Macroeconomics sacrifices individual detail to focus on the interaction
of broad sectors of the economy. Households supply production inputs to firms
that use them to make output. Firms pay factor incomes to households, who
buy the output from firms. This is the circular flow.
Gross domestic product (GDP) is the value of net output
of the factors of production located in the domestic economy. It can be measured
in three equivalent ways: value added in production, factor incomes including
profits or final expenditure.
Leakages from the circular flow are those parts of payment
by firms to households that do not automatically return to firms as spending
by households on the output of firms. Leakages are saving, taxes net of subsidies
and imports. Injections are sources of revenue to firms that
do not arise from household spending. Investment expenditure by firms, spending
on goods and services by the government, and exports are injections. By definition,
total leakages equal total injections.
GDP at market prices values domestic output at prices
inclusive of indirect taxes. GDP at basic prices measures
domestic output at prices exclusive of indirect taxes. Gross national
product (GNP), also called gross national income (GNI), adjusts GDP
for net property income from abroad.
National income is net national product (NNP) at basic
prices. NNP is GNP minus the depreciation of the capital
stock during the period. In practice, many assessments of economic performance
are based on GNP since it is not hard to measure depreciation accurately.
Nominal GNP measures income at current prices. Real
GNP measures income at constant prices. It adjusts nominal GNP for
changes in the GNP deflator as a result of inflation.
Per capita real GNP divides real GNP by the population.
It is a more reliable indicator of income per person in an economy, but only
an average measure of what people get.
Real GNP and per capita real GNP are crude measures of national and individual
welfare. They ignore non-market activities, bads such as pollution, valuable
activities such as work in the home, and production unreported by tax evaders.
Nor do they measure the value of leisure.
Because it is expensive, and sometimes impossible, to make regular and
accurate measurements of all these activities, in practice GNP is the most
widely used measure of national performance.
