National-Income Accounting

1. National-Income Accounting

2. National-Income Accounting • National-income accounting refers to the measurement of aggregate economic activity, particularly national income and its components.

3. Gross Domestic Product (GDP) • Gross domestic product (GDP) is the total market value of final goods and services produced within a nation’s borders in a given time period. (Usually a year)

4. Gross Domestic Product • Total Market Value means the dollar value of every one of the good or service produced during the period of time. • Final goods and service means that production is only counted in the final stage. This is to keep things such as a car’s engine from being counted twice.

5. GDP Versus GNP • Gross National Product (GNP) refers to output produced by American-owned factors regardless of location. • GDP refers to output produced within America’s borders.

6. GDP Versus GNP • GDP is geographically focused, including all output produced within a nation’s borders regardless of whose factors of production are used to produce it. • Japanese companies producing in America count, but not American companies abroad.

7. GDP per Capita • GDP per capita is total GDP divided by total population–average GDP. • GDP per capita is commonly used as a measure of a country’s standard of living. • However, it is not always an accurate measure.

8. Exceptions from the GDP • There are three major exceptions when creating GDP. • Non-Market Activities • Unreported Incomes • Intermediate Goods

9. Non-Market Activities • GDP measures exclude most goods and services produced that are not sold in the market. • A homemaker who cleans, washes, gardens, shops and cooks produces goods of value. • Because they are not exchanged in the market they are not included in GDP.

10. Unreported Income • The GDP statistics fail to capture market activities that are not reported to tax or census authorities. • The underground economy is motivated by tax avoidance or to conceal illegal activities.

11. Intermediate Goods • Intermediate goods are goods or services purchased for use as input in the production of final goods or services. • For example, the engine or chassis of a car are not counted, so as to keep them from being counted twice.

12. Value Added • Value added is the increase in the market value of a product that takes place at each stage of the production process.

13. Value Added in Various Stages of Production

14. Two Ways to Calculate GDP • Compute the value of the final output. • Count only the value added at each stage of production.

15. Real Versus Nominal GDP • Nominal GDP is the value of final output produced in a given period, measured in the prices of that period. • Real GDP is the value of final output produced in a given period, adjusted for changing prices.

16. Computing Real GDP • The base period is the time period used for comparative analysis. • From this base year, we find the GDP deflator for other years. • The GDP deflator is a measure of price changes over time.

17. Computing Real GDP • The general formula for computing real GDP is:

18. $10000 9000 8000 7000 GDP (billions of dollars per year) 6000 Nominal GDP 5000 4000 3000 1980 1985 1990 1995 1996 2000 Changes in GDP: Nominal Versus Real

19. Net Domestic Product • Changes in real GDP tell us how much the economy’s output is growing. • Growth is at the expense of future output unless factors of production are replaced.

20. Net Domestic Product • Depreciationis the consumption of capital in the production process — the wearing out of plant and equipment.

21. Net Domestic Product • Net domestic product is the amount of output we could consume without reducing our stock of capital. NDP = GDP – depreciation

22. Net Domestic Product • Investment is spending on (production of) new plant, equipment, and structures (capital) in a given time period, plus changes in business inventories. • The distinction between GDP and NDP is mirrored in the difference between gross investment and net investment.

23. Net Domestic Product • Gross investment is total investment expenditure in a given time period. • Net investment is gross investment less depreciation.

24. Net Domestic Product • The stock of capital — the total collection of plant and equipment — will not grow unless gross investment exceeds depreciation.

25. The Uses of Output • The GDP accounts also tell us what mix of output has been selected, that is, society’s answer to the core issue of WHAT to produce.

26. The Uses of Output • The major uses of total output conform to the four sets of market participants: consumers, business firms, government, and foreigners.

27. Consumption • Goods and services used by households are called consumption goods. • Consumer spending claims nearly two-thirds of our annual output.

28. Investment • Investment goods are the plant, machinery, and equipment that we produce. • Also includes net inventory changes and new residential construction.

29. Government Spending • Resources purchased by the government sector are unavailable for consumption or investment purposes.

30. Net Exports • Exportsare goods and services sold to foreign buyers. • Importsare goods and services purchased from foreign sources.

31. Net Exports • Exports are added to GDP and imports are subtracted. • Net Exports are the value of exports minus the value of imports.

32. Computing GDP • The value of GDP can be computed by adding up expenditures of market participants: GDP = C + I + G + (X – IM) Where: C = Consumption expenditure X = exports I= investment expenditure IM = imports G = government expenditure

33. Measures of Income • GDP accounts have two sides. • One side focuses on expenditure – the demand side. • The other side focuses on income – the supply side.

34. VALUE OF OUTPUT VALUE OF INCOME Consumer spending Wages Investment spending Profits Factor market Product market Interest Government spending Rent Net exports Sales taxes Depreciation Output = Income

35. National Income • By charting the flow of income through the economy, we see FOR WHOM the output is produced.

36. Depreciation • Depreciation charges reduce GDP to the level of NDP (Net Domestic Product) before any income is available to current factors of production. NDP = GDP – depreciation

37. Net Foreign Factor Income • Wages, interest, and profits paid to foreigners are not part of U.S. income. • They need to be subtracted from the income flow.

38. Net Foreign Factor Income • Incomes earned by U.S. citizens in other nations represents an inflow of income to U.S. households and are added.

39. National Income • Once depreciation charges and indirect business taxes are subtracted from GDP and net foreign income is added, we have national income.

40. National Income • National income (NI) is total income earned by current factors of production. NI = NDP – indirect business taxes + net foreign factor income

41. Personal Income • Personal income (PI) is the income received by households before payment of personal taxes. Personal income = National income – (corporate taxes + retained earnings + Social Security taxes) + (transfer payments + net interest)

42. Disposable income • Disposable income (DI) is the after-tax income of households. • It is personal income less personal taxes. Disposable income = personal income – personal taxes

43. Disposable income • Savingis that part of disposable income not spent on current consumption –disposable income less consumption.

44. Disposable income • All disposable income is either consumed or saved. Disposable income = Consumption + Saving

45. The Flow of Income

46. Total income (GDP) ends up distributed the following way: • To households, in the form of disposable income. • To businesses, in the form of retained earnings and depreciation allowances. • To government, in the form of taxes.