Income and Spending

Approaches to calculate GDP

Output based Expenditure based Income based

GDP
Why we need 3 ways? To improve accuracy Various methods are giving various information for policy making and analysis To select the most suited methods at countrys situation

Output base
This will calculate the value of the total output produced by various sectors of a nation. To avoid an error called Double Counting, there are two methods used; Value of the product to the final customer. Value added on the process.

Output is measured in three sectors of the economy Primary sector (Agriculture, forestry, fishing) Secondary sector (industry; manufacturing and constructing) Tertiary sector (Service)

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Calculation of GDP on value added method Transaction Price received 8.00 18.00 25.00 32.00 Value added 8.00 10.00 7.00 7.00 32.00

1. Famer sells wheat to flour mill 2. Miller sells flour to baker 3. Baker sells bread to grocer 4. Grocer sells bread to consumer

Expenditure based
= + + + GDP calculated from the expenditure side Consumption spending by households (C) - act of using goods and services to satisfy wants. Divided in to three subcategories: non durable goods, durable goods and services Investment spending by business and households (I) - act of producing goods and services that are not for immediate consumption. Divided in to three subcategories: business fixed investment, residential fixed investment and inventory investment. Government spending on purchasing goods and services (G) - the ways, military equipments, services that government workers provide. Transfer payments are not counted as a part of GDP. Foreign demand (net export) (NX) - the value of goods and services exported to other countries minus the value of goods and services that foreigners provide us.

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Two Sector Economy = + Domestic households and domestic firms Two kind of commodities consumers good and investment goods No government intervention and no imports and exports

Three Sector Economy = + + Government intervenes to the economy Government expenditure, Tax and transfer payments Government imposes main type of tax Lump sum Tax and Income Tax Same amount of tax revenue at each level of GDP and does affect the consumers disposable income The amount of income tax does change in responsive to change in national income.

Four Sector Economy = + + + net exports = Exports - Imports =

Effects of Injections and Withdrawals Inflows or Injections - income received either by domestic firms or domestics households that does not arise from the other group. Withdraws or out flows income received either by domestic firms or domestic households that is not passed on the other group by buying goods or services from it. + = + + + = + + + + + = + + +

Income base
Considers the income of the factor owners for giving factors for GDP. There are three categories considered; Operating surpluses - It is the net income after payment for labour and material but before direct taxes. Mixed incomes - Income earned by self employment. Compensation of employees - The payment for labour. It takes the gross income of employees.

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Output method Rs m Agriculture, Forestry, Fishing Mining and quarrying x

Income method Rs m Income from employment x

Expenditure method Rs m Consumption x

Income from self employment Gross trading profits: Companies

Investment

Manufacturing Construction Electricity, Gas, Water and sanitary services Transport, Storage and communication Wholesale and retail sale

Gov. Expenditure x x Physical increase in stocks Exports

x x x

Public corporations

Rent

Less :Imports

(x)

Gross Domestic Expenditure @ Mkt price

Banking Insurance and real estate Ownership of dewellings Public administration and defense Other servicew

x x

Factor Cost Adj. Less : Expenditure tax x

Add: Subsidies

(x)

GDP at Factor Cost Net factor income GNP at factor cost Depriciation Net National Product

x x x (x) x

GDY at Factor Cost Net factor income GNY at Factor Cost Depriciation Net National Product

x x x (x) x

GDE at Factor Cost Net factor income GNE at Factor Cost Depriciation Net National Product

x x x (x) x

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Estimation of national income

GDP (Gross Domestic Product) (-) Depreciation [Net Domestic Product] (-) Indirect business taxes and subsidies [Domestic Income (DI) = National Income = (W + R + I + P)] (-) Earnings not received (+) Receipts not earned [Personal Income (PI)] (-) Personal Taxes [Disposable Personal Income (DPI)] What GDP does not cover? 1. Value of unpaid activities is omitted (non-market activities). E.g. Housewives 2. Unreported activities (Happens in black economy, though they are legal.) E.g. A repair at your house which does not get recorded to avoid taxes. 3. Economic bads The negative externalities that will bring ham to the society are not deducted from GDP. E.g. Garbage disposal of factories and subsequent environmental damages. Problems of measuring GDP What goods and services are to be included? Which stage of production should be included? When they were included? Exclusion of non-productive transactions Exclusion of non-market illegal activities Product quality improvements are not accounted Environmental damage is not counted

Determinants of economic growth Investment in physical capital o E.g. Plant, machinery, etc Investment in social capital o E.g. Infrastructural facilities. Technological advancements. Increasing the labour productivity through education, heath, and training.

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Non-economic measures Physical Quality of Life Index (PQLI) - It takes the average of the following; Basic literacy rate. Infant mortality rate. Life expectancy rate.

Human Development Index - it measures the human development level of a country by taking following aspects; Life expectancy. Knowledge and education. Standard of living. Sri Lankas rank is 102 / 182

Questions on GDP

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