David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

CHAPTER 15 Introduction to macroeconomics
Similarly, it is generally felt that GDP data are more reliable than GNP data, since the latter includes
estimates of property income earned abroad. One reason why people hold assets abroad is to avoid
declaring the income to national tax authorities. Assessing capital gains (which are really income) on
foreign assets is also problematic. Hence, most international comparisons are based on GDP. We have a
more reliable idea of gross output than of gross income.
Summary
• Macroeconomics examines the economy as a whole.
• 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 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 ofleisure.
• 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.
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