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Measuring National Income

National income accounting attempts to measure gross domestic product (GDP). GDP being calculated annually can be considered by the quantity measured per unit of time (flow) where the quantity measured at date and time (stock) would be government debt as current outstanding debt. However, GDP can be overused as a means for measuring and comparing economic data. Therefore, GDP must not be linked to economic prosperity, as is it not a good measure of human wealth or happiness. This is because it measures only: the incomes earned by residents domestically and the total expenditure on the economy’s output of goods and services.

Neither, does GDP consider the opportunity cost of essential goods and services employed in industries that will contribute to GDP, whether or not they are profitable or misdirect resources. Representing assets where only exchange has occurred and no new employment has been added. Additionally, unsold inventories are uncounted for in GDP if total expenditure or income do not change. GDP also only includes the sale of final goods and services and not intermediate goods. In order to prevent counting them twice, where the value-added equals the value of a business’s output less the value of the intermediate goods that the business purchases. Services and goods without market prices are counted in GDP by what it costs to produce them. Even though, underground goods and services are not counted in GDP.

Alternatively, nominal GDP is measured at current prices by multiplying current prices by current quantities. Where, changes result from changes in both prices and quantity of output. If only the prices were to increase while the quantity of output remained the same, people would see an increase in nominal GDP is most likely not wealth creation but an inflation tax. To counter for inflation, economists use real GDP which multiplies current quantities by base prices, rising only when the quantity of output has increased. The inflation rate is calculated from the GDP deflator which is the ratio of nominal to real GDP. Like the GDP deflator, the consumer price index (CPI) measures the price of a fixed basket of goods and services purchased by a typical consumer. Though, different from the GDP deflator, CPI measures purchased rather than produced prices of goods and services. Where a Laspeyres index (CPI) tends to overestimate the price change, and a Paasche index (GDP deflator) tends to understate the price change. To measure the average there is an index called the Fisher index.

GDP is the sum of four categories of expenditure: consumption, investment, government purchases, and net exports. Considering under a closed economy NX is omitted. Firstly, disposable income is income minus taxes and the marginal propensity to consume is the change in consumption to a change in disposable income. Spending on investment goods forges current consumption (ratio of valuing future to present goods – not final goods) is negatively correlated to the real interest rate. Tending to overstate consumption spending, conversely investment and saving is unquoted relative to each ones importance to the structure of production. Government expenditure within GDP poses more concern, say every country is competing on the growth of GDP, all one government would be required to do is to spend more employing expansionary fiscal policies, either in acquiring more debt or lowering taxes.

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Copyright © 2016 Zoë-Marie Beesley

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