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Econ 102
Measuring domestic output and national income

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1.) Define the ff:

National Income Accounting – National income accounting is used to determine the level of economic activity of a country. Two methods are used and the results reconciled: the expenditure approach sums what has been purchased during the year and the income approach sums what has been earned during the year. GROSS DOMESTIC PRODUCT – The gross domestic product is the sum of all the final goods and services produced by the residents of a country in one year. Summing the production of residents (rather than nationals as in GNP) gives often a more accurate picture of the level of activity in a country. The difference between GDP and GNP is net unilateral transfers and factor income of foreigners. GROSS NATIONAL PRODUCT – The gross national product is the sum total of all final goods and services produced by the people of one country in one year. The GNP is a flow concept. It can be calculated with either the expenditure approach or the income approach. The GNP excludes intermediate goods, second hand sales as well as financial transactions. The GNP is a money amount and must be adjusted for changes in the value of money. VALUE ADDED – GNP can be calculated by adding up all the value added from the intermediate goods (the result is exactly the same). Countries with tax systems based on value added taxes prefer this method. Public Transfer Payments – Relationship between public transfer payment and safety net is that safety net is the rationale used for public transfer payment. Private Transfer Payments – Payment by citizens without reciprocation, i.e. donating to charity or a relief fund.

PERSONAL CONSUMPTION EXPENDITURE – Personal consumption expenditure is what households buy (except houses). It is made of durables (cars, appliances), nondurables (clothing, food) and services (haircuts, doctor visits, airline tickets). A convention is made on nondurables to be all items which last less than a year, including clothing. Nondurables expenditure is the most stable component of personal consumption expenditure. GROSS PRIVATE DOMESTIC INVESTMENT – Gross private domestic investment is made of 1) new construction, 2) new capital (machines, trucks and equipment), and 3) changes in inventory. It excludes investment made by government and investment made outside the country. New construction includes all forms of new building, be it for rental purpose or for private residential purpose. Changes in inventory captures the goods produced in one year and sold in future years. GROSS INVESTMENT – The amount a company invests in business assets that does not account for any depreciation. The gross figure more accurately reflects the company's actual financial commitment to an asset from which it can derive a return on investment.

Net Private Domestic Investment – Expenditures on capital goods to be used for productive activities in the domestic economy that are undertaken by the business sector during a given time period, after deducting capital depreciation. More specifically net private domestic investment is found be subtracting the capital consumption adjustment from gross private domestic investment. It's primary function is to measure the net increase in the capital stock resulting from investment.

GOVERNMENT PURCHASES – Government purchases combine all goods and services bought by all forms of government: form paper clips to bridges and hospitals. This does not include government payment for work or any transfer payment.

EXPORTS – To send goods or services across national frontiers for the purpose of selling and realizing foreign exchange.

IMPORTS – Products of foreign origin brought into a country.

NET EXPORTS – Net exports is the difference between total exports and total imports. It is equal to the trade or merchandise balance of payments. When imports exceed exports (and the balance of payments is in...
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