MEASURING THE

NATIONAL INCOME
ACCOUNTS
 WHY AN ECONOMY’S TOTAL INCOME EQUALS ITS TOTAL
EXPENDITURE.
The task of GDP is judging whether the economy is doing well or
poorly, it is natural total and total income that everyone in the economy
is earning.

GDP measures two things at once: the total income of everyone in the
economy and the total expenditure on the economy’s output of goods
and services. The reason that GDP can perform the trick of measuring
both total in and total expenditures is that these two things are really
the same. For and economy as a whole. Income must equal to
expenditure. Why is this true? An economy’s income is the same as its
because every transaction haw two parties: a buyer and a seller. Every
dollar/peso of spending by some buyer is of income for some seller.
 How Gross Domestic Product (GDP) is defined and calculated.
Gross Domestic Product (GDP) – is the monetary value of all the
finished goods and services produced within a country’s borders in
a specific time period. Though GDP is usually calculated on an
annual basis, it can be calculated on a quarterly basis as well.

GDP includes all private and public consumption, government

outlays, investments, private inventories, paid-in construction cost
and the foreign balance of trade.

GDP = C + I + G + (X-M)
GDP = private consumption + gross investment +
government investment + government spending +
(exports – imports)
 The breakdown of GDP into its four major components.
1. Personal Consumption Expenditure – this component measures the money
value of consumer goods and services which are purchased by households and
non-profit institutions for current use during a period of account

2. Investment – means addition to the physical stock of capital during a period of

time.
3. Government Purchases of Goods and Services – this component summarizes
government spending on goods and services. It includes purchase of intermediate
goods and wages and salaries paid by the government. All government purchases
are a proxy measure for government output.

4. Net Exports (X-M) – it shows the difference between domestic spending on

foreign goods (imports) and foreign spending on domestic goods (exports). Thus,
the difference between exports and imports of a country is called Net Exports.
 The Distinction between real GDP and nominal GDP
Nominal GDP:
 The aggregate market value of the
economic output produced in a year with
in the boundaries of the country.
 Refers to the monetary value of all goods
and services produced during the year
with.
 Nominal GDP is the GDP without the
effects of inflation or deflation, whereas
you can arrive at Real GDP, only after
giving effects of inflation or deflation.
 Reflects current GDP at current price.
 With the help of Nominal GDP you can
make comparisons between different
quarters of the same financial year.
Real GDP:
• Refers to the value of economic output
produced in a given period adjusted
according to the changes in the general
price level.
• Real GDP reflects current GDP at past
(base) year price.
• Comparison of various financial years can
be made easily because by removing the
figure of inflation, the comparison is made
only between outputs produced.
• Real GDP shows the actual picture of the
economic growth of the country, which is
not with the case of Nominal GDP.
Whether GDP is a good measure of economic
well-being.
GDP is an indicator of a society’s standard of living, but it is only a rough indicator because it
does not directly account for leisure, environmental quality, levels of health and education,
activities conducted outside the market, changes in inequality of income, increase in variety,
increase in technology, or the positive or negative value that society may place on certain
types of doubt.