Table of Contents

Chapter 1: Abstracts ... 2Chapter 2: Introduction ..... 3Chapter 3: Literature Review ..... 4A. The Economys Income and Expenditure . 5B. The Measurement of Gross Domestic Product . 6C. The Components of Gross Domestic Product .. 7D. Real Versus Nominal Gross Domestic Product .9E. GDP & Economic Well-Being 11Chapter 4: Data & Analysis ..... 12Chapter 5: Conclusion ...... 16Chapter 6: Sources & References ........... 17

Chapter 1AbstractEssentially, what is the activity of measuring a nations income? What is the purpose of it? How do we compute it and then decide whether a nations economy is doing well? How does the total income and total expenditure affect the income of a nation? Wed know the economy status of a nation once we calculate the total income and expenditure with gross domestic product (GDP). But before it comes to the calculation process what are the disparate types of spending in the composition of GDP that we must know? Additionally, how do we compute the total quantity of goods and services the economy is producing that is not affected by changes in the prices of those goods and services? What would be the value of the goods and services produced within a period of time if we valued these items at the prices that prevailed in some years in the past? What about the production of goods and services valued at current prices? How do we know the current level of prices relative to the level of prices in the base year?Finally, why does nations income measurement is seen as an importance? How does the economy well-being of a person, an organization, and a businesses affected by it?

Chapter 2Introduction

Before we learn further about the theory of measuring a nations income, one must simply understand the main comprehension of it as well as its importance in economy. In contrast to microeconomics, in which we usually investigated the impact of an exogenous change on usually just two variables such as price and quantity, macroeconomics is the study of the entire economy as a whole. Essentially, to decide whether a person is doing well financially, we might have to look at his or her income. In this case, the same idea applies to nations economy condition. By judging on the total income of each individual, organization, or business, we can decide if a nation is financially stable.

By using the calculation of gross domestic product (GDP) we can compute the total income of everyone in the economy and the total expenditure on the economys output of services and goods. Chiefly, the total income and total expenditure are the same thus income must equal to expenditure.

Every amount spent by a buyer in a transaction becomes an income for the seller, hence the equality of the income and disbursement. The GDP can be calculated by adding up the total expenditure by the buyer or by adding up the total income by the seller.

GDP is one of the most comprehensive and closely watched economic statistics: It is used by the White House and Congress to prepare the Federal budget, by the Federal Reserve to formulate monetary policy, by Wall Street as an indicator of economic activity, and by the business community to prepare forecasts of economic performance that provide the basis for production, investment, and employment planning.

But to fully understand an economys performance, one must ask not only What is GDP? (or What is the value of the economys output?), but other questions such as: How much of the increase in GDP is the result of inflation and how much is an increase in real output? Who is producing the output of the economy? What output are they producing? What income is generated as a result of that production? and How is that income used (to consume more output, to invest, or to save for future consumption or investment)? Thus, while GDP is the featured measure of the economys output, it is only one summary measure. The answers to the follow-up questions are found by looking at other measures found in the NIPAs (National Income and Produced Accounts); these include personal income, corporate profits, and government spending. Because the economy is so complex, the NIPAs simplify the information by organizing it in a way that illustrates the processes taking place.

Chapter 3Literature ReviewA. The Economys Income and ExpenditureIn contrast to microeconomics, in which we usually investigated the impact of an exogenous change on usually just two variables such as price and quantity, macroeconomics is the study of the entire economy as a whole. Essentially, by judging on the total income of each individual, organization, or business, we can decide if a nation is financially stable.By using the calculation of gross domestic product (GDP) we can compute the total income of everyone in the economy and the total expenditure on the economys output of services and goods. Chiefly, the total income and total expenditure are the same thus income must equal to expenditure. Every amount spent by a buyer in a transaction becomes an income for the seller, hence the equality of the income and disbursement. The GDP can be calculated by adding up the total expenditure by the buyer or by adding up the total income by the seller.Income-basedGDPis calculated by adding earnings from the factors of production (labour and capital) plus taxes less subsidies, in order to obtain a measure comparable to that of expenditure-basedGDP. Expenditure-based GDP is calculated by adding the final expenditures of the six sectors of the economy: households, non-profit institutions serving households, non-financial corporations, financial corporations, governments and non-residents.Many of the main aggregates associated with the production accounts have been defined in describing the input-output system. There are however, some broad aggregates of particular significance to the income and expenditure accounts, such as national income, personal disposal income and final domestic demand that remain to be defined.

B. The Measurement of Gross Domestic Product Market value, means that production is valued at the price paid for the output. Hence, items sold at higher prices are more heavily weighted in GDP. Furthermore GDP adds different kind of products into single measure of the value of economic variety. Of all, means that GDP attempts to measure all production in the economy that is legally sold in the markets. Besides, GDP also includes the market value of the housing services provided by the economys stock of housing. However, GDP excludes items produced and sold illicitly or illegal because it is difficult to measure due to the absence of accurate reports regarding them. Final, means that GDP includes only goods and services that are sold to the end user. Intermediate goods are the units that are produced by one form to be further processed by another firm. Counting only final goods and services avoids double counting intermediate production. Goods and services, while GDP generally includes tangible manufactured items, it also includes intangible such as the services from a financial consultant. Produced, GDP does not include the sale of used items which were produced in a previous period. This happens to prevent double counting of the products. Within a country, GDP measures the value of production within the geographic borders of a country. Items are included in a nations GDP if they are produced domestically. In a given period of time, the GDP is measured per year or per quarter. It measures the economys flow of income and expenditure during that interval.

C. The Components of Gross Domestic ProductThe components of GDP will tell you what a country is good at producing. That's because GDP is the country's total economic output for each year. Y = C + I + G + NX

Consumption (C)is spending by households on goods and services. The final purchase of goods and services by individuals. The purchase of a new pair of shoes, a hamburger at the fast food restaurant, or the service of getting your house cleaned are all examples of consumption. It is also often referred to as consumer spending. Investment (I)is spending on capital equipment, inventories, and structures such as new housing. Investment does not include spending on stocks and bonds. Investment includes purchases that companies make to produce consumer goods. However, not every purchase is counted. If a purchase only replaces an existing item, then it doesn't add to GDP and so isn't counted. The Bureau of Economic Analysis(BEA) divides business investment into two sub-components: Fixed Investment and Change in Private Inventory. Government Purchases (G)is spending on goods and services by all levels of government (federal, state, and local). Government purchases do not include transfer payments such as government payments for social security, welfare, and unemployment benefits because the government does not receive any product or service in return. Net Exportsis the value of foreign purchases of U.S. domestic production (exports) minus U.S. domestic purchases of foreign production (imports). Imports must be subtracted because consumption, investment, and government purchases include expenditures on all goods,

the foreign and domestic, and foreign component must be removed so that only spending on domestic production remains.Here are examples for further understanding in the components of GDP:I. If an individual spends money to renovate their hotel so that occupancy rates increase, that is private investment, but if they buy shares in a consortium to do the same thing it is saving. The former is included when measuring GDP (inI), the latter is not. However, when the consortium conducts the renovation the expenditure involved would be included in GDP.II. If a hotel is a private home then renovation spending would be measured asConsumption, but if a government agency is converting the hotel into an office for civil servants the renovation spending would be measured as part of public sector spending(G).III. If the renovation involves the purchase of a chandelier from abroad, that spending wouldalsobe counted as an increase in imports, so thatNXwould fall and the total GDP is affected by the purchase. (This highlights the fact that GDP is intended to measure domestic production rather than total consumption or spending. Spending is really a convenient means of estimating production.)IV. If a domestic producer is paid to make the chandelier for a foreign hotel, the situation would be reversed, and the payment would be counted inNX(positively, as an export). Again, GDP is attempting to measure production through the means of expenditure; if the chandelier produced had been bought domestically it would have been included in the GDP figures (inCorI) when purchased by a consumer or a business, but because it was exported it is necessary to "correct" the amount consumed domestically to give the amount produced domestically.

D. Real Versus Nominal Gross Domestic ProductNominal GDP is the value of output measured in the prices that existed during the year in which the output was produced (current prices). Nominal GNP measures the value of output during a given year using the prices prevailing during that year. Over time, the general level of prices rise due to inflation, leading to an increase in nominal GNP even if the volume of goods and services produced is unchanged.Real GDP is the value of output measured in the prices at prevailed in some arbitrary (but fixed) base year (constant prices). If we observe that nominal GDP has risen from one year to the next, we are unable to determine whether the quantity of goods and services has risen or whether the prices of goods and services have risen. However, if we observe at real GDP has risen, we are certain that the quantity of goods and services has risen because the output from each year is valued in terms of the same base year prices. Thus, real GDP is the better measure of production in the economy.GDP Deflator, is an economic metric that accounts for inflation by converting output measured at current prices into constant-dollar GDP. The GDP deflator shows how much a change in the base year's GDP relies upon changes in the price level. Also known as the "GDP implicit price deflator."In economics, it's helpful to be able to measure the relationship betweennominal GDP (aggregate output measured at current prices) andreal GDP(aggregate output measured at constant base year prices). To do this, economists have developed the concept of the GDP deflator. The GDP deflator is simply nominal GDP in a given year divided by real GDP in that given year and then multiplied by 100.

Real GDP, or real output, income, or expenditure, is usually referred to as the variable Y. Nominal GDP, then, is typically referred to as P x Y, where P is a measure of the average or aggregate price level in an economy. This shows why the GDP deflator can be thought of as a measure of the average price of all of the goods and services produced in an economy

Since the GDP deflator is a measure of aggregate prices, economists can calculate a measure ofinflationby examining how the level of the GDP deflator changes over time. Inflation is defined as the percent change in the aggregate (i.e. average) price level over a period of time (usually a year), which corresponds to the percent change in the GDP deflator from one year to the next.

E. GDP & Economic Well-BeingReal GDP is a long indicator of the economic well-being of a society because countries with a large real GDP per person tend to have better educational systems, better health care systems, more literate citizens better housing, a better diet, a longer life expectancy, and so on. That is, a larger real GDP per person generally indicates a larger consumption per person. However, GDP is not a perfect measure of material well-being because it excludes leisure, the qua1ity of the environment, and goods and services produced at home and not sold markets such as child-rearing, housework, and volunteer work. In addition, GDP says nothing about the distribution of income. GDP also fails to capture underground or shadow economy the portion of economy that does not report its economic activity. For example, GDP does not measure illegal drug sales income at is unreported to avoid taxation.For many years, especially since World War II, nations have equated economic growth with progress. Economic growth is an increase in the production and consumption of goods and services, and is indicated by increasing Gross Domestic Product (GDP). GDP, therefore, has become the standard measure of economic progress, even though it was only intended as a macroeconomic accounting tool. Prompted by Wall Street, the Federal Reserve System, and the media, citizens generally applaud increases in GDP.The problem with GDP is that it doesn't separate costs from benefits. It simply adds them together under the heading of economic activity. In a 1968 campaign speech, Robert F. Kennedy eloquently explained the shortcomings of using GDP to gauge progress. Is increasing GDP indicative of increasing wellbeing? It depends on whether the social costs of such an increase outweigh the benefits. GDP is a good measure of size, but at some point bigger is worse, not better. At the individual level, economic activity is required for wellbeing, but the relationship becomes very weak after a surprisingly low per capita GDP is achieved. Beyond that, the disutility of production and consumption causes a net drain on health and happiness.

Chapter 4Data AnalysisEstimates of GDP and their revisions The first estimate of quarterly GDP is published approximately 25 days after the end of the quarter. This is then updated four weeks later when the second estimate of GDP (formerly known as UK Output, Income and Expenditure) is published, containing more detail on the output approach and some aggregate income and expenditure data. Detailed information on income and expenditure components is available a further four weeks later when the Quarterly National Accounts (QNA) are published. There are potential revisions to the data in subsequent QNA releases as well as in the annual national accounts Blue Book publication wherein annual data are balanced at a much more detailed level and, potentially, major methodological changes can be introduced, both of which can lead to revisions to quarterly data. The largest methodological revision introduced in recent years was the improvement in the measurement of the output of the financial services sector (FISIM) in the 2008 Blue Book, in line with international regulation. This had the effect of revising GDP upwards in every period back to the 1960s. So, revisions fall into two main categories, improved and updated data and major methodological changes. Conflation of these two categories can lead to incorrect conclusions regarding the quality of early estimates, hence it is worth looking at various vintages of the data. In the main, early revisions are due to improved data, later ones to improved methodology (see Brown et al for further discussion). The first chart below shows GDP growth rates (based on each quarter compared with the same quarter of the previous year) at various maturities, with the initial estimate and estimates after three, six, 12, 24, 36, 48 and 60 months. The second just compares the first estimate with that after 60 months.

The charts illustrate that, in broad terms, the picture of growth in GDP over this period is similar, irrespective of the maturity of data, although there are some exceptions, for example in the late 1980s (see Brown et al). Indeed, based on standard statistical tests, there is no evidence of bias in revisions of GDP growth (calculated as the average revision) between: 1. The preliminary estimate and the second annual balance; 2. The second estimate and the second annual balance or; 3. Quarterly national accounts and the second annual balance in the last five years.This result also holds in the 1980s and the 2000s as a whole, but there is evidence of a small positive bias in GDP revisions in the 1990s. The reason for picking the second annual balance to test against is that there are far fewer data updates after this period. The extent to which there is potential bias in the estimates is also a function of the period over which revisions are calculated. This is illustrated in the chart below, which shows the average revisions after 24 months calculated over different historical periods: Mean revisions between T and T+24 GDP estimates 0.001800 0.001600 0.001400 0.001200 0.001000 0.000800 0.000600 0.000400 0.000200 0.000000 -0.000200.This shows clearly the variability of the mean revision and that, in the period from 1995 quarter one to 2009 quarter one, the average revision between the first estimate and the estimate published two years later has become markedly smaller.

Conclusion In summary, the addition of the latest data to the analysis presented in the previous article has not changed the general conclusions made there. 4. The size of revisions in the recent period has been smallFurthermore, revisions after the second balanced year are generally due to methodological changes. To the extent that these have led to revisions in the past, there is no reason to suppose that any future revisions consequent on methodological improvements will be of the same size or direction. That would depend on the nature of the methodological improvements

Chapter 5ConclusionIn our opinion GDP is an estimate of market throughput, adding together the value of all final goods and services that are produced and traded for money within a given period of time. It is typically measured by adding together a nations personal consumption expenditures (payments by households for goods and services), government expenditures (public spending on the pro-vision of goods and services, infrastructure, debt payments, etc.), net exports (the value of a countrys exports minus the value of imports), and net capital formation (the increase in value of a nations total stock of monetized capital goods).Growth does usually and eventually translate into higher consumption of goods and services. But most studies suggest that the general conclusion is that while cross-country data shows a correlation between GDP per capita and objective indicators of quality of life (for example, richer countries tend to have higher life expectancy), time series analysis provides very little support for GDP per capita. Causation of improvements in the objective indicators (for example, in a large number of countries the turning point towards sustained economic growth anteceded by many decades sustained improvements in life expectancy). Concisely, GDP measures the size of the nations economy, and total market of goods and services produced within the nation. The computed data of those aspects say a lot about a nation. In addition, the economists and business owners use GDP results in decisions making which leads to wider business opportunities, hence the chance of a nation to dominate the worldwide successful overall rate. But should we judge a nations success in general based on its GDP? Is it guaranteed that wed have better life if we choose to live in a country with great economy condition? Wed have to disagree by that concept since each country has different either internal or external advantages to support the economic activities. For instance, although U.S.A is known its dominance in worldwide economy, it doesnt guarantee to fulfill its peoples life expectancies. In the other hand, despite for Switzerlands high annual taxes, it is proven to provide its peoples main necessity. Therefore, one shall not judge a country based on its GDP achievements.

Chapter 6Sources & References Herrick, Bruce, and Charles P. Kindleberger. 1983.Economic Development. McGraw-Hill Book Co.ISBN 0070345848. Karasek, Mirek, Waddah K. Alem, and Wasfy B. Iskander. 1988.Socio-Economic Modelling & Forecasting in Lesser Developed Countries. London: The Book Guild Ltd.ISBN 0863322204. Kuznets, Simon. 1956. Quantitative Aspects of the Economic Growth of Nations. I. Levels and Variability of Rates of Growth. Economic Development and Cultural Change. 5: 1-94. Kuznets, Simon. 1966.Modern Economic Growth Rate Structure and Spread. New Haven, CT: Yale University Press. Kuznets, Simon. 1971.Economic Growth of Nations: Total Output and Production Structure. Cambridge, MA: Harvard University Press.ISBN 0674227808. Mings, Turley, and Matthew Marlin. 2000.The Study of Economics: Principles, Concepts, and Applications,6th ed. Dushkin/McGraw-Hill.ISBN 0073662445. Morgenstern, O. 1963.On the Accuracy of Economic Observations. Princeton, NJ: Princeton University Press.ISBN 0691003513. Czech, Brian et al. 2005. Establishing Indicators for Biodiversity. Science 308:791-792. Understanding the quality of early estimates of Gross Domestic Product, Economic and Labour Market Review 2009, http://www.statistics.gov.uk/elmr/12_09/downloads/ELMR_Dec09_Brown.pdf United Nations Development Programme. 2009. Statistics Website. http://hdr.undp.org/en/statistics/. Victor, P. 2008. Managing without Growth: Slower by Design, Not Disaster. Edward Elgar Publishing. 260pp. Amadeo, Kimberly. (2015) http://useconomy.about.com/od/grossdomesticproduct/f/GDP_Components.htm Beggs, Jody. (2015)http://economics.about.com/od/gross-domestic-product/ss/The-Gdp-Deflator_3.htm#step-headingMeasuring a Nations Income17