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1. MEASUREMENT OF
NATIONAL INCOME ACCOUNTS

2. Measurement of
NIA
• The national income accounts are an
accounting framework used in
measuring current economic activity.
• Almost all countries have some form
of official national income accounts.
• In Pakistan, NIA are prepared and
released by the Federal Bureau of
Statistics.
• The coverage is on National basis and
Annual data.

3. Measurement of
NIA
• The national income accounts are based on the
idea that the amount of economic activity (Gross
Domestic Product – GDP) that occurs during a
period of time can be measured in terms of :
– The amount of output produced, excluding
output used up in intermediate stages of
production (the product approach);
– The incomes received by the producers of
output (the income approach); and
– The amount of spending by the ultimate
purchasers of output (the expenditure
approach).

4. Measurement of
NIA
• Each approach gives a different
perspective on the economy.
• However, the fundamental principle
underlying national income
accounting is that, except for
problems such as incomplete or
misreported data, all three
approaches give identical
measurements of the amount of
current economic activity.

5. GDP and GNP
• GNP is the market value of final goods and
services newly produced by domestic factors of
production during the current period (as
opposed to production taking place within a
country, which is GDP).
• We define net factor payments from abroad
(NFP) to be income paid to domestic factors of
production by the rest of the world minus
income paid to foreign factors of production by
the domestic economy.
• Using this concept, the relationship between
GDP and GNP can be expressed as:
GDP = GNP – NFP

6. Measurement of GDP:
The Product Approach
• It measures GDP by adding the market
values of goods and services produced,
excluding any goods and services used up in
intermediate stages of production.
• This approach makes use of the value-added
concept. The value added of any producer is
the value of its output minus the value of
the inputs it purchases from other
producers.
• The product approach computes economic
activity by summing the value added by all
producers; i.e., GDP =  VA of all sectors

7. Measurement of GDP:
The Product Approach
• Market Value: Goods and services are
counted in GDP at their market values, that
is, at the prices at which they are sold. The
advantage of using market values is that it
allows adding the production of different
goods and services.
– A problem with using market values to measure
GDP is that some useful goods and services are
not sold in formal markets. Ideally, GDP should be
adjusted upward to reflect the existence of these
goods and services. However, because of the
difficulty of obtaining reliable measures, some
nonmarket goods and services simply are ignored
in the calculation of GDP.

8. Issues with Market
Value
• Some nonmarket goods and services are partially
incorporated in official GDP measures. An
example is activities that take place in the so-
called underground economy.
• A particularly important component of economic
activity that does not pass through markets are
the services provided by government, such as
defence, public education and building and
maintenance of roads and bridges. The fact that
most government services are not sold in
markets implies a lack of market values to use
when calculating the government’s contribution
GDP.
• Addition thru cost estimates.

9. Newly Produced
G&S
• As a measure of current economic activity,
GDP includes only goods or services that are
newly produced within the current period.
• GDP excludes purchases or sales of goods
that were produced in previous periods.
– Thus, although the market price paid for a newly
constructed house would be included in GDP, the
price paid in the sale of a used house is not
counted in GDP. Value of service of Real Estate
Agent will be included.

10. Final Goods and
Services
• G&S produced during a period of time may be
classified as either intermediate G&S or final
G&S.
– Intermediate G&S are those used up in the
production of other G&S in the same period that
they themselves were produced.
• Another subtle distinction between intermediate
and final goods arises in the treatment of
inventory investment. Inventories are stocks of
unsold finished goods, goods in process, and raw
materials held by firms.
• Inventory investment is treated as final good,
thus becomes part of GDP.

11. The Expenditure Approach to
Measuring GDP
• A different perspective on the components
of GDP is obtained by looking at the
expenditure side of the national income
accounts.
• The expenditure approach measures GDP as
total spending on final G&S produced within
a nation during a specified period of time.
• The four major categories of spending are
consumption, investment, government
purchases of G&S, and net exports of goods
and services.

12. The Expenditure Approach to
Measuring GDP
• In symbols, if
– Y = GDP = total production (or output) = total
income = total expenditure;
– C = consumption;
– I = investment;
– G = government purchases of goods and services;
– NX = net exports of goods and services.
• We can express the expenditure approach to
measuring GDP as
Y = C + I + G + NX
– This equation is one of the basic relationships in
macroeconomics. It is called the income –
expenditure identity. Remember imports are
converted to local currency by using REER

13. The Components of
Expenditure
• Consumption. Consumption is spending by
domestic households on final G&S, including
those produced abroad.
• It is the largest component of expenditure
usually accounting for about two thirds of GDP.
• Consumption expenditures are grouped into
three categories:
– Consumer durables, which are long-lived consumer
items, such as cars, televisions, etc (but not houses,
which are classified under investment);
– Nondurable goods, which are shorter-lived items,
such as food, clothing, and fuel; and
– Services, such as education, health care, financial
services, and transportation.

14. The Components of
Expenditure
• Investment. Investment includes both spending
for new capital goods, called fixed investment,
and increases in forms’ inventory holdings, called
inventory investment. Fixed investment in turn
has two major components:
– Business fixed investment, which is spending by
businesses on structures (factories, warehouses, and
office buildings, for example) and equipment (such
as machines, vehicles, and furniture); and
– Residential investment, which is spending on the
construction of new houses and apartment
buildings. Houses and apartment buildings are
treated as capital goods because they provide a
service (shelter) over a long period of time.

15. The Components of
Expenditure
• Government Purchases of Goods and Services include
any expenditure by the government for a currently
produced good or services, foreign or domestic, is the
third major component of spending.
• Not all the cheques written by the government are for
purchases of goods and services.
– Transfers, a category that includes government payments
for Social Security and Medicare benefits, unemployment
insurance, welfare payments, and so on, are payments
(primarily to individuals) by the government that are not
made in exchange for current goods or services. As a
result, they are excluded from the government purchase
category and are not counted in GDP as calculated by the
expenditure approach.
– Similarly, interest payments on the national debt are not
counted as part of government purchases.

16. The Components of
Expenditure
• Net Exports are exports minus
imports. Net exports are positive if
exports are greater than imports and
negative if imports exceed exports.
• Net exports are added to total
spending because they represent
spending (by foreigners) on final G&S
produced in a country. Subtracting
imports ensures that total spending
reflects spending only on domestically
produced output.

17. The Income Approach to
Measuring GDP
• The third and final way to measure GDP is
the income approach. It calculates GDP by
adding the incomes received by producers,
including profits, and taxes paid to the
government.
• A key part of the income approach is a
concept known as national income. National
income is the sum of five types of income.
– Compensation of employees
– Proprietors’ income
– Rental income of persons
– Corporate profits
– Net interest

18. Examples
• Expenditure
Approach to
Measuring GDP
• Income Approach
to Measuring GDP

19. Private Sector and
Government Sector Income
• The income of the private sector, known as
private disposable income, measures the
amount of income the private sector has
available to spend.
– In general, the disposable income of the private
sector as a whole equals income received from
private-sector activities, plus payments received
by the private sector from the government, minus
taxes paid to the government. Thus Private
disposable income = Y + NFP + TR + INT – T
• The net Government income equals taxes
minus transfers and interest payment on
govt. debt, i.e., T – TR - INT

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