THREE APPROACHES FOR MEASURING GDP

1. Expenditure Approach– To measure GDP using expenditure approach, we add up all the spending on final goods and services that has taken place throughout the year.

2. Income Approach– measures GDP as the sum of incomes of factors of production (wages, rent, interests and profit).

3. Product/Value Added Approach–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 values added by all producers.

OTHER MEASURES OF INCOME

• Gross National Product (GNP)

• Net National Product (NNP)

• National Income

• Personal Income

• Disposable Personal Income

GROSS NATIONAL PRODUCT

• Gross national product (GNP) is the total income earned by a nation’s permanent residents (called nationals).

• It differs from GDP by including income that our citizens earn abroad and excluding income that foreigners earn here.

• GNP includes income that Pakistani citizens earn abroad.

• GNP excludes income that foreigners earn in Pakistan.

NET NATIONAL PRODUCT (NNP)

• Net National Product (NNP) is the total income of the nation’s residents (GNP) minus losses from depreciation.

• Depreciation is the wear and tear on the economy’s stock of equipment and structures.

• Such as trucks rusting and computers becoming obsolete.

NATIONAL INCOME

• National Income is the total income earned by a nation’s residents in the production of goods and services.

• It differs from NNP by excluding indirect business taxes (such as sales taxes) and including business subsidies.

PERSONAL INCOME

• Personal income is the income that households and non corporate businesses receive.

• Unlike national income, it excludes retained earnings, which is income that corporations have earned but have not paid out to their owners.

• In addition, it includes household’s interest income and government transfers.

DISPOSABLE PERSONAL INCOME

• Disposable personal income is the income that household and noncorporate businesses have left after satisfying all their obligations to the government.

• It equals personal income minus personal taxes.

EXERCISE• One day, Barry and Barber, Inc., collects $400 for haircuts. Over

this day, his equipment depreciates in the value by $50. Of the remaining $350, Barry sends $30 to the government in sales taxes, takes home $200 in wages, and retains $100 in his business to add new equipment in the future. From the $220 that Barry takes home, he pays $70 in income taxes. Based on this information, compute Barry’s contribution to the following measures of income:

• Gross Domestic Product (GDP).

• Net National Product (NNP).

• National Income (NI).

• Personal Income (PI).

• Disposable Personal Income (DPI).

SOLUTION

• GDP equals the dollar amount Barry collects, which is $400.

• NNP = GDP – Depreciation = $400 - $50 = $350.

• National Income = NNP – Sales Taxes = $350 - $30 = $320.

• Personal Income = NI – Retained Earnings = $320 - $100 = $220.

• Disposable Personal Income = PI – Personal Income tax = $220 - $70 = $150.