Class_1_National_Output_by_Dr_ahmeda.pdf

Note

1. Class 1
Measures of National Output

2. Circular flow diagram
of a closed economy.
1.Closed Economy: An economy which
doesn’t trade with other nations because
it is completely self-reliant.
Economic Agents (Closed Economy):
I.Households (Producers of labor in the
market for factors of production (FOP) &
consumers of commodities in market for
goods & services (G&S))
II.Firms (Producers of commodities in
market for G&S & consumers of labor in
market for FOP)
III.Government (Could act as both)
For open economies there is one more
economic agent: Foreign economies.

3. Factors of Production:
Broadly there are 4 factors of production in economics:
1.Land: The piece of land on which the business operations takes
place. Cost of land is the rents paid to the landowner.
2.Labor: The service provided by the employees. Cost of labor is the
wages & salaries paid to the employees.
3.Capital: The tools and funds used to operate a business. Cost of
using capital is the rents paid to the owner of capital.
4.Entrepreneurship: Entrepreneur is a person who organizes land,
labor and capital to earn a profit. Usually, in economics we define
cost and revenue from the perspective of an entrepreneur.

4. Measures of National Output/Income
Gross Domestic Product (GDP)
•GDPisthetotal‘marketvalue’of
all‘finalgoodsandservices’
‘newlyproduced’inagiven‘time
period(usuallyayear)’withinthe
‘boundariesofacountry’.
Gross National Income (GNI)
•GNIisthe‘marketvalue’ofallthe
‘finalgoodsandservices’‘newly
produced’inagiven‘timeperiod
(usually1year)’bythe‘factorsof
production’‘ownedbythe
citizens’ofacountry.
RelationbetweenGDP&GNP:
GNI=GDP+Netincomefromabroad
NetIncomefromabroad=InwardRemittance–OutwardRemittance

5. Keywords
1.Market Value: GDP is a monetary measure. All goods and services (G&S)are
measured in their respective prices so that they can be aggregated under a
single unit or currency.
2.Final G&S: To avoid double counting the market value of only the final goods
are taken (not the intermediary goods).
3.Time Period: GDP is measured as a flow variable. All G&S are not produced
simultaneously at a single point in time and there is a cost of surveying for GDP
accounting. Thus, we consider a time interval of GDP (usually 1 year). This
interval may differ from country to country (i.e., quarterly data in US).
4.Newly Produced: The market value of G&S produced in 2022 (i.e., secondhand
products) will not be included in GDP accounting for 2023.
5.Boundary of a country: The output of any individual or any firm within the
Bangladeshi borders whether domestic or foreign will be included in the GDP
of Bangladesh.

6. Nominal vs. Real GDP
Nominal/Money GDP
•Nominal GDP is measured by
adding the product of quantity
of each good or service and
their corresponding price in the
market in the current period.
•It includes price fluctuations
from period to period.
•Mathematically: σ??????
1�
1
Real GDP
•Real GDP is measured by adding
the product of quantity of each
good and service and their
corresponding price in the
market in the base period.
•Its purpose was to remove the
effects of price fluctuations.
•Mathematically: σ??????
0�
1

7. Exercise (Calculating Nominal & Real GDP)
Year ProductXPP
1
X
1
P
0
X
1
NGDP RGDP
2015 (Base
Year)
Mangoes3020
Tangerines4040
Apples3510
2023 (Current
Year)
Mangoes3555
Tangerines5080
Apples4040

8. Exercise (Calculating Nominal & Real GDP)
Year ProductXPP
1
X
1
P
0
X
1
NGDP RGDP
2015 (Base
Year)
Mangoes3020600600
25502550Tangerines404016001600
Apples3510350350
2023 (Current
Year)
Mangoes35551925700
75253100Tangerines508040002000
Apples40401600400

9. Approaches to measuring GDP:
There are 3 approaches to measuring GDP:
1.Product/Value Added Approach
2.Expenditure Approach
3.Income Approach

10. Product or Value-Added
Approach
InthisapproachGDPisthesummationof
thetotalvalueaddedofallnewly
producedfinalG&Sinagivenperiod
withintheboundariesofaneconomy.
AccordingtotheInternational
StandardforIndustrialClassification(ISIC)
rev.3,theeconomyofacountrycanbe
dividedinto15sectors.Ifwetakethesum
ofthemarketvalueofthenewly-produced
finalproductsproducedbyeachofthese
15sectorsinsideBangladeshforagiven
yearandaddthetaxreceivedfromthese
sectorswhilesubtractingthesubsidies
providedtothesesectors,wereceivethe
GDPofBangladeshforthatyear.
Source:BBS, National Accounts Statistics (2020), Tab. 5

11. How does including the
market value of final products
remove double-counting
errors?
StageProduct
Selling
price
Value
added
MiningZinc Blende10 10
RoastingZinc Calcine25 15
RefiningZinc Block 40 15
FabricationBatteries 60 20
Gross Value Added (GVA) 60

12. Expenditure Approach
The expenditure approach takes the sum of 4 components.
They are:
1.Consumption Expenditure (C)
2.Investment Expenditure (I)
3.Government Expenditure (G)
4.Net Exports (X -M)
Therefore, if Y = GDP,
�=??????+??????+??????+�−??????
According to the table,
C = BDT 17,468 billion [1.1.1]
I = BDT 5,986 billion [1.2.1]
G = BDT 3,635 billion [1.1.2 + 1.2.2]
X = BDT 3,896 billion [2.1]
M = BDT 5,450 billion [2.2]
Therefore, Y = BDT 25,535 billion [3]
Source:BBS, National Accounts Statistics (2020), Tab. 15

13. Income Approach
According to the income approach the GDP of an economy is the sum of income derived from newly-
produced G&D produced by households & firms inside a country as well as the government of that
country within a certain period. There are four components in this approach as well. They are:
1.Compensation of Employees (w): Wages, Salaries & Supplementary Income
2.Gross Operating Surplus (π): Profits of Corporations & Government Enterprises before taking account
of rent liabilities, interest liabilities and taxes.
3.Informal Income (In): Income of farms and unincorporated business or economic activities such of the
informal sector.
4.Taxes less Subsidies (T-Sub): Tax is a form of government income or revenue. Taxes paid by firms or
individual entrepreneurs on the factors of production and imported goods are added while subsidies
received by these firms and individual entrepreneurs are subtracted.
�=�+??????+????????????+�−�????????????

14. Shortcomings of GDP
Measurement Issues
1.Non-market Goods & Services: Mothers
cooking meals, educating their children etc.
not included.
2.Underground Economy: Trade of illegal
commodities such as illegal drugs, weed
etc. cannot be included.
3.Imputed Values: Wage & Salaries are
imputed to measure the market value of
services.
4.Exclusion of Quality: Improvement in
quality of goods & services not
incorporated.
5.Exclusion of Leisure & Effort: Increment in
leisure due to less stressing work
environment or the effort of individuals
doing the same activity is not incorporated.
Well-being Issues
1.Environmental Pollution: Costs of
environmental degradation or pollution
due to economic activities is not
incorporated.
2.Composition and Distribution of Income:
Whether an economy produces weapons
relatively more than books won’t matter if
both have the same price in the market.
Such an economy may be prone to higher
violence or may advocate violence in the
world.
3.Intangible Sources of Well-being: Crime
reduction, peaceful international relations,
less domestic violence etc. are not
incorporated in GDP measurement.
See topics 2.3.8to 2.3.8.2in the
“Introduction to Macroeconomics with
Applications to Bangladesh Economy”
book for details.