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

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.

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.

Car 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.

Example 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.

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:

$GDP=C+I+G+(X–M)$

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.