Economics Online Tutor
| National Income Accounts Per Capita Measurements Nominal And Real Values |
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NATIONAL INCOME ACCOUNTS
GROSS DOMESTIC PRODUCT (GDP) = CONSUMPTION (C) + INVESTMENT (I) +
GOVERNMENT SPENDING (G) = NET EXPORTS (NX, OR (X-M), OR X)
GROSS NATIONAL PRODUCT (GNP) = GDP + RECEIPTS OF FACTOR INCOME
FROM THE REST OF THE WORLD - PAYMENTS OF FACTOR INCOME TO THE
REST OF THE WORLD
NET DOMESTIC PRODUCT (NDP) = GDP - CAPITAL CONSUMPTION ALLOWANCE
(DEPRECIATION)
NET NATIONAL PRODUCT (NNP) = GNP - CAPITAL CONSUMPTION ALLOWANCE
(DEPRECIATION)
NATIONAL INCOME (NI) = NNP - INDIRECT BUSINESS TAXES
PERSONAL INCOME (PI) = NI - INCOME EARNED BUT NOT RECEIVED (RETAINED
CORPORATE PROFITS, OR RETAINED EARNINGS; CORPORATE INCOME TAXES,
AND SOCIAL SECURITY CONTRIBUTIONS BY FIRMS) + INCOME RECEIVED BUT
NOT EARNED (GOVERNMENT TRANSFER PAYMENTS)
DISPOSABLE INCOME (DI) OR DISPOSABLE PERSONAL INCOME (DPI) = PI -
PERSONAL INCOME TAXES
GROSS DOMESTIC PRODUCT (GDP) = CONSUMPTION (C) + INVESTMENT (I) +
GOVERNMENT SPENDING (G) = NET EXPORTS (NX, OR (X-M), OR X)
GROSS NATIONAL PRODUCT (GNP) = GDP + RECEIPTS OF FACTOR INCOME
FROM THE REST OF THE WORLD - PAYMENTS OF FACTOR INCOME TO THE
REST OF THE WORLD
NET DOMESTIC PRODUCT (NDP) = GDP - CAPITAL CONSUMPTION ALLOWANCE
(DEPRECIATION)
NET NATIONAL PRODUCT (NNP) = GNP - CAPITAL CONSUMPTION ALLOWANCE
(DEPRECIATION)
NATIONAL INCOME (NI) = NNP - INDIRECT BUSINESS TAXES
PERSONAL INCOME (PI) = NI - INCOME EARNED BUT NOT RECEIVED (RETAINED
CORPORATE PROFITS, OR RETAINED EARNINGS; CORPORATE INCOME TAXES,
AND SOCIAL SECURITY CONTRIBUTIONS BY FIRMS) + INCOME RECEIVED BUT
NOT EARNED (GOVERNMENT TRANSFER PAYMENTS)
DISPOSABLE INCOME (DI) OR DISPOSABLE PERSONAL INCOME (DPI) = PI -
PERSONAL INCOME TAXES
| Per Capita Measurements: Comparisons of the different economies of the world, as well as comparisons of the economy of one nation over different time frames, gain additional meaning (especially in the standard of living) if the national income measurements are reported on a per capita basis. Per capita means per person, and is determined by taking the national income measurement, and dividing by the total number of people in the population. |
So what is the "best" measurement of the macroeconomy?
GDP is the one that is most widely used. It counts the total production within the economy, so it probably
is a better measurement for many kinds of comparisons than most of the other measurements. But NDP
is a better measurement to reflect growth: it doesn't count replacement of capital as "new" production.
GDP is more widely used than NDP because it is easier to calculate, and easier to make comparisons
between different countries that may use different accounting methods. The best measurement for
determining the standard of living would be real GDP per capita, but even that is not a perfect
measurement of the standard of living. It can tell you the changes in wealth for an "average" person in
the economy, but it will not tell you if the changes in wealth are distributed equitably. If all of the gains
go to a very small segment of the economy, a tiny fraction of the population, then a per capita
measurement can be very misleading. And it doesn't account for the fact that many people view a
"standard of living" as including things that cannot be measured in monetary terms.
Nominal and Real Values
One of the uses of national income accounts, such as GDP, is for the comparison of an economy's
performance over time. It is a measurement of economic growth. However, just looking at the value of
GDP from one period of time compared to the value of GDP from another period of time will not give an
indication of economic growth. This is because a change in the value of GDP has two components: a
change in total output, and a change in prices (or the overall price level). To measure growth, you would
need to isolate these two components, take out the price level component, and only look at the total
output component.
In order to do this, economists adjust the GDP numbers by a price index to reflect the change in the
overall price levels over the relevant time frame. This means that they adjust out the price level
changes, leaving only the changes in output to account for a change in GDP.
The actual raw numbers for GDP are called nominal values. The numbers for GDP after the adjustment
for the change in the price level are called real values. The price index used for adjusting for the price
level change relating to GDP is called a GDP deflator, or GDP price index (GDPPI). The calculation is as
follows:
Real GDP = Nominal GDP divided by GDPPI
In order to have a reference point for any price index, a base year is established. For the purpose of
calculations, this base year can be considered to be arbitrary (although if you have to do calculations on
a given set of numbers, and at the same time you have to decide what to use as the base year, you might
want to pick the year that makes your calculations the easiest - using the beginning year under
consideration is often easiest). For the base year, a number of 100 is assigned for a price index. This
means that the resulting calculations must be adjusted by a factor of 100. This amounts to simply moving
the decimal point over two spaces. Knowing the nominal values for different years, as well as the price
index used for each year, will allow you to calculate not only real GDP but also GDP growth and the rate of
inflation.
For examples of calculations involving price indexes and finding real values from nominal values, please
refer to the section in this site that deals with the subject of inflation.
You may be familiar with the concept of price indexes (or indices, my dictionary lists indexes as the
preferred plural). All of them are based on the prices over time of a constant bundle of goods
considered to be relevant for what the index is trying to measure. Besides the GDP deflator (GDPPI)
mentioned here, other price indexes in common use are:
Consumer Price Index (CPI): Measures the prices of a "typical" bundle of goods that an "average"
household purchases. Cost of living adjustments (COLAs) for people on fixed incomes, as well as many
wage rates, are tied to this measurement. This measurement is far from perfect. For one thing, the
economy is not made up of only "average" households that purchase "typical" bundles of goods.
Differences are especially noticeable between different demographic groups, such as age groups. In
addition, price changes alone can cause changes in what actual bundles of goods that consumers
purchase. For example, if some goods in the bundle increase in price while others decrease in price,
the law of demand says that consumers will tend to buy fewer of the goods with rising prices and more of
the goods with falling prices, relative to each other over time. A fixed "bundle" does not take this into
consideration, overstating the price index (and the rate of inflation).
Producer Price Index (PPI): Formerly known as the wholesale price index (WPI), this measures the
prices received by producers. This is considered to be a leading economic indicator, because it
measures price changes at an earlier stage than the CPI does. If the PPI increases, it can be expected
that a CPI increase will soon follow.
GDP is the one that is most widely used. It counts the total production within the economy, so it probably
is a better measurement for many kinds of comparisons than most of the other measurements. But NDP
is a better measurement to reflect growth: it doesn't count replacement of capital as "new" production.
GDP is more widely used than NDP because it is easier to calculate, and easier to make comparisons
between different countries that may use different accounting methods. The best measurement for
determining the standard of living would be real GDP per capita, but even that is not a perfect
measurement of the standard of living. It can tell you the changes in wealth for an "average" person in
the economy, but it will not tell you if the changes in wealth are distributed equitably. If all of the gains
go to a very small segment of the economy, a tiny fraction of the population, then a per capita
measurement can be very misleading. And it doesn't account for the fact that many people view a
"standard of living" as including things that cannot be measured in monetary terms.
Nominal and Real Values
One of the uses of national income accounts, such as GDP, is for the comparison of an economy's
performance over time. It is a measurement of economic growth. However, just looking at the value of
GDP from one period of time compared to the value of GDP from another period of time will not give an
indication of economic growth. This is because a change in the value of GDP has two components: a
change in total output, and a change in prices (or the overall price level). To measure growth, you would
need to isolate these two components, take out the price level component, and only look at the total
output component.
In order to do this, economists adjust the GDP numbers by a price index to reflect the change in the
overall price levels over the relevant time frame. This means that they adjust out the price level
changes, leaving only the changes in output to account for a change in GDP.
The actual raw numbers for GDP are called nominal values. The numbers for GDP after the adjustment
for the change in the price level are called real values. The price index used for adjusting for the price
level change relating to GDP is called a GDP deflator, or GDP price index (GDPPI). The calculation is as
follows:
Real GDP = Nominal GDP divided by GDPPI
In order to have a reference point for any price index, a base year is established. For the purpose of
calculations, this base year can be considered to be arbitrary (although if you have to do calculations on
a given set of numbers, and at the same time you have to decide what to use as the base year, you might
want to pick the year that makes your calculations the easiest - using the beginning year under
consideration is often easiest). For the base year, a number of 100 is assigned for a price index. This
means that the resulting calculations must be adjusted by a factor of 100. This amounts to simply moving
the decimal point over two spaces. Knowing the nominal values for different years, as well as the price
index used for each year, will allow you to calculate not only real GDP but also GDP growth and the rate of
inflation.
For examples of calculations involving price indexes and finding real values from nominal values, please
refer to the section in this site that deals with the subject of inflation.
You may be familiar with the concept of price indexes (or indices, my dictionary lists indexes as the
preferred plural). All of them are based on the prices over time of a constant bundle of goods
considered to be relevant for what the index is trying to measure. Besides the GDP deflator (GDPPI)
mentioned here, other price indexes in common use are:
Consumer Price Index (CPI): Measures the prices of a "typical" bundle of goods that an "average"
household purchases. Cost of living adjustments (COLAs) for people on fixed incomes, as well as many
wage rates, are tied to this measurement. This measurement is far from perfect. For one thing, the
economy is not made up of only "average" households that purchase "typical" bundles of goods.
Differences are especially noticeable between different demographic groups, such as age groups. In
addition, price changes alone can cause changes in what actual bundles of goods that consumers
purchase. For example, if some goods in the bundle increase in price while others decrease in price,
the law of demand says that consumers will tend to buy fewer of the goods with rising prices and more of
the goods with falling prices, relative to each other over time. A fixed "bundle" does not take this into
consideration, overstating the price index (and the rate of inflation).
Producer Price Index (PPI): Formerly known as the wholesale price index (WPI), this measures the
prices received by producers. This is considered to be a leading economic indicator, because it
measures price changes at an earlier stage than the CPI does. If the PPI increases, it can be expected
that a CPI increase will soon follow.
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