National Income & Accounting

NODE 01

Macroeconomics

vs

• Studies the economy as a whole.
• National income, output, employment.
• Inflation, interest rates, growth.
• Micro = Individual | Macro = Aggregate.

NODE 02

Economic Aggregates

• Quantity measured for the economy as a whole.
• E.g., GDP, GNP, National Income.
• Aggregate Consumption / Investment.

NODE 03

Final Goods

• Purchased for final use.
• Not for further processing/resale.
• E.g., Consumer buying bread.
• Included in GDP calculation.

NODE 04

Intermediate Goods

→

→

• Used as an input to produce another good.
• Used up during the production process.
• Not counted separately in GDP.

NODE 05

Double Counting

WHT

+

FLR

+

BRD

=

ERR

• Counting the same output value more than once.
• Wheat + Flour + Bread = Error.
• National accounting avoids this.

NODE 06

Value Added

100

50+

70+

• Additional value created at a stage of production.
• Value of Output − Intermediate Consumption.
• Sum of value added = Value of final output.

NODE 07

Stock and Flow

• Stock: Measured at a point in time (Wealth, Debt).
• Flow: Measured over a period of time (Income, Prod).
• Extremely important distinction in macro.

NODE 08

Gross vs Net

- DEP =

• Gross: Includes depreciation.
• Net: Excludes depreciation.
• Net = Gross − Depreciation.

NODE 09

Depreciation

• Loss in value of fixed capital.
• Due to wear & tear, obsolescence, normal aging.
• Also called: Consumption of fixed capital.

NODE 10

Investment

• Expenditure on capital goods & inventory changes.
• Adds to productive assets.
• Gross Investment vs Net Investment.

NODE 11

Circular Flow of Income

• Basic 2-sector model: Households ↔ Firms.
• HH provide factors → receive income.
• HH spend income → Firms receive revenue.
• Production continues.

NODE 12

Real vs Money Flow

• Real flow: Movement of goods/services/factors.
• Money flow: Movement of payments/income.
• They move in opposite directions.

NODE 13

Leakages & Injections

• Leakages: Funds leaving flow (Saving, Taxes, Imports).
• Injections: Spending entering (Invest, Gov Exp, Exports).
• Equilibrium condition: Leakages = Injections.

NODE 14

GDP

• Gross Domestic Product.
• Market value of final goods/services.
• Produced within DOMESTIC territory during a period.

NODE 15

GNP

• Gross National Product.
• Attributable to a country's RESIDENTS/nationals.
• GNP = GDP + Net Factor Income from Abroad.

NODE 16

GDP vs GNP

TERR

vs

RES

• GDP focuses on WHERE production occurs.
• GNP focuses on WHO earns the income.
• Territory vs Resident concept.

NODE 17

NDP

=

• Net Domestic Product.
• NDP = GDP − Depreciation.

NODE 18

NNP

=

• Net National Product.
• NNP = GNP − Depreciation.

NODE 19

National Income

NNP @ FC

• Traditional framework: National Income = NNP at Factor Cost.
• Links national production with factor incomes.

NODE 20

Market Price vs Factor Cost

+ TAX

• Market Price: Paid by purchaser.
• Factor Cost: Income accruing to factors.
• Distinction incorporates indirect taxes & subsidies.

NODE 21

Basic Transformation

MP=FC+NIT

• Market Price = Factor Cost + Net Indirect Taxes.
• Where NIT = Indirect Taxes − Subsidies.

NODE 22

National Income Identities

• GDPmp − Dep = NDPmp
• NDPmp + NFIA = NNPmp
• NNPmp − NIT = NNPfc
• NNPfc = National Income

NODE 23

Three Methods

• 1. Value Added / Product Method.
• 2. Income Method.
• 3. Expenditure Method.
• Output = Income = Expenditure.

NODE 24

Value Added Method

+

+

• Value of output − Intermediate consumption.
• Equals Gross Value Added (GVA).
• Important: Avoid double counting.

NODE 25

Income Method

• Adds factor incomes generated during production.
• Compensation of employees (Wages).
• Rent, Interest, Profits.

NODE 26

Expenditure Method

Y =C+I+G+NX

• Adds expenditure on final goods/services.
• Y = C + I + G + (X − M).
• Net exports = X − M.

NODE 27

Consumption (C)

• Spending by households on final goods/services.
• E.g., food, clothing, transport, healthcare.

NODE 28

Investment (I)

• Spending that adds to productive assets/inventories.
• E.g., machinery, factories, construction.

NODE 29

Government Exp (G)

• Government purchases of final goods/services.
• Transfer payments are NOT included here (not for current production).

NODE 30

Exports & Imports (NX)

EXP

IMP

• Exports (X): Domestic prod sold to foreigners (Added).
• Imports (M): Foreign prod bought by residents (Subtracted).
• NX = X - M.

NODE 31

Nominal GDP

P×Q

• Values current output at current prices.
• Can rise due to more production OR higher prices.

NODE 32

Real GDP

• Measures output using constant base-year prices.
• Removes effect of price changes.
• Tracks changes in actual physical volume/output.

NODE 33

Nominal vs Real GDP

• Nominal GDP ↑ does not necessarily mean Real Output ↑.
• If output is same but prices rise, Nominal rises, Real stays flat.

NODE 34

GDP Deflator

• Index comparing nominal GDP with real GDP.
• = (Nominal GDP ÷ Real GDP) × 100.
• Reflects price level of domestically produced final goods.

NODE 35

GDP Growth

• Change in REAL output over time.
• Better measure of economic growth than nominal.

NODE 36

Per Capita Income

NI

• Average income/output per person.
• = National Income ÷ Population.
• Does NOT show inequality or distribution.

NODE 37

GDP & Welfare

• GDP ≠ complete measure of welfare.
• Ignores distribution, leisure, unpaid work.
• Ignores environmental quality, health aspects.

NODE 38

Economic Welfare vs GDP

• Two economies can have identical GDP but different outcomes.
• High inequality vs Equal distribution.
• GDP = economic activity measure, not welfare.

NODE 39

Green Accounting Connection

🌱

• Supplementing GDP with environmental measures.
• Accounts for environmental depletion/degradation.
• Connects to Sustainable Economy (Realm 18).

NODE 40

National Accounts System

• Not just a single formula.
• Organizes info on Prod, Inc, Exp, Saving, Trade.
• Same activity observed from different sides.

NODE 41

The Three-Sided Identity

PROD INC EXP

• What was produced? (Production)
• Who received income? (Income)
• Who purchased it? (Expenditure)
• PROD = INC = EXP.

NODE 42

Important Distinctions

GDPGNP

GROSSNET

MPFC

NOMREAL

STOCKFLOW

• Domestic vs Resident (GDP/GNP).
• Before vs After depreciation (Gross/Net).
• Purchaser vs Factor (MP/FC).
• Current prices vs Volume adjusted (Nom/Real).

NODE 43

Master Nat-Income Chain

• PROD → VA → GDP.
• GDP + NFIA = GNP → - DEP = NNP.
• NNP - NIT = National Income.
• Also: C + I + G + NX = GDP.

NODE 44

Master Circular Flow

• Expands the 2-sector model.
• Households + Firms + Government.
• + Financial System + Rest of World.
• Connects Realms 07, 08, 10, and 12.