National Income Accounting

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National Income Accounting

• Whats GDP?
• National Saving and Wealth
• Measurement of Prices (nominal and real)

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1. Whats GDP?

• Definition Gross Domestic Product is the total
  market value of all final goods and services
  currently and domestically produced with a given
  period.
• Important Qualifiers
• (1) Production GDP must involve production
• (2) Current GDP must be produced with the
  current time period.

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• (3) Domestic Production
• Gross National Product (GNP) GDP Net
  Factor Payments (NFP)
• NFP production by domestic residents abroad
  production by foreigners in domestic country.

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• (4) Market Value Goods and services included
  in GDP must be sold in a legitimate market and
  valued at market prices.
• Value Example - Adding up apples and
  oranges.

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• (5) Final Goods goods produced for final use
  and not modified for the production of another
  good in the given period (in contrast with
  intermediate goods)
• Value Added Revenues from selling good
  cost of intermediate inputs.
• Value of Final Good Total Value Added
• Profits Value Added Other Costs
  (Labor, Rent, Interest)

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2. Measuring GDP

• Three ways to compute GDP
• (1) Product Approach
• market value of all final goods and
  services
• (2) Income Approach
• total income earned by all domestic
  residents
• (3) Expenditures Approach
• total spending by everyone on final goods
  and services

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Expenditures Approach

• Four Major Components of Aggregate Expenditures
• (1) Consumption (C)
• Current spending by domestic households on all
  final goods or services. 67 of GDP.
• (2) Investment (I)
• The accumulation of physical capital assets
• (i) Fixed Investment business spending on
  new capital goods and residential structures.
• (ii) Inventory Investment Goods produced but
  not sold.
• Investment is the change in the nations capital
  stock.
• About 16 of GDP.

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• (3) Government Purchases (G)
• Government expenditures on final goods and
  services. 20 of GDP.
• G does NOT include Government Transfer
  Payments (TR).
• Government Spending G TR INT
• Federal Budget Surplus T (G TR
  INT)
• Budget Deficit - (Budget Surplus)

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• (4) Net Exports (NX)
• Exports Imports. About -3 of GDP.
• Foreign Trade Deficit Imports - Exports
• Distinction between NX and NFP

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• Income-Expenditures Identity
• GDP Y C I G NX
• Examples Adding up expenditures to get GDP

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Table 2.1 Expenditure Approach to Measuring GDP
in the United States, 2005
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Income Approach

• GDP total income of all domestic residents.
  Why?
• (i) Spending by one Income for another
• (ii) A Simple Example
• GDP Spending on Final Goods Value Added
• Total Income Profits Wages
• Profits Value Added Wages GDP Wages
• ? GDP Profit Wages Total Income!

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• National Income Compensation of Employees
• Proprietors Income
• Rental Income
• Corporate Profits
• Net Interest
• (indirect business taxes, business transfers,
  and surplus of gov agencies)

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• Net National Product (NNP) National Income (NI)
  Statistical discrepancy
• GNP NNP Depreciation Investment
• Y GDP GNP NFP

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Table 2.2 Income Approach to Measuring GDP in the
United States, 2005
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• Private Income (PI) is total (before tax) income
  to individuals and businesses
• PI Y TR INT NFP
• Private Disposable Income (PDI) is after tax
  income
• PDI PI - T