National income accounting

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National income accounting

• Gross domestic product, GDP

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Gross Domestic Product

• Expenditure approach
• Market value of all final goods and services
  produced in an economy in a particular period of
  time
• Income approach
• Payments to owners of resources used to produce
  aggregate output

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Market value

• Find total expenditure on each good and service
  as Price x Quantity sold
• Sum all of these
• Note only includes goods and services exchanged
  in a market. Does not include household
  production, e.g. garden veggies, home haircuts

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Final goods

• Only includes value of final goods and services
  sold, i.e. sold to the final consumer
• Does not include value of intermediary goods or
  services, those that are processed further and
  sold again, e.g. what goes into a T-shirt that
  you buy i.e. cotton, cloth made from cotton,
  plain white T-shirt made from the cloth
• The value added by intermediary goods is included
  in the price of the final good, i.e. the price of
  your T-shirt includes the value of the cotton and
  other intermediary goods that went into its
  production
• If intermediary goods were included we would be
  double counting their value!

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Produced goods and service

• Only includes the value of goods and services
  produced during the given period of time.
• Goods produced but not yet sold are accounted for
  as changes in business inventories
• Sales of previously produced goods are not counted

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Expenditure approach to GDP

• GDP is divided into four aggregates
• Personal consumption, C
• Investment, I
• Government purchases, G
• Net exports, X - M
• GDP C I G (X-M)

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Gross Domestic Product, 2004

• Gross domestic product 11,734.3 billion
• C 8,214.3
• I 1,928.1
• G 2,215.9
• X-M -624.0

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Personal consumption, C

• Personal consumption expenditures 8,214.3
• Durable goods 987.8
• Nondurable goods 2,368.3
• Services 4,858.2

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Investment, gross private domestic

• Gross private domestic investment 1,928.1
• Fixed investment 1,872.6
• Change in business inventories 55.4

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Government purchases

• Government consumption expenditures
• and gross investment 2,215.9
• Federal 827.6
• State and local 1,388.3

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Net exports

• Net exports of goods and services -624.0
• Exports 1,173.8
• Imports 1,797.8

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Net Domestic Product
Net Domestic Product, NDP GDP
depreciation Depreciation is value of the
capital stock used up each year, i.e. worn out
and/or obsolete. Net Investment Gross
investment depreciation For 2004 GDP
11,995 billion Depreciation 1,442 billion NDP
10,553 billion Net investment 486 billion
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Green GDP

• Accounts for depletion of natural and
  environmental resources, in addition to
  depreciation of physical capital
• Green GDP GDP depreciation of fixed capital
  depletion of natural and environmental resources
• Evaluation of depletion is difficult because many
  of these are public goods or unowned and
  therefore are not marketed, do not have a market
  price

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Disposable income

• Disposable income, DI is income available to
  households after paying taxes and receiving
  transfer payments
• Net taxes, NT taxes - transfers

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Disposable income

• DI GDP (taxes transfers) GDP NT
• 9,713.13 in 2004

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Nominal versus Real GDP

• Changes in prices affect GDP overtime
• As prices increase, nominal GDP will increase
  even if aggregate output has not
• Gives appearance of economic growth when there is
  none

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Nominal versus Real GDP

• We will from now on distinguish between nominal
  GDP and real GDP
• Nominal GDP - GDP based on prices prevailing at
  the time of the transaction also known as
  current-dollar GDP
• Real GDP - The economy's aggregate output
  measured in dollars of constant purchasing power,
  i.e. adjusted for changes in prices

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Nominal versus Real GDP

• Nominal GDP is converted to Real GDP using a
  price index
• Price index - A number that shows the average
  price of a market basket of goods

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Nominal versus Real GDP

• Price index is created by comparing the price of
  the basket in each year to the price of the
  basket in a base year
• Base year - The year with which other years are
  compared when constructing an index the index
  equals 100 in the base year

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Nominal versus Real GDP

• Example creating a price index

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Nominal versus Real GDP

• Using the price index to deflate nominal GDP
  values
• Real GDP Nominal GDP/(price index/100)

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Nominal versus Real GDP

• For 2002
• Nominal GDP 10442.1
• GDP deflator price index 110
• Real GDP 10442.1/(110/100)
• 9436.1

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Comparing real GDP- adjusting for differing
populations

• Economies with larger populations naturally tend
  to have higher GDPs, e.g. China, India, Brazil
• The standard of living depends not upon how much
  stuff but on how much stuff there is per person

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Real GDP per capita

• Per capita per person
• Real GDP per capita real GDP/population
• if real GDP 12 trillion and population 300
  million,
• then Real GDP per capita 12 trillion/300
  million 40,000

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Comparing real GDP

• To compare real GDP among different economies,
  the values for GDP must be in a common unit of
  account
• The US is most frequently used as a common unit
  of account

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Comparing real GDP- adjusting for differing
populations

• Economies with larger populations naturally tend
  to have higher GDPs, e.g. China, India, Brazil
• The standard of living depends not upon how much
  stuff but on how much stuff there is per person

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Summary

• Nominal GDP C I G (X-M)
• NDP GDP depreciation
• Green GDP GDP depreciation of fixed capital
  depletion of natural and environmental resources
• Net taxes taxes transfers
• DI GDP Net taxes
• Real GDP Nominal GDP/(GDP deflator/100)
• Real GDP per capita real GDP/population