National Income Accounting and GDP
National Income Accounting and GDP
→Importance of National Income Accounting:
• Economic Pulse of Nation
• Long Run course comparison
• Basis for formulation and application of public policies
Gross DomesticProduct –GDP
Market Value of the total goods and services produced within the
boundaries of the US, whether by Americans or foreigners in one year
→use monetary measure- production composition may be different from year to year, so we must attach a monetary value
→avoid multiple counting: use market value of FINAL goods and services andignore transactions involving intermediate goods.
→exclude nonproduction transactions:
1 Public Transfer Payments→SS, welfare, veterans
2 Private transfer payments→gifts, transfers from parent to child
3 Secondhand Sales→resale of goods already counted when new
4 Security Transactions→broker’s service is counted
Expenditure Approach to GDP
Sum of the total spending for goods and services produced within the US in aperiod of time which includes personal consumption, Gross Private Domestic Investment, government and netforeign investment. It is meant to be a measure of production of goods and services withinthe economy.
GDP = C + G + Ig + Xn
C = Consumption (65% of total GDP)
29% non durable goods (less than 3 yrs use)
12% durable goods (more than 3 yrs use)
59% services
G = Government Spending (20% of total GDP)
43% federal government spending
57% state and local government spending
Ig= Gross Private Domestic Investment (17%)
28% new residential construction
25% new commercial construction
46% tools and machines
1% change in business inventories
Xn= Net Foreign Investment (-2% of GDP)
Imports minus exports (we currently import more than we export)
Income Approach to GDP
National Income is the sum of the total income earned by American resource suppliers and indirect business taxes “so we can make it even to our receipts.”The addition of threeadditional items brings the GDP into balance.
Total income earned by American resource suppliers includes:
+Wages and salaries (compensation for employees) (labor)
+Rent (land)
+Interest (capital)
+Proprietor’s income (form of profit earned by single owner and partnerships)
+ Corporate Profits
- +Corporate income tax (profit paid as tax)
- +Dividends (form of profit given to shareholders of stock)
- +Undistributed corporate profits (retained earnings)
+Indirect Business Taxes (Sales Taxes, excise taxes, etc.) or Taxes on Production and Imports (Customs Duties)
The above accounts for the National Income; however, we must add a few more items to get to GDP
+Consumption of Fixed Capital or Depreciation- not included in national income because it does not add to anyone’s income. However, the usefulness of these assets beyond the year they are purchased must be added to the “wealth” accounting
+Net Foreign Factor Income
—Net Income produced by Americans abroad should be subtracted from other incomeitems in order to measure “domestic product”. Of course, we don’t count foreign earnings as a part of our domestic GDP- Our foreign investments make more overseas than foreign investments here, thus it is subtracted, “net”.
+ Statistical Discrepancy
Just in case we need to make it even- only 43 billion in 2005
Other National Accounts
Net Domestic Product (NDP) equals GDP minus Depreciation (consumption of fixed capital) –measures output without the loss of future output by using up capital
National Income (NI) equalsNDP plus Net American Income Abroad minus
Indirect Bs. Taxes(payments to non-productive resources)
Personal Income (PI) equalsNI minus SS Contributions minus Corp Income Taxes
minusUndistributedCorporate Profit plus Transfer
payments
Disposable Income (DI) equalsPI minus Personal Taxes