Ch203 - CHAPTER 3 NATIONAL INCOME ACCOUNTING CONCEPTS AND...

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The structure of the macro economy has been portrayed in the circular flow of output and income as dealt with in the previous chapter. This circular flow depiction of macroeconomic activities provides logical foundation for the concepts and measurement of national income aggregates. A strikingly unique feature of national income concepts is that they are quantifiable and are not abstract ones. Hence, they render as much precision as feasible in the national income statistics, given the limitations in the estimation of national income aggregates and in the construction of national income accounts. There have been many attempts in the past to evolve methods of national income accounting and these efforts have contributed to the system that we have at present. In this chapter, we shall present principal methods to measure national income aggregates. It is pertinent at this juncture to remind ourselves of an important observation made in respect of the circular flow of macroeconomic activities. We have, in that context, stated that the value of N ATIONAL I NCOME A CCOUNTING : C ONCEPTS AND M EASUREMENT C HAPTER 3 aggregate output equals the value of aggregate income, which in turn must equal to the aggregate expenditure. Based on this, national income measurement can be categorised into three approaches : output or product approach, income approach and expenditure approach. All these must, in principle, yield the same result. Measuring Gross Domestic Product Let us first take up the measurement of the value of all that is produced in the economy. This is expressed as Gross Domestic Product. Here, the measurement procedure is actually three-fold. We use the product method, the income method and the expenditure method to compute the Gross Domestic Product. As this aggregate is held to be very important for macroeconomic assessment, greater attention is called for in the computation of this measure. Gross Domestic Product : The Output Approach Gross Domestic Product (GDP) is a summary statistic, which is widely used by economists and policy analysts to
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I NTRODUCTORY M ACROECONOMICS 18 assess the rate of growth of an economy during a year. GDP is generally recognised to be the primary measure. GDP is defined as the market value of all final goods and services produced by the factors of production located in the country during a period of one year . A key phrase in this definition is ‘ final goods and services ’ which require some elaboration. Final goods are those that are meant for final use by consumers or firms . These goods are not required to enter into further stages of production or resale to change their form and content. They are finished goods meant only for final consumption and investment.
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