Slides for Part I

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Slides for Part I
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National Income Accounting (NIA)
NIA is the measurementof aggregate or
totaleconomic activity
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Stocks versus Flows
We measure stockvariables at a specific point
intime whereasflows are measuredper unit of
time.
Flows include

• Income
• Sales revenue
• Output

Stocks include
We measure economicactivity as aflow.

• Checking account balance
• Balance owed on student loans
• Inventories

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Gross Domestic Product (GDP)
GDP is the market value of new goods and services
produced in the economy in one year with the use
of both domestic and foreign-owned economic
resources.
GDP is our basicmeasure of economicactivity
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Three approaches to measuring GDP

• The value-added approach
• The final goods approach
• The income approach

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Value-Added
Value-added is the increase in the market value
of a good that takes place at each stage of the
production -distribution process.
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Illustration

• Stage 1 Farmer grows wheat, sells it to the
  Miller for 55 cents.
• Stage 2 Miller mills the wheat, sells it to the
  Baker for 85 cents--hence value-added at the
  milling stage is 30 cents.
• Stage 3 Baker bakes the bread--sells it to the
  supermarket for 1.45--hence value-added at the
  baking stage is 60 cents.
• Stage 4 Supermarket sells the bread to the
  consumer for 1.65--hence value added at the
  retailing stage is 20 cents.

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Don't double count!
?To count the loaf of bread in GDP, we count the
final transaction only. Otherwise, we would be
counting value-added twice.
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Here we simplyadd up allexpenditures fornew
goods and services in oneyear
The final expenditures approach
GDP C I G X
Where, C is personal consumption expenditureI
is gross private domestic investmentG is
government expenditure (local, state, and
federal) andX is net exports, or Exports minus
Imports
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Definitions

• Capital consumption allowance (CCA)A monetary
  measure of the depreciation of the capital stock
  in a year due to normal wear and tear, fires, or
  other accidents.
• Net Investment Gross Investment minus CCA.
• Indirect business taxes taxes collected by
  businesses for government units, such as taxes on
  entertainment, motels, groceries, liquor,
  cigarettes, or gasoline taxes. Also called excise
  taxes.
• Net income earned abroad Income earned by
  domestic residents in foreign factor markets
  minus income earned by foreigners in domestic
  factor markets.

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This mainly involves summing up incomeearned in
factor markets
The income approach
GDP Wages Salaries interest rent
profits - net income earned abroad CCA
indirect business taxes
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Two Approaches to U.S. GDP, 1999
Source Bureau of Economic Analysis
(www.bea.doc.gov/bea)

• Final Goods (in billions)
• Consumption
  6,257
• Investment
  1,623
• Government Expenditures 1,630
• Exports
  998
• Imports
  - 1,252
• Total
  9,256

• Income Approach (in billions)
• Employee compensation 5,331
• Profits, rents, interest, etc. _at_
  3,209
• Indirect businesstaxes
  716
• Total
  9,256_at_includes capital consumption adjustment
  and statistical discrepancy

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Relation of GDP to GNP, NNP, National Income, and
Personal Income
All data in billions of current dollars
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From National Income to Personal Income
All data in billions of dollars
www.bea.gov
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Personal disposable income (PDI)
Personal income 7,792Less
Personal tax payments
1,152Equals PDI
6,640
PDI is the obviously one measureof ready
spending powerof the household sector