Aggregate Output and Aggregate Income

Aggregate Output is the total amount of output produced and supplied in the economy over a given period.
Aggregate income is the total amount of income received by all the factors of production in an economy over a given period.

Aggregate Output 

Gross Domestic Product

  • Aggregate output is defined as an economy’s total productivity or Gross Domestic Product (GPD).
  • Gross Domestic Product is a quantitative measure of a nation’s economic activity. It represents the value of all goods and services produced within a nation’s geographic borders in a specified period of time.
  • It is of two types : 
    • Gross Domestic Product at Market Price. 
    • Gross Domestic Product at Factor Cost. 

Gross Domestic Product at Market Price (GDPMP )

  • It is the gross value of all final goods and services produced in the domestic territory valued at market price in a year.
  • Gross in GDPMP  states that no provision has been made for depreciation, i.e. it includes depreciation.
  • Domestic in GDPMP   states that it includes goods and services produced by all units located within the domestic territory, i.e. it excludes net factor income from abroad. 
  • Market Price in GDPMP   states that it includes the amount of indirect taxes paid and excludes the amount of subsidy received, i.e. it includes net indirect taxes. 
  • Product in GDPMP   states that only final goods and services have to be included. 

Gross Domestic Product at Factor Cost (GDPFC)

  • It is the gross value of all final goods and services produced in the domestic territory valued at factor cost in a year.
  • All the components are the same as GDPMP except for the factor cost.
  • Factor Cost in GDPFC states that it excludes net indirect taxes.

Components of GDP

GDP = Consumption + Government Expenditures + Investment + Net Exports.

The components used to calculate GDP include:

Consumption (C)

  • Private consumption expenditure or consumption spending by households – this component measures the monetary value of consumer goods and services which are purchased by households and non-profit institutions for current use.
  • These include:
    • Consumer durables
    • Semi durables
    • Non-durables
    • Services
  • Private consumption expenditure includes the expenditure incurred on all these categories of goods and services. It includes expenditures incurred by normal residents, whether in the domestic territory or abroad and any expenditure incurred by non-residents in the domestic market will not be included.

Government Expenditure(G) 

  • Government expenditure or government final consumption expenditure refers to the expenditure incurred by the general government on various administrative services like defense, law, and order, education, etc.
  • These services are valued at their cost to the government as they are not normally sold to the public.
  • It includes:
    • Intermediate Consumption of government
    • Compensation of Employees paid by the government
    • Direct purchases from abroad for embassies and consulates located abroad
  • It excludes the sale of goods and services produced by the general government.

Investment Expenditure (I)

  • It refers to the addition of the capital stock of the economy. It shows the expenses incurred on acquiring goods for investment by the production units located within the domestic territory.
  • It includes:
    • Gross Fixed Capital Formation – refers to the expenses incurred on the purchase of fixed assets. It is of three types, i.e. Gross Business Fixed Investment, Residential Construction Investment, Public Investment.
    • Inventory Investment (Change in Stock) – it refers to the physical change in the stock of raw material, semi-finished goods, and finished goods lying with the producers. It is included as an investment item since it shows the goods produced but not used for current consumption. It is calculated as the change between the closing and the opening stock of the year.

Net exports (X – M)

  • It represents the difference between exports and imports of a country during a period of one year.
  • Exports (X) refers to expenditure by other country peoples on the purchase of domestic products. They are produced within the country, therefore they are included.
  • Imports (M) is the expenditure by residents on foreign products, imports are deducted because they are not produced with domestic territory.

Types of GDP

Nominal GDP 

  • It is also known as the current price GDP. When the GDP of a given year is calculated on the basis of the price of the same year, it is called nominal GDP.
  • Nominal GDP =

Real GDP 

  • It is also known as GDP at a constant price. When the GDP of a given year is calculated on the basis of the price of Base Year, it is called real GDP.
  • Real GDP =

National Income

  • It is the net money value of all final goods and produced in the domestic territory as well abroad, valued at factor cost in a year. It includes Net factor income from abroad and excludes depreciation and net indirect taxes.
  • It is of two types:
    1. National Income at Current Price.
    2. National Income at Constant Price.

National Income at Current Price

  • It is the monetary value of final goods and services produced by normal residents of a country in a year, measured at the prices of the current year. It is also known as Nominal National Income.

National Income at Constant Price

  • It is the monetary value of final goods and services produced by normal residents of a country in a year, measured at base year price. It is also known as Real National Income.
  • National Income at Constant Price = 

Personal income

  • Personal income is the sum total of all the incomes that are actually received by households from all the sources.
Personal income = Private Income – Corporate tax – Retained Earnings.
  • It includes:
    • Private Income - It represents the income that accrues to the private sector from all the sources within and outside the country. It consists of two types of income:
      • Factor Income – it is also known as earned income. There are two sources of factor income for the private sector, i.e.
        • Income from domestic product accruing to the private sector.
        • Net factor income from abroad.
      • Transfer Income – it is also known as unearned income. It is also received from two sources, i.e.
        • National debt interest and current transfers from the government.
        • Net current transfers from the rest of the world.
  • It excludes:
    • Corporate Tax - Personal Income does not include ‘Corporate Tax’ as such tax is paid by the private enterprises to the Government and is not received by the households.
    • Retained Earnings - Personal Income does not include Retained Earnings also, as they are retained by private enterprises for their future expansion and unforeseen events.

Personal Disposable Income 

  • It represents that part of personal income which is actually available at the disposal of households.
Personal Disposable Income  = Personal Income – Personal Taxes – Miscellaneous receipts of the Government
  • It is that part of personal income that is left with the households after making payments of taxes, fees, and other miscellaneous receipts of the government.
  • Therefore it excludes:
    • Personal Taxes – Personal Disposable Income does not include ‘Personal Taxes’ as households need to pay direct taxes like income tax, house tax, etc. to the Government.
    • Miscellaneous Receipts of Government – Personal Disposable Income does not include ‘Miscellaneous Receipts of Government’ as these are small compulsory payments made by households to the government in the form of fees, fines, etc.
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