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Measures of economic activity - National Income (GDP/GNP) measures

Remember               Y=E=Q (in fact these are identities because they measure the same thing)

Therfore we can measure national income (GDP/GNP) in three different ways.

We could look at the total level of expenditure on goods and services. This would include consumer expenditure (C), investment expenditure (I), government expenditure (G) and net export spending (X-M) i.e. C + I + G + (X-M).

Alternatively, we could look at the total level of income generated. This would include all factor incomes - wages, profit, rent and interest.

A final possibility is to measure the total level of output produced by firms.

All three of these are methods of calculating national income:

  • Total expenditure
  • Total income and
  • Total output

Each should give the same result, because each is measuring essentially the same thing; i.e. a flow of income over a period of time. The logic of this is that, for the economy as a whole, the value of all output equals what is spent on the output, and what is spent on the output becomes income to those who have produced the output.


For an excellent review of the operation of the Circular Flow of Income, watch the video on YouTube by Paj Holden.