NATIONAL INCOME:

MEAN:

A variety of measures of national income and output are used in economics to estimate
total economic activity in a country or region, including gross domestic product (GDP), gross national
product (GNP), and net national income (NNI). All are specially concerned with counting the total
amount of goods and services produced within some "boundary". The boundary may be defined
geographically, or by citizenship; and limits on the type of activity also form part of the conceptual
boundary; for instance, these measures are for the most part limited to counting goods and services
that are exchanged for money: production not for sale but for barter, for one's own personal use, or
for one's family, is largely left out of these measures, although some attempts are made to include
some of those kinds of production by imputing monetary values to them. Mr Ian Davies defines
development as 'Simply how happy and free the citizens of that country feel

National accounts
Main article: National accounts

Arriving at a figure for the total production of goods and services in a large region like a
country entails a large amount of data-collection and calculation. Although some attempts
were made to estimate national incomes as long ago as the 17th century,[2] the systematic
keeping of national accounts, of which these figures are a part, only began in the 1930s, in the
United States and some European countries. The impetus for that major statistical effort was
the Great Depression and the rise of Keynesian economics, which prescribed a greater role
for the government in managing an economy, and made it necessary for governments to
obtain accurate information so that their interventions into the economy could proceed as
much as possible from a basis of fact.

Market value
Main article: Market value

In order to count a good or service it is necessary to assign some value to it. The value that
the measures of national income and output assign to a good or service is its market value –
the price it fetches when bought or sold. The actual usefulness of a product (its use-value) is
not measured – assuming the use-value to be any different from its market value.

Three strategies have been used to obtain the market values of all the goods and services
produced: the product (or output) method, the expenditure method, and the income method.
The product method looks at the economy on an industry-by-industry basis. The total output
of the economy is the sum of the outputs of every industry. However, since an output of one
industry may be used by another industry and become part of the output of that second
industry, to avoid counting the item twice we use, not the value output by each industry, but
the value-added; that is, the difference between the value of what it puts out and what it takes
in. The total value produced by the economy is the sum of the values-added by every
industry.

The expenditure method is based on the idea that all products are bought by somebody or
some organisation. Therefore we sum up the total amount of money people and organisations
spend in buying things. This amount must equal the value of everything produced. Usually
expenditures by private individuals, expenditures by businesses, and expenditures by
government are calculated separately and then summed to give the total expenditure. Also, a
correction term must be introduced to account for imports and exports outside the boundary.

The income method works by summing the incomes of all producers within the boundary.
Since what they are paid is just the market value of their product, their total income must be
the total value of the product. Wages, proprieter's incomes, and corporate profits are the
major subdivisions of income.

The output approach

The output approach focuses on finding the total output of a nation by directly finding the
total value of all goods and services a nation produces.

Because of the complication of the multiple stages in the production of a good or service,
only the final value of a good or service is included in total output. This avoids an issue often
called 'double counting', wherein the total value of a good is included several times in
national output, by counting it repeatedly in several stages of production. In the example of
meat production, the value of the good from the farm may be $10, then $30 from the
butchers, and then $60 from the supermarket. The value that should be included in final
national output should be $60, not the sum of all those numbers, $100. The values added at
each stage of production over the previous stage are respectively $10, $20, and $30. Their
sum gives an alternative way of calculating the value of final output.

Formulae:

GDP(gross domestic product) at market price = value of output in an economy in a particular

year - intermediate consumption

NNP at factor cost = GDP at market price - depreciation + NFIA (net factor income from
abroad) - net indirect taxes[3]

The income approach

The income approach equates the total output of a nation to the total factor income received
by residents of the nation. The main types of factor income are:

 Employee compensation (= wages + cost of fringe benefits, including unemployment,

health, and retirement benefits);
 Interest received net of interest paid;
 Rental income (mainly for the use of real estate) net of expenses of landlords;
 Royalties paid for the use of intellectual property and extractable natural resources.
All remaining value added generated by firms is called the residual or profit. If a firm has
stockholders, they own the residual, some of which they receive as dividends. Profit includes
the income of the entrepreneur - the businessman who combines factor inputs to produce a
good or service.

Formulae:

NDP at factor cost = Compensation of employees + Net interest + Rental & royalty income +
Profit of incorporated and unincorporated firms + Income from self-employment.

National income = NDP at factor cost + NFIA (net factor income from abroad).

The expenditure approach

The expenditure approach is basically an output accounting method. It focuses on finding the
total output of a nation by finding the total amount of money spent. This is acceptable,
because like income, the total value of all goods is equal to the total amount of money spent
on goods. The basic formula for domestic output combines all the different areas in which
money is spent within the region, and then combining them to find the total output.

GDP = C + I + G + (X - M)

Where:
C = household consumption expenditures / personal consumption expenditures
I = gross private domestic investment
G = government consumption and gross investment expenditures
X = gross exports of goods and services
M = gross imports of goods and services

Note: (X - M) is often written as XN, which stands for "net exports"

Names
The names of the measures consist of one of the words "Gross" or "Net", followed by one of
the words "National" or "Domestic", followed by one of the words "Product", "Income", or
"Expenditure". All of these terms can be explained separately.

"Gross" means total product, regardless of the use to which it is subsequently put.
"Net" means "Gross" minus the amount that must be used to offset depreciation – ie.,
wear-and-tear or obsolescence of the nation's fixed capital assets. "Net" gives an
indication of how much product is actually available for consumption or new
investment.
"Domestic" means the boundary is geographical: we are counting all goods and
services produced within the country's borders, regardless of by whom.
"National" means the boundary is defined by citizenship (nationality). We count all
goods and services produced by the nationals of the country (or businesses owned by
them) regardless of where that production physically takes place.
The output of a French-owned cotton factory in Senegal counts as part of the
Domestic figures for Senegal, but the National figures of France.
 "Product", "Income", and "Expenditure" refer to the three counting methodologies
explained earlier: the product, income, and expenditure approaches. However the
terms are used loosely.
"Product" is the general term, often used when any of the three approaches was
actually used. Sometimes the word "Product" is used and then some additional
symbol or phrase to indicate the methodology; so, for instance, we get "Gross
Domestic Product by income", "GDP (income)", "GDP(I)", and similar constructions.
"Income" specifically means that the income approach was used.
"Expenditure" specifically means that the expenditure approach was used.

Note that all three counting methods should in theory give the same final figure. However, in
practice minor differences are obtained from the three methods for several reasons, including
changes in inventory levels and errors in the statistics. One problem for instance is that goods
in inventory have been produced (therefore included in Product), but not yet sold (therefore
not yet included in Expenditure). Similar timing issues can also cause a slight discrepancy
between the value of goods produced (Product) and the payments to the factors that produced
the goods (Income), particularly if inputs are purchased on credit, and also because wages are
collected often after a period of production.

GDP and GNP

Main articles: GDP and GNP

Gross domestic product (GDP) is defined as "the value of all final goods and services
produced in a country in 1 year".[4]

Gross National Product (GNP) is defined as "the market value of all goods and services
produced in one year by labour and property supplied by the residents of a country."[5]

As an example, the table below shows some GDP and GNP, and NNI data for the United
States:[6]

National income and output (Billions of dollars)

Period Ending 2003
Gross national product 11,063.3
  Net U.S. income receipts from rest of the world 55.2
      U.S. income receipts 329.1
      U.S. income payments -273.9
Gross domestic product 11,008.1
  Private consumption of fixed capital 1,135.9
  Government consumption of fixed capital 218.1
  Statistical discrepancy 25.6
National Income 9,679.7

 NDP: Net domestic product is defined as "gross domestic product (GDP) minus
depreciation of capital",[7] similar to NNP.
 GDP per capita: Gross domestic product per capita is the mean value of the output
produced per person, which is also the mean income.
National income and welfare
GDP per capita (per person) is often used as a measure of a person's welfare. Countries with
higher GDP may be more likely to also score highly on other measures of welfare, such as
life expectancy. However, there are serious limitations to the usefulness of GDP as a measure
of welfare:

 Measures of GDP typically exclude unpaid economic activity, most importantly

domestic work such as childcare. This leads to distortions; for example, a paid nanny's
income contributes to GDP, but an unpaid parent's time spent caring for children will
not, even though they are both carrying out the same economic activity.
 GDP takes no account of the inputs used to produce the output. For example, if
everyone worked for twice the number of hours, then GDP might roughly double, but
this does not necessarily mean that workers are better off as they would have less
leisure time. Similarly, the impact of economic activity on the environment is not
measured in calculating GDP.
 Comparison of GDP from one country to another may be distorted by movements in
exchange rates. Measuring national income at purchasing power parity may overcome
this problem at the risk of overvaluing basic goods and services, for example
subsistence farming.
 GDP does not measure factors that affect quality of life, such as the quality of the
environment (as distinct from the input value) and security from crime. This leads to
distortions - for example, spending on cleaning up an oil spill is included in GDP, but
the negative impact of the spill on well-being (e.g. loss of clean beaches) is not
measured.
 GDP is the mean (average) wealth rather than median (middle-point) wealth.
Countries with a skewed income distribution may have a relatively high per-capita
GDP while the majority of its citizens have a relatively low level of income, due to
concentration of wealth in the hands of a small fraction of the population. See Gini
coefficient.

Because of this, other measures of welfare such as the Human Development Index (HDI),
Index of Sustainable Economic Welfare (ISEW), Genuine Progress Indicator (GPI), gross
national happiness (GNH), and sustainable national income (SNI) are used.
Bibliography
Australian Bureau of Statistics, Australian National Accounts: Concepts, Sources and
Methods, 2000. This fairly large document has a wealth of information on the meaning of the
national income and output measures and how they are obtained

References
1. ^ Australian Bureau of Statistics, Concepts, Sources and Methods, Chap. 4, "Economic
concepts and the national accounts", "Production", "The production boundary". Retrieved
November 2009.
2. ^ Eg., William Petty (1665), Gregory King (1688); and, in France, Boisguillebert and
Vauban. Australia's National Accounts: Concepts, Sources and Methods, 2000. Chapter 1;
heading: Brief history of economic accounts (retrieved November 2009).
3. ^ NFIA meaning - Acronym Attic
4. ^ Australian Council of Trade Unions, APHEDA, Glosssary, accessed November 2009.
5. ^ United States, of the United States], p 5; retrieved November 2009.
6. ^ U.S Federal Reserve, the link appears to be dead as of late 2009
7. ^ Penn State Glossary

Input-output model
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This article is about the economic model. For the computer interface, see Input/output.

In economics, an input-output model uses a matrix representation of a nation's (or a

region's) economy to predict the effect of changes in one industry on others and by
consumers, government, and foreign suppliers on the economy. Wassily Leontief (1905-
1999) is credited with the development of this analysis. Francois Quesnay developed a cruder
version of this technique called Tableau économique. Leontief won the Nobel Memorial
Prize in Economic Sciences for his development of this model. And, in essence, Léon
Walras's work Elements of Pure Economics on general equilibrium theory is both a
forerunner and generalization of Leontief's seminal concept. Leontief's contribution was that
he was able to simplify Walras's piece so that it could be implemented empirically. The
International Input-Output Association[1] is dedicated to advancing knowledge in the field of
input-output study, which includes "improvements in basic data, theoretical insights and
modelling, and applications, both traditional and novel, of input-output techniques."

Input-output depicts inter-industry relations of an economy. It shows how the output of one
industry is an input to each other industry. Leontief put forward the display of this
information in the form of a matrix. A given input is typically enumerated in the column of
an industry and its outputs are enumerated in its corresponding row. This format, therefore,
shows how dependent each industry is on all others in the economy both as customer of their
outputs and as supplier of their inputs. Each column of the input-output matrix reports the
monetary value of an industry's inputs and each row represents the value of an industry's
outputs. Suppose there are three industries. Column 1 reports the value of inputs to Industry 1
from Industries 1, 2, and 3. Columns 2 and 3 do the same for those industries. Row 1 reports
the value of outputs from Industry 1 to Industries 1, 2, and 3. Rows 2 and 3 do the same for
the other industries.

While most uses of the input-output analysis focuses on the matrix set of interindustry
exchanges, the actual focus of the analysis from the perspective of most national statistical
agencies, which produce the tables, is the benchmarking of gross domestic product. Input-
output tables therefore are an instrumental part of national accounts. As suggested above, the
core input-output table reports only intermediate goods and services that are exchanged
among industries. But an array of row vectors, typically aligned below this matrix, record
non-industrial inputs by industry like payments for labor; indirect business taxes; dividends,
interest, and rents; capital consumption allowances (depreciation); other property-type
income (like profits); and purchases from foreign suppliers (imports). At a national level,
although excluding the imports, when summed this is called "gross product originating" or
"gross domestic product by industry." Another array of column vectors is called "final
demand" or "gross product product consumed." This displays columns of spending by
households, governments, changes in industry stocks, and industries on investment, as well as
net exports. (See also Gross domestic product.) In any case, by employing the results of an
economic census which asks for the sales, payrolls, and material/equipment/service input of
each establishment, statistical agencies back into estimates of industry-level profits and
investments using the input-output matrix as a sort of double-accounting framework.

The mathematics of input-output economics is straightforward, but the data requirements are
enormous because the expenditures and revenues of each branch of economic activity have to
be represented. As a result, not all countries collect the required data and data quality varies,
even though a set of standards for the data's collection has been set out by the United Nations
through its System of National Accounts[2](SNA): the replacement for the current 1993 SNA
standard is pending.when? Because the data collection and preparation process for the input-
output accounts is necessarily labor and computer intensive, input-output tables are often
published long after the year in which the data were collected--typically as much as 5-7 years
after. Moreover, the economic "snapshot" that the benchmark version of the tables provides
of the economy's cross-section is typically taken only once every few years, at best, although
many developed countries estimate input-output accounts annually and with much greater
recency.

Contents
[hide]

 1 Usefulness
 2 Key Ideas
 3 Forecasting and/or Analysis Using Input-Output
 4 Input-output Analysis Versus Consistency Analysis
 5 See also
 6 Bibliography
 7 External links
Usefulness
In addition to studying the structure of national economies, input-output economics has been
used to study regional economies within a nation, and as a tool for national and regional
economic planning. Indeed a main use of input-output analysis is for measuring the economic
impacts of events as well as public investments or programs as shown by IMPLAN and
RIMS-II. But it is also used to identify economically related industry clusters and also so-
called "key" or "target" industries--industries that are most likely to enhance the internal
coherence of a specified economy. By linking industrial output to satellite accounts
articulating energy use, effluent production, space needs, and so on, input-output analysts
have extended the approaches application to a wide variety of uses.

Key Ideas
Leontief's text remains one of the best expositions of input-output analysis. Nonetheless, two
books--a rather fundamental one by William Miernyk[3] and another by Ronald E. Miller and
Peter D. Blair--probably have greater international currency. An updated and expanded
second edition of the latter has been published by Cambridge University Press in 2009.

Consider the production of the ith sector. We may isolate (1) the quantity of that production
that goes to final demand,ci, (2) to total output, xi, and (3) flows xij from that industry to
other industries. We may write a transactions tableau

Table: Transactions in a Three Sector Economy

Economic Inputs to Inputs to Inputs to Final Total

Activities Agriculture Manufacturing Transport Demand Output

Agriculture 5 15 2 68 90

Manufacturing 10 20 10 40 80

Transportation 10 15 5 0 30

Labor 25 30 5 0 60

or

Note that in the example given we have no input flows from the industries to 'Labor'.

We know very little about production functions because all we have are numbers representing
transactions in a particular instance (single points on the production functions):
The neoclassical production function is an explicit function

Q = f(K,L),

where Q = Quantity, K = Capital, L = Labor,

and the partial derivatives ( ) are the demand

schedules for input factors.

Leontief, the innovator of input-output analysis, uses a special production function which
depends linearly on the total output variables xi. Using Leontief coefficients aij, we may
manipulate our transactions information into what is known as an input-output table:

or

Now

gives

Rewriting finally yields

Introducing matrix notation, we can see how a solution may be obtained. Let

denote the total output vector, the final demand vector, the unit matrix and the input-output
matrix, respectively. Then:

provided (I − A) is invertible.
There are many interesting aspects of the Leontief system, and there is an extensive literature.
There is the Hawkins-Simon Condition on producibility. There has been interest in
disaggregation to clustered inter-industry flows, and the study of constellations of industries.
A great deal of empirical work has been done to identify coefficients, and data have been
published for the national economy as well as for regions. This has been a healthy, exciting
area for work by economists because the Leontief system can be extended to a model of
general equilibrium; it offers a method of decomposing work done at a macro level.

Transportation is implicit in the notion of inter-industry flows. It is explicitly recognized

when transportation is identified as an industry – how much is purchased from transportation
in order to produce. But this is not very satisfactory because transportation requirements
differ, depending on industry locations and capacity constraints on regional production. Also,
the receiver of goods generally pays freight cost, and often transportation data are lost
because transportation costs are treated as part of the cost of the goods.

Walter Isard and his student, Leon Moses, were quick to see the spatial economy and
transportation implications of input-output, and began work in this area in the 1950s
developing a concept of interregional input-output. Take a one region versus the world case.
We wish to know something about interregional commodity flows, so introduce a column
into the table headed “exports” and we introduce an “import” row.
 Table: Adding Export And Import Transactions

Economic Activities 1 2 … … Z Exports Final Demand Total Outputs

Imports

A more satisfactory way to proceed would be to tie regions together at the industry level.
That is, we could identify both intra-region inter-industry transactions and inter-region inter-
industry transactions. The problem here is that the table grows quickly.

Input-output is conceptually simple. Its extension to a model of equilibrium in the national

economy is also relatively simple and attractive but requires great skill and high-quality data.
One who wishes to do work with input-output systems must deal skillfully with industry
classification, data estimation, and inverting very large, ill-conditioned matrices. Moreover,
changes in relative prices are not readily handled by this modeling approach alone. Of course,
input-output accounts are part and parcel to a more flexible form of modeling, Computable
general equilibrium models.

Two additional difficulties are of interest in transportation work. There is the question of
substituting one input for another, and there is the question about the stability of coefficients
as production increases or decreases. These are intertwined questions. They have to do with
the nature of regional production functions.

Forecasting and/or Analysis Using Input-Output

Table: Interregional Transactions

Economic North East West Total

Ag ... ... Ag ... ... Ag ... ... Exports
Activities Mfg Mfg Mfg Outputs

North Mfg

...
...

Ag

East Mfg

...

...

Ag

West Mfg

...

...

Table: Input-Output Model for Hypothetical Economy Total requirements from regional industries
per dollar of output delivered to final demand

Purchasing Industry Agriculture Transport Manufacturer Services

Selling Industry

Agriculture 1.14 0.22 0.13 0.12

Transportation 0.19 1.10 0.16 0.07

Manufacturing 0.16 0.16 1.16 0.06

Services 0.08 0.05 0.08 1.09

Total 1.57 1.53 1.53 1.34

Input-output Analysis Versus Consistency Analysis

Despite the clear ability of the input-output model to depict and analyze the dependence of
one industry or sector on another, Leontief and others never managed to introduce the full
spectrum of dependency relations in a market economy. In 2003, Mohammad Gani[4], a
pupil of Leontief, introduced Consistency Analysis in his book 'Foundations of Economic
Science' (ISBN 984320655X), which formally looks exactly like the input-output table but
explores the dependency relations in terms of payments and intermediation relations.
Consistency analysis explores the consistency of plans of buyers and sellers by decomposing
the input-output table into four matrices, each for a different kind of means of payment. It
integrates micro and macroeconomics in one model and deals with money in an ideology-free
manner. It deals with the flow of funds via the movement of goods.

Bibliography
 Dietzenbacher, Erik and Michael L. Lahr, eds. Wassilly Leontief and Input-Output
Economics. Cambridge University Press, 2004.
 Isard, Walter et al. Methods of Regional Analysis: An Introduction to Regional
Science. MIT Press 1960.
 Isard, Walter and Thomas W. Langford. Regional Input-Output Study: Recollections,
Reflections, and Diverse Notes on the Philadelphia Experience. The MIT Press. 1971.
 Lahr, Michael L. and Erik Dietzenbacher, eds. Input-Output Analysis: Frontiers and
Extensions. Palgrave, 2001.
 Leontief, Wassily W. Input-Output Economics. 2nd ed., New York: Oxford
University Press, 1986.
 Miller, Ronald E. and Peter D. Blair. Input-Output Analysis: Foundations and
Extensions. Prentice Hall, 1985.
 Miller, Ronald E. and Peter D. Blair. Input-Output Analysis: Foundations and
Extensions, 2nd edition. Cambridge University Press, 2009.
 Miller, Ronald E., Karen R. Polenske, and Adam Z. Rose, eds. Frontiers of Input-
Output Analysis. N.Y.: Oxford UP, 1989.[HB142 F76 1989/ Suzz]
 Miernyk, William H. The Elements of Input-Output Anaysis, 1965.[5].
 Polenske, Karen. Advances in Input-Output Analysis. 1976.
 ten Raa, Thijs. The Economics of Input-Output Analysis. Cambridge University Press,
2005.
 US Department of Commerce, Bureau of Economic Analysis . Regional multipliers:
A user handbook for regional input-output modeling system (RIMS II). Third edition.
Washington, D.C.: U.S. Government Printing Office. 1997.