1. Prepared by Anton Ljutic
Lecture notes
Prepared by Anton Ljutic

2. Measuring National Income
CHAPTER THREE
Measuring National Income

3. This Chapter Will Enable You to:
Understand the circular flow of national income
Explain the concept of equilibrium and why national income can rise and fall
Use StatsCan data to calculate various national income accounting statistics
Understand some of the problems in determining official statistics

4. The Circular Flow Of Income (I)
Flow of factor services
Labour – Land – Capital – Enterprise
Financial flows
Wages – Rent – Interest - Profit
Households sell factor services to the business sector and earn incomes. With this income, they pay for the goods and services received from the business sector.

5. Circular Flow (II) Consumption spending $ Goods and services
Business sector
Household sector
Factors of production $
Factor incomes: rent, wages, interest, profit
National income is the sum of all incomes earned from economic transactions or the sum of all spending

6. Leakages and Injections (I)
Leakage = Income received within the circular flow that does not flow directly back
Savings
Taxes less transfer payments
Transfer payments = One way transactions; payment is made, but no good or service flows back in return
Imports

7. Leakages and Injections (II)
Injection = Any spending flow that is not dependent on the current level of income
Investment (spending on capital goods)
Exports
Government spending

8. Leakages and Injections (III)
Figure 3.3
Consumption spending $
Goods and services
Business sector
Household sector
Factors of production $
Factor incomes
Investment
Saving, loanable funds
Financial intermediaries

9. Leakages and Injections (IV)
Figure 3.4
Exports
Imports
Consumption spending
Goods and services
Business sector
Household sector
Factors of production $ $
Factor incomes
Investment
Saving, loanable funds
Financial intermediaries

10. Leakages and Injections (V)
Figure 3.4
Exports
Imports
Consumption spending
Goods and services T T
Business sector
Household sector
Government G Tr
Factors of production $ $
Factor incomes
Investment
Saving, loanable funds
Financial intermediaries

11. Equilibrium and the Level of Income (I)
Equilibrium = A state of balance of equal forces resulting in no tendency to change
National income equilibrium = That level of income where total leakages from the circular flow equal total injections
S + IM + T = I + X + G

12. Equilibrium and the Level of Income (II)
Value of production = business receipts = aggregate expenditures
Aggregate expenditures = Total spending in the economy, divided into the four categories
Value of production = cost of production = total income
C + I + G + (X-IM)

13. Measuring National Income
Gross domestic product (GDP)
The value of all final goods and services produced in an economy in a certain period
It measures the value at market prices
National income (Y)
Total earnings of all the factors of production in a certain period
GDP = Y

14. Gross National Product
GNP = The total market value of all final goods and services produced by the citizens of a country regardless of the location of production
It is equal to GDP at market prices plus/minus net foreign investment income

15. GDP: The Expenditure Approach
It measures the value of production in a country over a period of one year
Value of production = aggregate expenditures (AE) plus or minus change in inventories
AE = C + I + G + (X - M) or
AE = C + I + G + Xn

16. Measuring GDP: The Income Approach
Wages and salaries
Gross profits which are the earnings of corporation before any distribution of dividends or payment of taxes
Interest and investment income
Farmers’ income
Net income of non-farm unincorporated business (self employed income)
Net domestic income:
It consists of all incomes earned in Canada.
Equals NNP at factor cost.

17. Reconciling GNP and National Income
GDP at market prices +/- net foreign investment income = GNP at market prices
GNP at market prices - depreciation = Net National Product at market prices (NNP)
NNP at market prices - indirect taxes (net of subsidies) = NNP at factor costs (same as national income)

18. Related Measures of GDP
NNP at factor cost less
Undistributed corporate profits
Corporate profit taxes
Other income not paid out
plus
Government transfer payments
equals
Personal income
less
personal income taxes
Disposable income (the personal after-tax income of people)

19. Problems in Measuring GDP
Not all market sales should be included such as:
The sale of intermediate goods
Sales that merely transfer ownership of assets
Both public and private transfer payments
The sale of second-hand goods

20. Omissions from Measured GDP
Not all goods and services are included such as:
Illegal activities
Unreported activities
Non-market activities (homemaker services, do-it-yourself, and voluntary work)

21. Chapter Summary: What to Study and Remember
the circular flow of national income
the concept of equilibrium and why national income can rise and fall
use StatsCan data to calculate various national income accounting statistics
some of the problems in determining official statistics