Measures of national income and output facts for kids

A country's economy is like a huge, busy shop! To understand how well it's doing, economists use different ways to measure all the goods and services produced. These measurements are called measures of national income and output. They help us see the total economic activity in a country or region.

Some common measures you might hear about are gross domestic product (GDP) and gross national product (GNP). There are also others like net national income (NNI). All these measures try to count the total amount of goods and services made within a country. They also look at the total income earned by everyone in the nation.

Sometimes, these measures only count things that are bought and sold with money. Other times, they try to include things that are traded without money, by guessing their value.

Tracking a Country's Economy

Counting everything a large country produces is a huge job! It needs a lot of information and careful calculations. People tried to estimate national incomes as far back as the 1600s. But countries only started keeping detailed records, called national accounts, in the 1930s. This began in the United States and some European countries.

Why did they start then? The Great Depression, a time when economies around the world were struggling, made it clear that governments needed better information. This data helped them make smart decisions to manage the economy and help people.

How We Value Things

To count goods and services, we need to give them a value. The value used in these national income measures is their market value. This is simply the price something sells for when it's bought or sold. We don't usually measure how useful a product actually is, just its price in the market.

Economists use three main ways to figure out the total market value of all goods and services produced:

• The product (or output) method
• The expenditure method
• The income method

The Product Method

The product method looks at the economy industry by industry. Imagine a car factory. It buys steel, tires, and other parts. Then it turns them into a car. We don't count the steel and tires separately and then the car. Instead, we count the "value added" by the car factory. This is the difference between what the factory sells the car for and what it paid for the parts.

By adding up the value added by every industry, we get the total value produced in the economy. This helps us avoid counting things more than once.

Avoiding Double Counting

It's important to avoid 'double counting'. This means making sure we don't count the same thing multiple times as it moves through different stages of production.

Think about making a hamburger:

• A farmer sells beef to a butcher for $10.
• The butcher sells ground beef to a restaurant for $20 (adding $10 in value).
• The restaurant sells a hamburger to a customer for $30 (adding $10 in value).

The final value of the hamburger is $30. We don't add $10 + $20 + $30 to get $60. Instead, we only count the final value of the finished product, which is $30. Or, we can add up the value added at each step: $10 (farmer) + $10 (butcher) + $10 (restaurant) = $30. Both ways give us the correct final value.

The Expenditure Method

The expenditure method is based on a simple idea: everything produced in a country is eventually bought by someone or some organization. So, if we add up all the money spent on goods and services, we should get the total value of everything produced.

This method usually adds up spending by:

• Private individuals (like you buying clothes or food)
• Businesses (like a company buying new machines)
• The government (like building roads or schools)

We also need to adjust for things bought from other countries (imports) and things sold to other countries (exports).

The basic formula for this method is: Failed to parse (Missing <code>texvc</code> executable. Please see math/README to configure.): \mathrm{GDP} = C + G + I + \left ( \mathrm{X} - M \right ) Where:

• C is what people spend (Consumption).
• G is what the government spends (Government spending).
• I is what businesses spend on new things like factories or equipment (Investment).
• X is the value of goods and services sold to other countries (Exports).
• M is the value of goods and services bought from other countries (Imports).
• (X - M) is often called "net exports."

The Income Method

The income method works by adding up all the income earned by people and businesses within the country. This includes wages, salaries, profits for companies, and rent payments. Since what people are paid is the value of what they produced, their total income should equal the total value of the country's products.

In theory, all three methods (product, expenditure, and income) should give the same total number. In real life, there might be small differences because of things like goods sitting in warehouses or small errors in collecting data.

GDP and GNP: What's the Difference?

Gross domestic product (GDP) is the total value of all final goods and services made inside a country's borders in one year. It doesn't matter who made them, just that they were made within the country.

Gross national product (GNP) is the total value of all goods and services made in one year by the residents and businesses of a country, no matter where they are in the world.

Let's look at an example:

• A French-owned factory in Senegal makes cotton.
• The cotton it produces counts towards Senegal's Domestic figures (because it's made in Senegal).
• But it counts towards France's National figures (because it's owned by a French company).

• NDP: Net domestic product is like GDP, but it subtracts the cost of things wearing out or becoming old (this is called "depreciation"). It shows how much product is truly available for use or new investment.
• GDP per capita: This means "GDP per person." It's the total GDP divided by the number of people in the country. It gives an average idea of how much is produced per person, or the average income per person.

National Income and Well-being

People often use GDP per capita to guess how well people in a country are living. Countries with higher GDP might have longer life expectancy or better schools. However, GDP has some important limits as a measure of how good life really is:

• Unpaid work isn't counted: GDP usually doesn't include unpaid work, like parents taking care of their children or people volunteering. If a paid nanny looks after kids, it adds to GDP. But if a parent does the same work for free, it doesn't.
• Doesn't show effort or impact: GDP doesn't consider how much effort goes into producing things. If everyone worked twice as many hours, GDP might double, but people might be less happy because they have no free time. It also doesn't measure the impact on the environment.
• Exchange rates can be tricky: Comparing GDP between countries can be hard because currency exchange rates change.
• Doesn't measure quality of life: GDP doesn't include things like clean air, safety from crime, or how happy people are. For example, cleaning up an oil spill adds to GDP, but the damage the spill caused to beaches isn't subtracted.
• Doesn't show fairness: GDP is an average. A country might have a high GDP per capita, but if a few very rich people have most of the money, many citizens could still be poor. It doesn't show how wealth is shared.

Because of these limits, other measures are sometimes used to get a better idea of well-being. These include the Human Development Index (HDI) and the Genuine Progress Indicator (GPI).

See also

In Spanish: Renta nacional para niños