GDP Using the Income Approach: the U.S. Experience

1. GDP Using the Income Approach: the U.S. Experience Brian C. Moyer International Workshop on Household Income, Consumption, and Full Accounting of the Household Sector March 26-28, 2012 Beijing, China

2. Measuring GDP • Expenditures approach GDP = C + I + G + (X-M) • Income approach GDP = Compensation of Employees + Gross Operating Surplus + TOPI less Subsidies • Production or “value added” approach GDP = Gross Output - Intermediate Inputs

3. GDP by Expenditures and Income Percent change GDP by Expenditures GDP by Income

4. Income approach

5. Components of income Compensation of Employees Wages and salaries Employer contributions to pension and insurance funds Gross Operating Surplus Corporate profits, proprietors’ income, etc. Consumption of fixed capital Taxes on Production and Imports less Subsidies Federal excise taxes; State and local sales taxes Subsidies: grants by government to businesses and government enterprises 5

6. Source data • Administrative data • Mostly data collected for non-statistical purposes • Financial statements • Regulatory data • Tax agencies • Utilize a wide range of concepts and definitions that may differ significantly from those used in the national accounts • Scope and coverage may differ over time because of changes in business accounting and tax rules

7. Adjustments to source data • Significant adjustments are required to ensure coverage and consistency with national accounts concepts • Misreporting adjustments • Inventory valuation adjustments • Adjustments to exclude capital gains and losses • Capital consumption adjustments • Adjustments to industry classifications

8. Nonfarm proprietors’ income Total Nonfarm Proprietors’ Income Compared to Misreported Income Billions of dollars

9. Corporate profits

10. [Growth rts.] Wages and salaries Percent Change of Wages and Salaries

11. Wages and salaries Growth Rates of Real Value Added, 2007 QCEW CBP

12. Timing of source data ||||||||||||| |||||||||| || GDP by Expenditures GDP by Income 37% based on early source data 23% based on judgmental trend 63% based on judgmental trend 77% based on early source data

13. Timing of source data

14. Statistical discrepancy • Both GDP by income and GDP by expenditures have measurement strengths and weaknesses • Consistency with economic concepts • Source data timing • Consistency with benchmark data • Availability of corresponding price measures • GDP by Expenditures = GDP by Income + Statistical Discrepancy

15. Income and Production approaches • Income approach GDP = Compensation of Employees + Gross Operating Surplus + TOPI less Subsidies • Production approach GDP = Gross Output - Intermediate Inputs

16. Income and Production approaches • Value addedi = (Compensationi + Gross Operating Surplusi + TOPI less Subsidiesi) = (Gross Outputi– Intermediate Inputsi) • GDP = ∑i Value addedi

17. Supply-Use framework

18. Quality weighting • Reliability indicators assigned to components of intermediate inputs and gross operating surplus by industry—in most cases, coefficients of variation • Less reliable components adjust more; more reliable components adjust less

19. Quality weighting

20. Looking forward … • Research on combining GDP by expenditures and GDP by income based on reliability of underlying source data • Research on the role of capital gains and losses in financial profits • Improved consistency across source data: data synchronization • New Quarterly GDP by industry data based on the Income and Production approaches