1. National Income Accounting
Lecture 2
National Income Accounting

2. National Income Accounting
The circular flow of income and expenditure
Definition of national income
Measurement of National Income
The Expenditure Approach
The Components of GDP
The Factor Payments Approach
The Value Added Approach

3. Economy’s Income & Expenditure
Gross Domestic Product (GDP)
Measures the total income of everyone in the economy
Measures the total expenditure on the economy’s output of goods and services
For an economy as a whole
Income must equal expenditure
Every transaction has a buyer and a seller
If someone pays someone else Ghc100 to mow a lawn, the expenditure on the lawn service (Ghc100) is exactly equal to the income earned from the production of the lawn service (Ghc100).

4. Economy’s Income & Expenditure
Circular-flow diagram:
Describes all transactions between all households and firms in a simple economy

5. Circular Flow diagram Assumptions Markets Households Firms
Goods and services
Factors of production
Households
Spend all of their income
Firms
Pay rewards (wages, rent, profit) to resource owners

6. The Circular-Flow Diagram

7. The Circular Flow Diagram
GDP can be calculated by:
Adding up total purchases of households (expenditure)
Or,
Adding up total income of earned by households

8. The Circular Flow Diagram
Model unrealistic, however
Limitations?

9. The Circular Flow Diagram
Model unrealistic, however
Limitations
Omits
Savings
Taxes
Government purchases

10. The Measurement of GDP Gross domestic product (GDP)
Market value of all final goods and services produced within a country in a given period of time

11. The Measurement of GDP “GDP is the market value…”
“Cannot compare apples and oranges”.
Market prices - reflect the value of the goods
What is a limitation of the use of market prices in calculating GDP?
Do increases in total market values always indicate increases in production of goods and services in an economy?

12. The Measurement of GDP “… of all…” All items produced in the economy
And sold legally in markets
Would goods like land, stocks or bonds be included in GDP? Why?
Excludes some items
Produced and sold illicitly
Examples?
Produced and consumed at home

13. The Measurement of GDP “… final…”
Value of intermediate goods is already included in the prices of the final goods
Why is this important?

14. The Measurement of GDP “… goods and services…”
Tangible goods & intangible services
Books, shoes, etc
Haircut, music concert, etc

15. The Measurement of GDP “… produced…”
Goods and services currently produced
Sale of new vs. used car

16. The Measurement of GDP “… within a country…”
Goods and services produced domestically
Include output produced by foreigners
Exclude output produced by nationals in a foreign country

17. The Measurement of GDP “… in a given period of time”
A year or a quarter

18. Discussion questions
What contributes more to GDP- production of an economy car or a luxury car? Why?
Explain why an economy’s income must equal its expenditure
GDP does not include the value of used goods that are resold. Why would including such transactions make GDP a less informative measure of economic well-being?
A few years ago, Ama paid Ghc500 to put together a record collection. Today, she sold her albums at a garage sale for Ghc100. How does this sale affect GDP?
A farmer sells wheat to a baker for Ghc2. The baker uses the wheat to make bread, which is sold for Ghc3. What is the total contribution of these transactions to GDP?

19. Next Class Approaches to measurement of GDP Expenditure Approach
Factor Payments Approach
Value-Added Approach