Module 2: Measuring National
Output and National Income
Manish Chauhan
Different Sector of the Economy
On classical basis
Primary: extraction of raw materials mining, fishing and agriculture.
Seondary :concerned with producing finished goods, e.g. factories
making toys, cars, food, and clothes.
Tertiary:concerned with offering intangible goods and services to
consumers. This includes retail, tourism, banking, entertainment and I.T.
services
Industrial Classification
At international level International Standard Industrial Classification (ISIC)
At national level National Industrial Classification- 2008
Income, Expenditure and Circular Flow
Stock vs. Flows
Stock Variable: It is a quantity measured at a point in time.
Flow Variable: It is a quantity measured per unit of time.
Example
A persons wealth is stock, his income and expenditure are flow
The amount of capital in the economy is a stock, the amount of investment is a flow
The government debt is a stock, the government debt is stock, the government budget deficit is a
flow
Final goods, value added, and GDP
Final good produced by firm. Example
Value added =Value of Output Value of intermediate goods the firm used
GDP is the value of final goods produced
GDP = Sum of value added at all stages
Note: The value of the final goods already includes the value of the intermediate goods,
so including intermediate and final goods in GDP would be double-counting.
The expenditure components of GDP
Y = C + I + G + (X M)
C: Consumption
I: Investment
G: Government spending
X-M: net exports= Export Import
Consumption: The value of all goods and services bought by households.
Includes:
Durable goods : last a long time. ex: cars, home appliances
Nondurable goods: last a short [Link]: food, clothing
Services: work done for consumers, ex: dry cleaning, air travel.
Investment: Spending on [the factor of production] capital or Spending on
goods bought for future use
business fixed investment
Spending on plant and equipment that firms will use to produce other goods & services.
residential fixed investment
Spending on housing units by consumers and landlords.
inventory investment
The change in the value of all firms inventories.
Government spending (G):
G includes all government spending on goods and services.
G excludes transfer payments
(e.g., unemployment insurance payments), because they do not represent spending on goods and
services.
Methods of Calculating National Income
Value Added Method
It is also called net output method.
The following are the steps to calculate national income using the value-
added method:
1. Classifying the production units into primary, secondary, and tertiary sectors.
2. Estimating Net Value Added (NVA) of each sector.
3. Taking the sum of NVA of all the industrial sectors of the economy. This will give NDP.
4. Estimating NFIA and adding it to NDPfc, which gives NNPfc
Income Method
Traditionally, there are four factors of production, namely land, labor, capital,
and organization.
Accordingly there are four factor payments
Rent
compensation of employees
Interest
Profit
Final Expenditure Method
It is used to measure final expenditures incurred by production units for
producing final goods and services within an economic territory during a given
time period.
Final expenditure of an economy is divided into consumption expenditure
and investment expenditure.
Consumption expenditure: (1) Private Final Consumption Expenditure (PFCE) (2) Government Final
Consumption Expenditure (GFCE)
Investment Expenditure : 1)Acquisition of fixed capital assets, 2) Change in stocks, 3) Net acquisition
of valuables