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DA6. National Income Accounting

Statement

You are given the data below for 2008 for the imaginary country of Amagre, whose currency is the G.

  • Consumption 350 billion G
  • Transfer payments 100 billion G
  • Investment 100 billion G
  • Government purchases 200 billion G
  • Exports 50 billion G
  • Imports 150 billion G
  • Bond purchases 200 billion G
  • Earnings on foreign investments 75 billion G
  • Foreign earnings on Amagre investment 25 billion G

In addition to responding with a quantitative answer, briefly describe how you arrived at your answers. Questions:

  1. Compute net foreign investment.
  2. Compute net exports.
  3. Compute GDP.
  4. Compute GNP.

Answer

Introduction

Chapter 21 of the book “Principles of Economics” by Rittenberg and Tregarthen (2009) explains how to measure total output and income. The chapter discusses the concepts of Gross Domestic Product (GDP) and Gross National Product (GNP) and how to calculate them. The difference between GDP and GNP is that GDP includes foreign residents’ production within the country, while GNP includes residents’ production abroad. There are 4 components of GDP from expenditure view: consumption, investment, government spending, and net exports.

Let’s explain the numbers given in the question, and decide which components of GDP they belong to:

  • Consumption: 350 billion G; this is the total spending of all households in Amagre on goods and services.
  • Transfer payments: 100 billion G; these are payments that involves capital redistribution without exchanging goods or services; these are typically government payments to individuals, such as social security, unemployment benefits, etc. Transfer payments are not included in GDP because they do not produce anything new (Segal, 2021).
  • Investment: 100 billion G; this is the total spending on capital aiming to increase future production; it includes business investments, residential construction, and inventory.
  • Government purchases: 200 billion G; this is the total spending of the government on goods and services.
  • Exports: 50 billion G; this is the total value of goods and services produced in Amagre and sold to other countries.
  • Imports: 150 billion G; this is the total value of goods and services produced in other countries and sold in Amagre.
  • Bond purchases: 200 billion G; this is the total spending on bonds; bonds are debt securities issued by governments or corporations to raise capital (What is a Bond and How do they Work? | Vanguard, 2016). Bond purchases are not included in GDP because they are financial transactions and do not produce anything new.
  • Earnings on foreign investments: 75 billion G; this is the total income earned by Amagre residents from their investments abroad.
  • Foreign earnings on Amagre investment: 25 billion G; this is the total income earned by foreign residents from their investments in Amagre.

1. Compute net foreign investment

Net Foreign Investment(NFI) “is the difference between the aggregate amount that a country’s citizens and companies earn abroad and the aggregate amount that foreign citizens and overseas companies earn in that country” (Ganti, 2018). NFI is calculated as follows:

\[ \begin{aligned} NFI &= \text{Earnings on foreign investments} - \text{Foreign earnings on Amagre investment} \\ &= \text{75 billion G} - \text{25 billion G} \\ &= \text{50 billion G} \end{aligned} \]

2. Compute net exports

Net exports are calculated as the difference between exports and imports. Which represents the income inflowing from selling (exporting) goods and services to other countries and the income outflowing from buying (importing) goods and services from other countries. Net exports are calculated as follows:

\[ \begin{aligned} \text{Nx} &= \text{Exports} - \text{Imports} \\ &= \text{50 billion G} - \text{150 billion G} \\ &= -\text{100 billion G} \end{aligned} \]

3. Compute GDP

Gross Domestic Product (GDP) is “the sum of final goods and services produced for consumption (C), private investment (I), government purchases (G), and net exports (Nx)”. Thus GDP = C + I + G + Nx.

\[ \begin{aligned} \text{GDP} &= \text{Consumption} + \text{Investment} + \text{Government purchases} + \text{Net exports} \\ &= \text{350 billion G} + \text{100 billion G} + \text{200 billion G} + (-\text{100 billion G}) \\ &= \text{550 billion G} \end{aligned} \]

4. Compute GNP

Gross National Product (GNP) is “the total value of final goods and services produced during a particular period with factors of production owned by the residents of a particular country” (Rittenberg & Tregarthen, 2009, p.527). GNP is calculated as follows:

\[ \begin{aligned} GNP &= GDP + \text{net income received from abroad by residents of a nation} \\ &= GDP + NFI \\ &= \text{550 billion G} + \text{50 billion G} \\ &= \text{600 billion G} \end{aligned} \]

Conclusion

We noticed that bond purchases and transfer payments are not included in GDP because they are financial transactions and do not produce new goods. We also noticed that net exports are negative, which means that Amagre imports more than it exports. The GDP of Amagre is 550 billion G, and the GNP is 600 billion G.

References

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