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Slides for Part I

Slides for Part I. National Income Accounting (NIA). NIA is the measurement of aggregate or total economic activity. Stocks versus Flows. We measure stock variables at a specific point in time; whereas flows are measured per unit of time. Flows include:. Income Sales revenue Output.

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Slides for Part I

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  1. Slides for Part I

  2. National Income Accounting (NIA) NIA is the measurementof aggregate or totaleconomic activity

  3. 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

  4. Gross Domestic Product (GDP) GDPis 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

  5. Three approaches to measuring GDP • The value-addedapproach • The final goodsapproach • The income approach

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

  7. 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.

  8. 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.

  9. 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 expenditure;I is gross private domestic investment;G is government expenditure (local, state, and federal); andX is net exports, or Exports minus Imports

  10. 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.

  11. 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

  12. 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. @ 3,209 Indirect businesstaxes 716 Total $9,256@includes capital consumption adjustment and statistical discrepancy Source: Bureau of Economic Analysis (www.bea.doc.gov/bea) Two Approaches to U.S. GDP, 1999

  13. Relation of GDP to GNP, NNP, National Income, and Personal Income All data in billions of current dollars

  14. From National Income to Personal Income All data in billions of dollars www.bea.gov

  15. 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

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