Table of Contents

Chapter 1: Abstracts ... 2

Chapter 2: Introduction ..... 3
Chapter 3: Literature Review ..... 4
A.
B.
C.
D.
E.

The Economys Income and Expenditure . 5

The Measurement of Gross Domestic Product . 6
The Components of Gross Domestic Product .. 7
Real Versus Nominal Gross Domestic Product .9
GDP & Economic Well-Being 11

Chapter 4: Data & Analysis ..... 12

Chapter 5: Conclusion ...... 16
Chapter 6: Sources & References ........... 17

Measuring a Nations Income

Chapter 1
Abstract
Essentially, what is the activity of measuring a nations income? What is the purpose of it? How
do we compute it and then decide whether a nations economy is doing well? How does the total
income and total expenditure affect the income of a nation? Wed know the economy status of a
nation once we calculate the total income and expenditure with gross domestic product (GDP).
But before it comes to the calculation process what are the disparate types of spending in the
composition of GDP that we must know?
Additionally, how do we compute the total quantity of goods and services the economy is
producing that is not affected by changes in the prices of those goods and services? What would
be the value of the goods and services produced within a period of time if we valued these items
at the prices that prevailed in some years in the past? What about the production of goods and
services valued at current prices? How do we know the current level of prices relative to the
level of prices in the base year?
Finally, why does nations income measurement is seen as an importance? How does the
economy well-being of a person, an organization, and a businesses affected by it?

Measuring a Nations Income

Chapter 2
Introduction

Before we learn further about the theory of measuring a nations income, one must simply
understand the main comprehension of it as well as its importance in economy. In contrast to
microeconomics, in which we usually investigated the impact of an exogenous change on
usually just two variables such as price and quantity, macroeconomics is the study of the
entire economy as a whole. Essentially, to decide whether a person is doing well financially,
we might have to look at his or her income. In this case, the same idea applies to nations
economy condition. By judging on the total income of each individual, organization, or
business, we can decide if a nation is financially stable.
By using the calculation of gross domestic product (GDP) we can compute the total
income of everyone in the economy and the total expenditure on the economys output of
services and goods. Chiefly, the total income and total expenditure are the same thus income
must equal to expenditure.
Every amount spent by a buyer in a transaction becomes an income for the seller, hence the
equality of the income and disbursement. The GDP can be calculated by adding up the total
expenditure by the buyer or by adding up the total income by the seller.
GDP is one of the most comprehensive and closely watched economic statistics: It is used
by the White House and Congress to prepare the Federal budget, by the Federal Reserve to
formulate monetary policy, by Wall Street as an indicator of economic activity, and by the
business community to prepare forecasts of economic performance that provide the basis for
production, investment, and employment planning.

Measuring a Nations Income

But to fully understand an economys performance, one must ask not only What is GDP?
(or What is the value of the economys output?), but other questions such as: How much of
the increase in GDP is the result of inflation and how much is an increase in real output?
Who is producing the output of the economy? What output are they producing? What
income is generated as a result of that production? and How is that income used (to
consume more output, to invest, or to save for future consumption or investment)?
Thus, while GDP is the featured measure of the economys output, it is only one summary
measure. The answers to the follow-up questions are found by looking at other measures
found in the NIPAs (National Income and Produced Accounts); these include personal
income, corporate profits, and government spending. Because the economy is so complex, the
NIPAs simplify the information by organizing it in a way that illustrates the processes taking
place.

Measuring a Nations Income

Chapter 3
Literature Review
A. The Economys Income and Expenditure
In contrast to microeconomics, in which we usually investigated the impact of an
exogenous change on usually just two variables such as price and quantity, macroeconomics is
the study of the entire economy as a whole. Essentially, by judging on the total income of
each individual, organization, or business, we can decide if a nation is financially stable.
By using the calculation of gross domestic product (GDP) we can compute the total
income of everyone in the economy and the total expenditure on the economys output of
services and goods. Chiefly, the total income and total expenditure are the same thus income
must equal to expenditure. Every amount spent by a buyer in a transaction becomes an
income for the seller, hence the equality of the income and disbursement. The GDP can be
calculated by adding up the total expenditure by the buyer or by adding up the total income by
the seller.
Income-based GDP is calculated by adding earnings from the factors of production (labour
and capital) plus taxes less subsidies, in order to obtain a measure comparable to that of
expenditure-based GDP. Expenditure-based GDP is calculated by adding the final
expenditures of the six sectors of the economy: households, non-profit institutions serving
households, non-financial corporations, financial corporations, governments and nonresidents.
Many of the main aggregates associated with the production accounts have been defined in
describing the input-output system. There are however, some broad aggregates of particular
significance to the income and expenditure accounts, such as national income, personal
disposal income and final domestic demand that remain to be defined.

Measuring a Nations Income

B. The Measurement of Gross Domestic Product

Market value, means that production is valued at the price paid for the output. Hence,
items sold at higher prices are more heavily weighted in GDP. Furthermore GDP adds

different kind of products into single measure of the value of economic variety.
Of all, means that GDP attempts to measure all production in the economy that is legally
sold in the markets. Besides, GDP also includes the market value of the housing services
provided by the economys stock of housing. However, GDP excludes items produced
and sold illicitly or illegal because it is difficult to measure due to the absence of

accurate reports regarding them.

Final, means that GDP includes only goods and services that are sold to the end user.
Intermediate goods are the units that are produced by one form to be further processed
by another firm. Counting only final goods and services avoids double counting

intermediate production.
Goods and services, while GDP generally includes tangible manufactured items, it also

includes intangible such as the services from a financial consultant.

Produced, GDP does not include the sale of used items which were produced in a

previous period. This happens to prevent double counting of the products.

Within a country, GDP measures the value of production within the geographic borders

of a country. Items are included in a nations GDP if they are produced domestically.
In a given period of time, the GDP is measured per year or per quarter. It measures the
economys flow of income and expenditure during that interval.

Measuring a Nations Income

C. The Components of Gross Domestic Product

The components of GDP will tell you what a country is good at producing. That's because GDP
is the country's total economic output for each year.

Y = C + I + G + NX

Consumption (C)
is spending by households on goods and services. The final purchase of goods and
services by individuals. The purchase of a new pair of shoes, a hamburger at the fast food
restaurant, or the service of getting your house cleaned are all examples of consumption.
It is also often referred to as consumer spending.

Investment (I)
is spending on capital equipment, inventories, and structures such as new housing.
Investment does not include spending on stocks and bonds. Investment includes
purchases that companies make to produce consumer goods. However, not every
purchase is counted. If a purchase only replaces an existing item, then it doesn't add to
GDP and so isn't counted. The Bureau of Economic Analysis (BEA) divides business
investment into two sub-components: Fixed Investment and Change in Private Inventory.

Government Purchases (G)

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
for social security, welfare, and unemployment benefits because the government does not
receive any product or service in return.

Net Exports
is the value of foreign purchases of U.S. domestic production (exports) minus U.S.
domestic purchases of foreign production (imports). Imports must be subtracted because
consumption, investment, and government purchases include expenditures on all goods,

Measuring a Nations Income

the foreign and domestic, and foreign component must be removed so that only spending
on domestic production remains.
Here are examples for further understanding in the components of GDP:
I.

If an individual spends money to renovate their hotel so that occupancy rates increase,
that is private investment, but if they buy shares in a consortium to do the same thing it
is saving. The former is included when measuring GDP (in I), the latter is not.
However, when the consortium conducts the renovation the expenditure involved
would be included in GDP.

II.

If a hotel is a private home then renovation spending would be measured

as Consumption, but if a government agency is converting the hotel into an office for
civil servants the renovation spending would be measured as part of public sector
spending (G).

III.

If the renovation involves the purchase of a chandelier from abroad, that spending
would also be counted as an increase in imports, so that NX would fall and the total
GDP is affected by the purchase. (This highlights the fact that GDP is intended to
measure domestic production rather than total consumption or spending. Spending is
really a convenient means of estimating production.)

IV.

If a domestic producer is paid to make the chandelier for a foreign hotel, the situation
would be reversed, and the payment would be counted in NX (positively, as an
export). Again, GDP is attempting to measure production through the means of
expenditure; if the chandelier produced had been bought domestically it would have
been included in the GDP figures (in C or I) when purchased by a consumer or a
business, but because it was exported it is necessary to "correct" the amount consumed
domestically to give the amount produced domestically.

Measuring a Nations Income

D. Real Versus Nominal Gross Domestic Product

Nominal GDP is the value of output measured in the prices that existed during the year in
which the output was produced (current prices). Nominal GNP measures the value of output
during a given year using the prices prevailing during that year. Over time, the general level
of prices rise due to inflation, leading to an increase in nominal GNP even if the volume of
goods and services produced is unchanged.
Real GDP is the value of output measured in the prices at prevailed in some arbitrary (but
fixed) base year (constant prices). If we observe that nominal GDP has risen from one year to
the next, we are unable to determine whether the quantity of goods and services has risen or
whether the prices of goods and services have risen. However, if we observe at real GDP has
risen, we are certain that the quantity of goods and services has risen because the output from
each year is valued in terms of the same base year prices. Thus, real GDP is the better measure
of production in the economy.
GDP Deflator, is an economic metric that accounts for inflation by converting output
measured at current prices into constant-dollar GDP. The GDP deflator shows how much a
change in the base year's GDP relies upon changes in the price level. Also known as the "GDP
implicit price deflator."
In economics, it's helpful to be able to measure the relationship between nominal GDP
(aggregate output measured at current prices) and real GDP (aggregate output measured at
constant base year prices). To do this, economists have developed the concept of the GDP
deflator. The GDP deflator is simply nominal GDP in a given year divided by real GDP in that
given year and then multiplied by 100.

Measuring a Nations Income

Real GDP, or real output, income, or expenditure, is usually referred to as the variable Y.
Nominal GDP, then, is typically referred to as P x Y, where P is a measure of the average or
aggregate price level in an economy. This shows why the GDP deflator can be thought of as a
measure of the average price of all of the goods and services produced in an economy

Since the GDP deflator is a measure of aggregate prices, economists can calculate a
measure of inflation by examining how the level of the GDP deflator changes over time.
Inflation is defined as the percent change in the aggregate (i.e. average) price level over a
period of time (usually a year), which corresponds to the percent change in the GDP deflator
from one year to the next.

Measuring a Nations Income

10

E. GDP & Economic Well-Being

Real GDP is a long indicator of the economic well-being of a society because countries
with a large real GDP per person tend to have better educational systems, better health care
systems, more literate citizens better housing, a better diet, a longer life expectancy, and so
on. That is, a larger real GDP per person generally indicates a larger consumption per person.
However, GDP is not a perfect measure of material well-being because it excludes leisure, the
qua1ity of the environment, and goods and services produced at home and not sold markets
such as child-rearing, housework, and volunteer work. In addition, GDP says nothing about
the distribution of income. GDP also fails to capture underground or shadow economy the
portion of economy that does not report its economic activity. For example, GDP does not
measure illegal drug sales income at is unreported to avoid taxation.
For many years, especially since World War II, nations have equated economic growth
with progress. Economic growth is an increase in the production and consumption of goods
and services, and is indicated by increasing Gross Domestic Product (GDP). GDP, therefore,
has become the standard measure of economic progress, even though it was only intended as a
macroeconomic accounting tool. Prompted by Wall Street, the Federal Reserve System, and
the media, citizens generally applaud increases in GDP.
The problem with GDP is that it doesn't separate costs from benefits. It simply adds them
together under the heading of economic activity. In a 1968 campaign speech, Robert F.
Kennedy eloquently explained the shortcomings of using GDP to gauge progress. Is
increasing GDP indicative of increasing wellbeing? It depends on whether the social costs of
such an increase outweigh the benefits. GDP is a good measure of size, but at some point

Measuring a Nations Income

11

bigger is worse, not better. At the individual level, economic activity is required for wellbeing,
but the relationship becomes very weak after a surprisingly low per capita GDP is achieved.
Beyond that, the disutility of production and consumption causes a net drain on health and
happiness.

Chapter 4
Data Analysis
Estimates of GDP and their revisions
The first estimate of quarterly GDP is published approximately 25 days after the end of the
quarter. This is then updated four weeks later when the second estimate of GDP (formerly
known as UK Output, Income and Expenditure) is published, containing more detail on the
output approach and some aggregate income and expenditure data. Detailed information on
income and expenditure components is available a further four weeks later when the Quarterly
National Accounts (QNA) are published. There are potential revisions to the data in
subsequent QNA releases as well as in the annual national accounts Blue Book publication
wherein annual data are balanced at a much more detailed level and, potentially, major
methodological changes can be introduced, both of which can lead to revisions to quarterly
data.
The largest methodological revision introduced in recent years was the improvement in the
measurement of the output of the financial services sector (FISIM) in the 2008 Blue Book, in
line with international regulation. This had the effect of revising GDP upwards in every period
back to the 1960s.
So, revisions fall into two main categories, improved and updated data and major
methodological changes. Conflation of these two categories can lead to incorrect conclusions

Measuring a Nations Income

12

regarding the quality of early estimates, hence it is worth looking at various vintages of the
data. In the main, early revisions are due to improved data, later ones to improved
methodology (see Brown et al for further discussion).
The first chart below shows GDP growth rates (based on each quarter compared with the
same quarter of the previous year) at various maturities, with the initial estimate and estimates
after three, six, 12, 24, 36, 48 and 60 months. The second just compares the first estimate with
that after 60 months.

Measuring a Nations Income

13

Measuring a Nations Income

14

The charts illustrate that, in broad terms, the picture of growth in GDP over this period is
similar, irrespective of the maturity of data, although there are some exceptions, for example
in the late 1980s (see Brown et al). Indeed, based on standard statistical tests, there is no
evidence of bias in revisions of GDP growth (calculated as the average revision) between:
1. The preliminary estimate and the second annual balance;
2. The second estimate and the second annual balance or;
3. Quarterly national accounts and the second annual balance in the last five years.
This result also holds in the 1980s and the 2000s as a whole, but there is evidence of a
small positive bias in GDP revisions in the 1990s. The reason for picking the second annual
balance to test against is that there are far fewer data updates after this period. The extent to
which there is potential bias in the estimates is also a function of the period over which
revisions are calculated. This is illustrated in the chart below, which shows the average
revisions after 24 months calculated over different historical periods:
Mean revisions between T and T+24 GDP estimates 0.001800 0.001600
0.001400

0.001200

0.001000

0.000800

0.000600

0.000400

0.000200

0.000000 -0.000200.This shows clearly the variability of the mean revision and
that, in the period from 1995 quarter one to 2009 quarter one, the average
revision between the first estimate and the estimate published two years later
has become markedly smaller.

Measuring a Nations Income

15

Conclusion In summary, the addition of the latest data to the analysis

presented in the previous article has not changed the general conclusions
made there.

4. The size of revisions in the recent period has been smallFurthermore, revisions after
the second balanced year are generally due to methodological changes. To the extent
that these have led to revisions in the past, there is no reason to suppose that any future
revisions consequent on methodological improvements will be of the same size or
direction. That would depend on the nature of the methodological improvements

Measuring a Nations Income

16

Chapter 5
Conclusion
In our opinion GDP is an estimate of market throughput, adding together the value of all
final goods and services that are produced and traded for money within a given period of time. It
is typically measured by adding together a nations personal consumption expenditures
(payments by households for goods and services), government expenditures (public spending on
the pro-vision of goods and services, infrastructure, debt payments, etc.), net exports (the value
of a countrys exports minus the value of imports), and net capital formation (the increase in
value of a nations total stock of monetized capital goods).
Growth does usually and eventually translate into higher consumption of goods and services.
But most studies suggest that the general conclusion is that while cross-country data shows a
correlation between GDP per capita and objective indicators of quality of life (for example,
richer countries tend to have higher life expectancy), time series analysis provides very little
support for GDP per capita. Causation of improvements in the objective indicators (for example,
in a large number of countries the turning point towards sustained economic growth anteceded
by many decades sustained improvements in life expectancy).
Concisely, GDP measures the size of the nations economy, and total market of goods and
services produced within the nation. The computed data of those aspects say a lot about a nation.
In addition, the economists and business owners use GDP results in decisions making which
leads to wider business opportunities, hence the chance of a nation to dominate the worldwide
successful overall rate. But should we judge a nations success in general based on its GDP? Is it
guaranteed that wed have better life if we choose to live in a country with great economy
condition? Wed have to disagree by that concept since each country has different either internal
or external advantages to support the economic activities. For instance, although U.S.A is known
its dominance in worldwide economy, it doesnt guarantee to fulfill its peoples life expectancies.
In the other hand, despite for Switzerlands high annual taxes, it is proven to provide its peoples
main necessity. Therefore, one shall not judge a country based on its GDP achievements.

Measuring a Nations Income

17

Chapter 6
Sources & References

Herrick, Bruce, and Charles P. Kindleberger. 1983. Economic Development. McGrawHill Book Co. ISBN 0070345848.

Karasek, Mirek, Waddah K. Alem, and Wasfy B. Iskander. 1988. Socio-Economic

Modelling & Forecasting in Lesser Developed Countries. London: The Book Guild
Ltd. ISBN 0863322204.

Kuznets, Simon. 1956. Quantitative Aspects of the Economic Growth of Nations. I.

Levels and Variability of Rates of Growth. Economic Development and Cultural Change.

5: 1-94.
Kuznets, Simon. 1966. Modern Economic Growth Rate Structure and Spread. New
Haven, CT: Yale University Press.

Kuznets, Simon. 1971. Economic Growth of Nations: Total Output and Production
Structure. Cambridge, MA: Harvard University Press. ISBN 0674227808.

Mings, Turley, and Matthew Marlin. 2000. The Study of Economics: Principles,
Concepts, and Applications, 6th ed. Dushkin/McGraw-Hill. ISBN 0073662445.

Morgenstern, O. 1963. On the Accuracy of Economic Observations. Princeton, NJ:

Princeton University Press. ISBN 0691003513.

Czech, Brian et al. 2005. Establishing Indicators for Biodiversity. Science 308:791-792.
Understanding the quality of early estimates of Gross Domestic Product, Economic and
Labour Market Review 2009,

http://www.statistics.gov.uk/elmr/12_09/downloads/ELMR_Dec09_Brown.pdf
United Nations Development Programme. 2009. Statistics Website.

http://hdr.undp.org/en/statistics/.
Victor, P. 2008. Managing without Growth: Slower by Design, Not Disaster. Edward
Elgar Publishing. 260pp.

Amadeo, Kimberly. (2015)

http://useconomy.about.com/od/grossdomesticproduct/f/GDP_Components.htm

Beggs, Jody. (2015)

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http://economics.about.com/od/gross-domestic-product/ss/The-Gdp-Deflator_3.htm#stepheading

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