National Income and Macroeconomic Aggregates
What the exam tests
National income accounting defines and measures aggregate output. The exam tests GDP components, the three measurement approaches, real versus nominal values and the limits of GDP.
Core rules
- GDP is the market value of final goods and services produced within a country's borders in a period. It excludes intermediate goods, transfer payments and second-hand sales.
- Expenditure approach: GDP = C + I + G + (X - M). Income approach sums factor incomes; output approach sums value added.
- GNP = GDP + net factor income from abroad. NNP = GNP - depreciation. National income is usually NNP at factor cost.
- Nominal GDP uses current prices; real GDP uses base-period prices. GDP deflator = (nominal / real) × 100.
- Per capita GDP = GDP / population. It is an average, not a distribution.
- GDP omits non-market production, the informal economy and environmental costs, and says nothing about inequality.
Worked example
An economy has C = 500, I = 200, G = 150, X = 100 and M = 120. GDP = 500 + 200 + 150 + (100 - 120) = 830. If nominal GDP is 1,100 and the deflator is 110, real GDP = 1,100 / 1.10 = 1,000. With population 50 million, real GDP per capita is 20,000 currency units. The 100-unit trade deficit reduces GDP relative to the domestic components.
Traps
- Adding intermediate goods, which double counts output.
- Including transfer payments, pensions or second-hand sales in GDP.
- Confusing GDP with GNP; factor income from abroad belongs in GNP.
- Using the CPI to deflate GDP; the GDP deflator covers domestic output, while the CPI includes imports.
- Treating a rise in nominal GDP as real growth without adjusting for prices.