Measuring Macroeconomic Activities

National Accounting(NA)
1. National Output(Q) or Income (Y) or Expenditure(E)
2. Price Levels(P) or Inflation ()
3. Unemployment (U) and Poverty

National Accounting: History

National Accounting is the method by which consistent estimates of
economic activity are produced.
1665: William Petty, English Economists, first introduced concept of
national income accounting.
1696: Georgory King improved the Petty estimate by using three
separate ways of measuring domestic product (income,
production and expenditure).
1823: Joseph Lowe, a Scottish journalist and political economist,
used inflation figures to deflate national income.
1931: Simon Kuzents attempted National Income Accounting for
US at NBER, Father of Modern National Income Accounting
1936: James Meade and Richard Stone creates National Income
and Expenditure for UK
1936: Wassily W. Leontief , developed Input out Analysis, an
interindustry relationship

National Accounting: History of India

In1876Dadabhai Narojimadethefirstcrudeestimatesofnational
incomeforIndiafortheyear186768.
In1934,VKRVRaopublished,anessayonIndiasNationalIncome,
19251929.firstauthenticacademicexercise,
FatherofIndianNationalIncomeAccounting
In1949,GovtofIndia,NationalIncomeAccountingCommittee
Prof. PCMahalnobis chairmen,FounderofISI
Prof. DRGadgil,founderofGIPEPune
DrVKRVRao,founderofDSEandIEGDelhi;ISEC,Bangalore
NSS:Round
OutcomeNAS,MOS&PI,GovtofIndia
1 Oct1950march
1951:1833sample
NSSOfoundedin1950:UsesNationalSamplesurvey,
2 AprilJune1951:
CSO:foundedMay1951,coordinationofstatisticsamong 1160Sample
ministries
3 Aug Nov 1951: 920
CC:foundedin1967Statisticalworkwithcomputercentre village and 490 urban
Now 12 000 to 14 000
1956 Fistnationalincomedatabothconstantandcurrent
villages at All India
Level
pricespublishedwith194849baseyear
st

nd

rd

National Accounting: Why?

Indicator of Level of Economic Dev of a country

Formulate Economic Policy

Evaluate Development Program

Compare national and international economic

development

Wage negotiations and structural changes of the

economy

Information about poverty and inequality

National Output
Concept and Measurement

Measuring the Production, Income, and Spending of Nations

NAS, MOSPI

NSSO
CSO
CC

National Output: Concepts & Measurement

1

GDP: GDPM,and GDPF

NDP: NDPM,and NGPF

GNP: GNPM,and GNPF

NNP : NNPM,and NNPF(= National Income)

Private Income

Personal Income

Personal Disposable Income

MP is what consumer pays

FC is what producer receives after
tax and subsidies

All Output expresses with current and constant prices.

Output at Current Price is called Nominal Output

Output at Constant Price is called Real Output.

National Output:
Current Prices( Nominal) and Constant Price(Real)

Current Prices=>
( Nominal term)

Constant Prices=>
( Real Term)

1.1.The Gross Domestic Product (GDP)

GDP =piqi

Gross Domestic Product(GDP) is the total market value of all final

goods and services produced within countrys borders irrespective of
ownership of resources during a given period of time (generally a year).
Ex. Phillips produces tube light with in India is GDP of India
TATA produces car in UK is GDP of UK but GNP of India.
Does not include:
Goods produced in the past
Goods produced outside India by Indians
Intermediate goods, Ex. Intel chips, wheat
Non-market production
Black market: hawkers selling coconut
Underground economy: drugs, prostitution,
Household production: self consumption item, not sold in market

1.1.The Measurement of GDP (GDP)

GDP is the Market Value . . .
Output is valued at market prices.
. . . Of All. . .
Includes all items produced in the economy and legally sold in markets
. . . Final . . .
It records only the value of final goods, not intermediate goods (the value is
counted only once).
. . . Goods and Services . . .
It includes both tangible goods (food, clothing, cars) and intangible services
(haircuts, housecleaning, doctor visits).
. . . Produced . . .
It includes goods and services currently produced, not transactions involving
goods produced in the past.
. . . Within a Country . . .
It measures the value of production within the geographic confines of a country.
. . . In a Given Period of Time.
It measures the value of production that takes place within a specific interval of
9
time, usually a year or a quarter (three months).

1.1. GDP: ( GDPF and GDPM)

Govt. Intervention in Production: Yes or No
a. GDP at Market Prices(GDPM): When the output of all final goods and services are
valued at market prices and the values thus obtained are added is known as GDPM. It
includes net of Indirect Taxes (Ti) and Subsidies (S)

GDPM =GDPF + (Ti-S)

b. GDP at Factor Costs/Prices(GDPF ):

GDPF =GDPM - (Ti-S)

GDPF with Constant Price: Real GDP

GDPF with Current Price: Nominal GDP

Ex1. Let cigarettes: market price =Rs. 24

Let Indirect business tax = Rs. 4
so, GDP at market price = Rs. 24
GDP at factor cost = Rs.24 Rs.4
= Rs. 20
= total value-added
Ex.. 2: Education in an university
Lets total value-added in university =Rs.140
Out of which , subsidy = Rs. 20
School fee = Rs.120
So, GDP at market price = Rs. 120
GDP at factor cost = Rs120 + Rs.20 = Rs. 140
= total value-added

1.2 GNP :Gross National Product (GNP):

GNP= piqi +NFA

Gross National Product(GNP) is the market value of all final goods and
services produced domestically irrespective of ownership plus net factor
income from aboard during a given year.
GNP= GDP + Net Factor Income from Abroad
Net Factor Income from Abroad (NFAI) : Income received from abroad by the
normal residents of a country for rendering factor services minus income paid for
the factor services rendered by non-residents within the domestic territory.
a. Net compensation of employees(COE) ex. Visiting prof salary, compensation to Indian
people working at American Embassy in India, interest income received by Indian
invested in UK, or US Bonds, salary of Indian working at IMF, WB.
b. Net income from property and entrepreneurship ( interest, rent , profit and dividend)
Ex. Tata motors at UK, profits of SBI at London
c. Net retained earnings(undistributed profits) of residents companies abroad.

11

Ex Infosys at UK

1.2 GNP : GNPM and GNPF

A) GNP at Market Price (GNPM): When the output of all final goods and
services are valued at market prices (current price) and the values thus
obtained are added is known as GNPM.
It includes Indirect Taxes (Ti) and net of Subsidies (S)
GNPM = GNPF +Ti-S
B) GNP at Factor Cost (GNPF):
GNPF = GNPM Ti+S
For National Income identity purpose we use the following identity
GNPF C + I +G+X-M
Hence

GNP GNI GNE

1.2. Net Product: NDP Vs NNP

Net Product (NP) Domestic or National : represents output ( income)
after taking into account any future needs

It is calculated as total value of final goods and services

produced in the economy during a year minus depreciation.
NDPF=GDPF- depreciation
NDPM=GDPM- depreciation
NNPF=GNPF-depreciation
NNPM=GNPM-depreciation

NNPF is known as National Income

1.4. How is GDP and GNP Related????

GNP=GDP+NetIncomefromabroad.
=>GDP=GNP GDP+NetIncomefromabroad
Similarly,
1. GNPF=GDPF+Netincomefromabroad
GNPM=GDPM+Netincomefromabroad
2. GDPF=GNPFNetincomefromabroad
GDPM=GNPMNetincomefromabroad

GrossDomesticProduct(GDP)isoneofthemeasuresofeconomicgrowthfor
acountry'seconomy.
GrossNationalProduct(GNP)isoneofthemeasuresofnationalincomefora
givencountry'seconomy
GDPPercapitaisthebestmeasuresforthelevelofeconomicdevelopmentin
comparisontoothercountries.

1.5 Private Sectors Income

a.Private Income: Income earned by households
Pvt.I = NNPF IAD END + NDI + TAD + OTA
b. Personal Income: Income received by households:
PI = Pvt.I RE CT
c. Personal Disposal Income: Income available for dispose
PDI = PI HDT MAD
IAD- Income from entrepreneurship and property accruing to govt
administrative deps ex. Railways
END- earnings of Govt. non departmental enterprises (PSUs)
NDI- National Debt Interest
TAD- Current Transfer from Govt. administration Dept.
OTA- Other net current transfer from abroad
RE- retained earnings of nations private corporate sector
CT- corporate tax
HDT- Household direct tax
MAD- Miscellaneous receipts of Govt. administrative dept. ex. Fines, fees

Problems and Solutions

Q. Mr. Moody, a barber works in his Saloon everyday . In one day he collects
Rs.500 from haircuts, over this day his equipment's depreciates in value by
Rs.50. Of the remaining Rs.450, he pays sales tax worth Rs.30, takes home
Rs.200 and retains Rs.220 for improvement and buying of new equipment. He
further pays Rs.20 as income tax from his home. Based on this information,
estimate Mr Moody contributions to the following measures of income (a) GDP,
(b) NNP at MP,(c) NNP at FC, (d) Personnel Income, (e) Personnel Disposable
Income.
Ans.
GDP=Rs. 500
NNPat MP= GDP Depreciation = 50050= Rs.450
NNP at FC=NNPSales Tax= 45030=Rs.420
PI= NNP at FC retained Earning= 420220= Rs.200
PDI= PI Income Tax= 20020=Rs.180.

National Income(Output): Estimation

Mary spends on a final good, cosmetics, Rs.100
which is equivalent to its market value of Rs.100,
which is equivalent to the income to factor of
production Rs.100.
So for an economy as a whole during a given year,
Output Income Expenditure
because:
All output produced is for transaction purpose
Every transaction has a buyer and a seller.
Every rupee of spending by some buyer is a
rupee of income for some seller.

National Income(Output): Estimation

a. Product Methods (GNP): GNP is the value added by the various
industries and activities of the economy ( or in each stage of
production) in a particular year.
Q=f(La,L,K,O)= piqi
b. Income Methods (GNI): It is equal to sum of the income generated
by production in the country or income earned by the owners of
factors of productions in a particular year
Y = (RLa)+(w L) + (i K) + (profit E)
c. Expenditure Methods (GNE): it is equal to total expenditures for all
final goods and services produced within the country or the final
expenditure of all residents (eco agents) in a country.
Z= (C+I+G+XM)
National Income Identity: QYZ

National Income(Output): Estimation

Sectoral Composition
A. Primary
(i) Agriculture + (ii) forestry and Fishing + (iii) Mining and Quarrying
B. Secondary
(i) Manufacturing + (ii) Electricity, gas and water supply + (iii )Construction
C. Tertiary (Services)

Trade, hotels and restaurant

Transport, storage and communication

Banking and insurance

Real estate , dwelling and business services

Public administration and defense

Other services

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2.1. Product Methods: GDPF = piqi +Ti-S

pi= Price of final good i
qi= Output of final good i
A. Primary
(i) Agriculture + (ii) forestry and Fishing + (iii) Mining and Quarrying

It is equal to the sum of the monetary value of all the final

goods and services produced within a country plus taxes
less subsidies on products.

The estimates of GDP in respect of agriculture, forestry, fishing, mining and

quarrying, registered manufacturing (establishments registered under
Factories Act, 1948) and construction are based on production approach

2.1. Net Product Methods: Value Added Approach

11

2.1. Net Product Methods: Value Added Approach

2.2. Income Approach: GDPF= (FPi)+D

GDPisthesumofdomesticfactorincomesreceivedbyall
factorofproductionsforproducinggoodsandservicesand
fixedcapitalconsumption(ordepreciation).
A.
B.

Compensation of Employee (COE):

Operating surplus

rent (r)
interest (i)
royalty(Ry)
profits and dividends (Profit)

Wages and salaries in cash Ex. Basic pay, DA

Compensation in kind ex. Free housing, medical
facilities
Employees contributions to social security schemes ex.
PPF

C. Mixed Income(self employed) i.e. r+w+i+profit

Transfer payments, illegal income, old age pensions, second
hand sales etc. are not included income method

12

2.2. Income Approach: GDPF= (FPi)+D

It measure the sum of income for the factors of productions
distributed by the recently productions units.
Itappliesforbothsecondaryandtertiarysector whichincludes
unregisteredmanufacturingproducts(establishmentsnotregistered
underFactoriesAct),
electricity,gasandwatersupply,
trade,hotelsandrestaurants,
transport,storage,communication,
bankingandinsurance,
realestate,ownershipofdwellings,
businessservices,
publicadministrationanddefenceandotherservices.
IncludedorNotIncluded
Scholarshipstostudents:Included
Commissionreceivedbystockbrokers:Included
Insurancecompensationtoinjuredworkers:Not
Giftchequetoabride:Not

2.2. Income Approach: GDPF= (FPi)+D

Example:WithIncomeMethodcalculateNDPFC,NNPFC,NNPMP,GDPMP with
theinformationgivenbelow.AllinRs.crore
1
2

COE
Rent

2000
20

6
7

MixedIncome
NFIA

1000
3

3
4

Interest
Profit

30
50

8
9

IndirectTaxes
Subsidies

500
400

Royality

40

10

Depreciations

260

Ans:
NDPFC=COE+OperatingSurplus+MixedIncome
=2000+(20+30+40+50)+1000
=3140cr.

NNPMP=NNPFC+IndirectTaxesSubsidies
=3137+500400
=3237cr.

NNPFC=NDPFC+NFIA
=3140(3)
=3137cr.

GDPMP=NDPFC+Depreciations+Net
IndirectTaxes
=3140+260+100
=3500cr.

13

2.3. Expenditure Approach: GDPM= C+I+G+X-M

It is equal to the total expenditures (Domestic + Foreign )
domestically made for all final goods and services produced
within the country.
A. Private Final Consumption (C):
B. Investments (I) = GDCF + K( inventories)
( I=Govt Fixed Invest +Pvt Fixed Invest+ Residential Invest)

C. Government Final Expenditure (G)

D. Exports (X)- Imports (M) =NX
GDPM is estimated by expenditure methods

2.3. Expenditure Approach: GDPM= C+I+G+X-M

A.

PrivateFinalConsumption(C):
Householdsconsumption(eg:goods&servicessuchasfood,clothes,laundryetc.),included
Commissionearnedonsaleofsecondhandgoods.Ex.Stockshares,included
Secondhandsalesandillegalgoods/servicesnotincluded.
Spendingonsecondhandgoodsnotincluded.

B.Investments(I)=GDCF+K(inventories)
Investmentfromfirmstoincreaseproductivecapacity(e.g.purchasingland,machines,
officebuildings,commission,legalchargesetc.
Italsoincludesunsoldgoodsintheinventoryoffirms.
C.GovernmentFinalExpenditure(G)
SpendingfromGovernment(e.g.tobuildhospitals,schools,infrastructure,paymentwages
respectiveofproductivity,etc.)included
TransferPayment/Publicassistanceexcluded
D.Exports(X) Imports(M)
Measuredbynetexportsi.e.subtractingthevalueofimportsfromthevalueofexportsof
goodsandservices.

14

Ex. Investmnet =GDCF+K

(i)GrossDomesticCapitalFormation:GDCF
Ex1.AninvestorspentR.10Lakhtobuy10newprintingmachinesandspent
RS.10000torepairtheoldprintingmachines.
GDCF=Netdomesticfixedcapitalformation(Rs.10Lakh)+
depreciation(Rs.10000)

(ii)ChangeinStock(Inventories)
Ex.2 OutputValueofMoserbearsCDs=Rs.10000
Sales=Rs.8000
Stock=+Rs.2000
GDP=C+I+G+(XM)=
=+Rs.8000+Rs.2000+0+(00)

2.3. Expenditure Approach: GDPM= C+I+G+X-M

Example:WithExpenditureMethodscalculateNNPMP,NDPMP ,NetDomestic
Income,NIwith theinformationgivenbelow.AllinRs.crore
1
2
3
4

PvtFinalConsExp.
Govt FinalConsExp.
IndirectTaxes
Subsidies
Fixed Capital
5 Formation

200
100
120
60
50

6
7
8
9

NVAinstock
Depreciations
Exports
Imports

10 NFIA

40
140
90
20
300

Ans:
NNPMP=1+2+5+6+(89)(7)+10
=200+100+50+40+(9020)140+300
=620cr.
NDPMP=NNPMPNFIA
=620300
=320cr.

NetDomesticIncome
=NDPMPNetIndirectTaxes
=320120+60
=260cr.
NI=NetDomesticIncome+NFIA
=260+300=560cr.

15

GDP and its components

In each of the following cases, determine how much GDP and
each of its components is affected (if at all).
A. Pinky spends Rs.200 to buy her husband an ice-cream at a
hotel in Gurgaon.
B. Sarah spends Rs.1800 on a new laptop to use in her
publishing business. The laptop was built in China.
C. Jane spends Rs.1200 on a computer to use in her editing
business. She got last years model on sale for a great price
from a local manufacturer.
D. Tata Motors builds Rs.500 million worth of cars, but
consumers only bought Rs.470 million worth of them.

16

Answers
A. Pinky spends Rs.200 to buy her husband icecream at a hotel in Gurgaon..

Consumption and GDP rise by Rs.200.

B. Sarah spends Rs.1800 on a new laptop to use in
her publishing business. The laptop was built in
China.

Investment rises by Rs.1800, net exports fall

by Rs.1800, GDP is unchanged.

Answers
C. Jane spends Rs.1200 on a computer to use in her
editing business. She got last years model on
sale for a great price from a local manufacturer.

Current GDP and investment do not change,

because the computer was built last year.
D. Tata Motors builds Rs.500 million worth of cars,
but consumers only bought Rs.470 million of
them.

Consumption rises by Rs.470 million,

inventory investment rises by Rs.30 million,
and GDP rises by Rs.500 million.

17

GDP Application

A. The GDP Deflator

GDP deflatort =

Nominal GDPt
100
Real GDP t

18

B. Growth Rates (GDP)

Growth rate: (GDPt-GDPt-1)/GDPt-1*100

12
10
8
6
4
2
0
-2
-4
-6
GDPFC Constant Prices

Linear (GDPFC Constant Prices)

Real GDP Growth Rate i.e. GDP at FC (constant price) base year (2004-05)

Real Growth Rate:

National Accounts Concepts
(constant price) base year (2004-05)
12.00

10.00

8.00

6.00

4.00

2.00

0.00

-2.00

-4.00

-6.00
GDPFC

NDPFC

GNPFC

NNPFC

-8.00

19

-5

-10

Agl & Allied

2011-12

2008-09

2005-06

2002-03

1999-00

1996-97

1993-94

1990-91

1987-88

1984-85

1981-82

1978-79

1975-76

1972-73

1969-70

1966-67

1963-64

1960-61

1957-58

1954-55

1951-52

20

15

10
8

0
6

-2

-15
-4

Industry

1951-52
1954-55
1957-58
1960-61
1963-64
1966-67
1969-70
1972-73
1975-76
1978-79
1981-82
1984-85
1987-88
1990-91
1993-94
1996-97
1999-00
2002-03
2005-06
2008-09
2011-12

(GDP FC constant price) base year (2004-05)

Sectoral Growth Rate:

14

12

10

Agriculture
Industry

12

10

Services

Sectoral Composition
of GDP at FC at Const Price (%) 2004-05 base year

80

70

60

50

40

30

20

10

Services

20

Sectoral Composition
of GDP at FC at Const Price (%) 2004-05 base year

C. Is GDP A Good Measure Of Economic Well-being?

Real GDP per capita is the main indicator of the average persons standard of living.
But GDP is not a perfect measure of well-being.
Some things that contribute to well-being are not included in GDP.
The value of Leisure
The value of a clean environment.
The value of almost all activity that takes place outside of markets, such as the
value of the time parents spend with their children and the value of volunteer
work.
GDP Measures the Size of the Pie but Not How the Pie Is Divided Up
Then Why Do We Care About GDP?

Having a large GDP enables a country to afford better schools, a cleaner

environment, health care, etc.
Many indicatoRs.of the quality of life are positively correlated with GDP.

21

Did World War II Bring Prosperity?

GDP and the Quality of Life

22

India GDP Estimates

Annual Series(1950-51)
Quarterly Series (since 1997 Q1)
No Series Less than Quarterly is available
IIP used as proxy for GDP

Base
year

No of Items in IIP

1937

15

1946

35

1951

88

1956

201

1960

312 (for monthly)

124 ( for annual)

1970

352

1980-81

352( new included old deleted)

1993-94

543

2004-05

682

India uses Laspeyers Methods to calculate IIP

Weights are based on value added methods

IndexofIndustrialProductions

200405

Weight

61

14.16%

620

75.35%

10.32

682*

100%

*clubbedin399itemgroups:Mining1,
Manufacturing 397,Electricity 1

23

IndexofIndustrialProductions
Represents the status of productions in industrial sector for a
given period of time
Sometime used as a proxy for measuring economic activities in
place of GDP.
Complied by Ministry of Commerce and Industry
IIP started compiling since 1937 covering 15 important
industries output comprising 90% of total productions
Since 1951, CSO is calculating IIP
Index is calculated by using simple arithmetic mean of
productions relatives calculated by Laspeyres formula: I=WiRi/
Wi, Where I is the index, Ri is the productions relatives of the
ith item for the month in question and Wi is the weight alloted
to it
Weights are alloted on the basis of Gross Valued Added

Implications for Managers

Movement in national Income helps the manager to figure out the state of
the economy
Component of the national income helps to determine the production ,
distribution, demand structure etc. of the economy.
Expenditure pattern indicates the role of govt in economic activity
Role of govt enhances private competitions
Pattern of govt finances thorough direct and indirect axes affects the
disposable income of the households thereby their consumption pattern
Level of imports and exports provides information to the managers about
the demand pattern and the potential customers.in the international
markets

24

References
N G Mankiw : Macroeconomics (2012 ed) Ch 2.
Blanchard O: Macroeconomics ( 4th ed) Ch2
D N Dwivedi : Macroeconomics Theory and Policy 3 ed. Ch 4
Handout supplied to you

Thank You All

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