Chapter 2 Measuring The National Income Accounts

Chapter 2
Measuring the National

Income Accounts
2.1
Why an economy’s total
income equal’s its total
expenditures
In a nation’s macroeconomy, income must equal expenditure. This is true
because, in every transaction, the income of the seller must be equal to the
expenditure of the buyer.
Gross Domestic Product (GDP) is a measure of the total income or total

output in the economy. Since income equals expenditure, GDP can be
measured by adding up the income earned in the economy (wages, rent
and profit) or the expenditure on goods and services produced in the
economy. That is, income equals expenditure equals GDP.
Gross National Product (GNP) – measures the total market value of all
final goods and services produced by nationals or permanent residents of a
country during a given a year. This is regardless of where the income for the
final goods and services was earned.
EXPENDITURE APPROACH
The expenditure method is the most widely used approach for estimating
GDP, which is a measure of the economy's output produced within a
country's borders irrespective of who owns the means to production. The
GDP under this method is calculated by summing up all of the expenditures
made on final goods and services. There are four main aggregate
expenditures that go into calculating GDP: consumption by households,
investment by businesses, government spending on goods and services, and
net exports, which are equal to exports minus imports of goods and services.
The components of GDP
GDP can be measured by adding up the value of the expenditures on final
goods and services. Economists divide expenditures into four components:
consumption (C), investment (I), government purchases (G) and net exports
(NX).
Consumption is spending by households on goods and services, with the

exception of new housing.
Investment is spending on capital equipment, inventories and structures

including new housing. Investment does not include spending on stocks and
bonds.
Government purchases is spending on goods and services by all levels of
government (federal, state and local). Government purchases do not
include transfer payments such as government payments of pensions or
benefits (such as unemployment benefits), because the government does
not receive any product or service in return.
Net exports is the value of foreign purchases of domestic production

(exports) minus domestic purchases of foreign production (imports). Imports
must be subtracted because consumption, investment and government
purchases include expenditures on all goods, foreign and domestic, and the
foreign component must be removed so that only spending on domestic
production remains.
NX = Exports - Imports
Denoting GDP as Y, we can say that Y = C + I + G + NX. The variables are

defined in such a way that this equation is an identity.
GDP = C + I + G + (X-M) GNP = C + I + G + NX + (NIFA-NOFA)
GDP = C + I + G + NX GNP = GDP + NFIA

NOMINAL GDP vs REAL GDP
What Is Nominal GDP?
Nominal GDP, or nominal gross domestic product, is a measure of the value

of all final goods and services produced within a country’s borders at current
market prices. Also known as a “current dollar GDP” or “chained dollar
GDP,” nominal GDP takes price changes, money supply, inflation, and
changing interest rates into account when calculating a country’s gross
domestic product.
How Is Nominal GDP Calculated?
• In calculating nominal GDP, we only use current quantities at current year

prices. This is achieved by using a consumer price index of the country’s
basket of goods. Nominal GDP takes into account all the goods and services
that are produced within a country’s borders at these current prices.
• If, for instance, the United States produced only three products—coffee,
sugar, and creamer, let’s say—nominal GDP would be calculated by first
multiplying the quantity of each product produced by its current market
price, and then adding the three results together. In order to calculate it, we
first need to know the quantity of each product produced and the up-to-
date average price for that product.
• Therefore, (coffee quantity x coffee’s current market price) +
(sugar quantity x sugar’s current market price) + (creamer
quantity x creamer’s current market price) = Nominal GDP
• For instance in 2019, the Philippines could have produced 1

million kilograms of coffee, which currently sells for Php. 15/kg; 2
million kilograms of sugar which currently sells at Php. 35/kg; and 1
million kilograms of creamer, which sell for Php. 50/kg. With this
information, we can now calculate this country’s nominal GDP by
plugging it into the formula above.
Nominal GDP = (1M kg x 15/kg) + (2M kg x 35/kg) + (1M kg x 50/kg)

= 15M + 70M + 50M
Nominal GDP = 135M
In addition that, it can then be further reduced to the nominal GDP
per capita by dividing the nominal GDP by the country’s
population.
Example: Country’s population is 110M as of 2020 Cencus
Nominal GDP per Capita = NGDP/Population

= 135Million / 110M
= 1.22M
What Is Real GDP?
Real gross domestic product, or real GDP, is a measure of a country’s output

in terms of the value of its goods and services, its investments, its government
spending, and its exports. Real GDP takes nominal GDP and adjusts for
inflation or deflation by comparing and converting prices to a base year’s
prices. By adjusting for price changes, the final number won’t reflect false
increases or decreases in GDP due to fluctuation in prices, and it is a more
accurate representation of a country’s economic
How to Calculate Real GDP
• To calculate real GDP, you must first calculate nominal GDP for the deflator,
which is a price index used to measure inflation against a base year.
• The NEDA calculates the GDP deflator for the Phil every year. It uses the year
2020 as the standard base year for prices and exchange rates.
Example:
1.5M Kilograms of coffee which sells for Php. 20/kg, 2.5M kilograms of sugar
which sells for Php. 40/kg, and 1.5M kilograms of creamer which sells for Php.
55/kg
Real GDP = (1.5M kg x 15/kg) + (2.5M kg x 35/kg) + (1.2M kg x 50/kg)
= 22.5M + 87.5M + 60M
Real GDP = 170M
GDP Deflator = Nominal GDP

X 100
Real GDP
= 212.5M X 100 = 125

170M

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Chapter 2

Measuring the National

Gross Domestic Product (GDP) is a measure of the total income or total

Consumption is spending by households on goods and services, with the

Investment is spending on capital equipment, inventories and structures

Net exports is the value of foreign purchases of domestic production

Denoting GDP as Y, we can say that Y = C + I + G + NX. The variables are

GDP = C + I + G + NX GNP = GDP + NFIA

What Is Nominal GDP?

Nominal GDP, or nominal gross domestic product, is a measure of the value

• In calculating nominal GDP, we only use current quantities at current year

• For instance in 2019, the Philippines could have produced 1

Nominal GDP = (1M kg x 15/kg) + (2M kg x 35/kg) + (1M kg x 50/kg)

Example: Country’s population is 110M as of 2020 Cencus

Nominal GDP per Capita = NGDP/Population

Real gross domestic product, or real GDP, is a measure of a country’s output

Real GDP = 170M

GDP Deflator = Nominal GDP

= 212.5M X 100 = 125

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