National Income Accounting

Measuring an economy’s output: final and intermediate goods, value added, the three methods, GDP, GNP, NNP and national income, real and nominal GDP, the deflator and the CPI.

Key ideas

• Only final goods are counted in GDP; counting intermediate goods too would count their value twice.
• Value added is the value of output minus the value of intermediate goods used, and adding every firm’s value added gives GDP.
• GDP can be measured by the product (value added), expenditure and income methods, which give the same total.
• Income is a flow (over a period); capital and wealth are stocks (at a point of time).
• Depreciation is the wear and tear of capital; net investment is gross investment minus depreciation.
• Nominal GDP uses current prices; real GDP uses base-year prices and shows changes in output only.
• GDP is not a full measure of welfare: it ignores how income is shared, unpaid work such as housework, and externalities such as pollution.

Remember

Watch out

• Adding the sales at every stage (double counting) instead of only the final value.
• Adding imports in the expenditure method: they are subtracted.
• Subtracting depreciation to go from GDP to GNP (that step adds net factor income from abroad).
• Using nominal GDP to measure growth in output when prices have changed.

Worked example