only currently produced goods and services supplied currently produced goods and services supplied through monetary transactionsthrough monetary transactions

• The The underground economyunderground economy is the part of is the part of an economy in which transactions take an economy in which transactions take place and in which income is generated that place and in which income is generated that is unreported and therefore not counted in is unreported and therefore not counted in GDP.GDP.

Limitations of the GDP ConceptLimitations of the GDP Concept

• Society is better off when crime Society is better off when crime decreases, but a decrease in crime decreases, but a decrease in crime is not reflected in GDP.is not reflected in GDP.

• An increase in leisure is an increase An increase in leisure is an increase in social welfare, not counted in in social welfare, not counted in GDP.GDP.

• Nonmarket and domestic activities Nonmarket and domestic activities are not counted even though they are not counted even though they amount to real production.amount to real production.

Limitations of the GDP ConceptLimitations of the GDP Concept

• GDP accounting rules do not adjust GDP accounting rules do not adjust for production that pollutes the for production that pollutes the environment.environment.

• GDP has nothing to say about the GDP has nothing to say about the distribution of output. Redistributive distribution of output. Redistributive income policies have no direct income policies have no direct impact on GDP.impact on GDP.

• GDP is neutral to the kinds of goods GDP is neutral to the kinds of goods an economy produces.an economy produces.

International Comparisons of GDPInternational Comparisons of GDP

Purchasing power parityPurchasing power parity

The number of units of currency needed in one The number of units of currency needed in one country to buy the same amount of goods and country to buy the same amount of goods and

services that 1 unit of currency will buy in services that 1 unit of currency will buy in another countryanother country

=