National Income and Macroeconomic Aggregates
Domain 7 covers the measurement of aggregate output and income: the concepts GDP, GNP, NNP and NDP, market price versus factor cost, the three estimation methods, and the precautions that prevent double counting.
Core identities
- GDP: market value of final goods and services produced within the domestic territory in a year.
- GNP = GDP + net factor income from abroad (NFIA).
- NNP = GNP - depreciation. NNP at factor cost is national income.
- Market price to factor cost: factor cost = market price - indirect taxes + subsidies.
- Personal income is income actually received by households; disposable income = personal income - direct taxes - non-tax payments. Per capita income = national income divided by population.
Methods
- Product/value-added: sum of value added by all sectors; count only final goods.
- Income: rent + wages + interest + profit + mixed income.
- Expenditure: C + I + G + (X - M).
Worked example
GDP at market price = 5,000; NFIA = 200; depreciation = 300; indirect taxes = 400; subsidies = 100. GNP = 5,000 + 200 = 5,200. NNP at market price = 5,200 - 300 = 4,900. NNP at factor cost = 4,900 - 400 + 100 = 4,600, which is national income.
Traps
- Adding NFIA when computing GDP; NFIA belongs only to GNP.
- Including transfer payments, capital gains and second-hand sales - none are current production.
- Counting intermediate goods and double counting them.
- Forgetting to subtract depreciation before moving from GNP to NNP.
- Treating nominal and real income as identical; real income is deflated by a price index.