Download ECONOMICS 576

Economics 576
Macroeconomic Theory and Policy
Income Accounting
Rough Review
The best known and most widely used measure of the nation’s
output is Gross Domestic Product (GDP). The following
material is offered only as a very basic, elementary review
of that account, plus a very general summary of another
account, National Income.
I. Gross Domestic Product
A. History and Uses
B. Defined
GDP is the total market value of all final
goods and services produced in the economy in
one year.
C. Explanation of key terms/phrases
1.
total market value - GDP is a nominal
or current dollar measure of output or
production. Thus the value that GDP
attaches to a good or service is that
which the market attaches to it—its
current dollar market price.
It should be noted that GDP may be adjusted
(through the Implicit Price Index or GDP
Deflator) and thus expressed in real or
constant dollar terms.
2.
final goods or services - The intent here
is to avoid double counting - to
insure that all output is included once
but only once in GDP.
Final goods or services are as opposed
to those defined to be intermediate. The
rule may be expressed variously eg., All
goods purchased for resale - either
directly or indirectly - with or
without further processing in the
physical sense, are defined as
"intermediate" and as such are excluded
from GDP.
Alternatively, all transactions charged
to current cost may be defined as
intermediate.
NOTE: Final is NOT synonymous with
Finished. A good may well be finished
in a physical sense but not final in
the national income accounting sense,
or even final in the national income
accounting sense without being finished
in a physical sense (eg., inventory
accumulation).
2.
in one year - Economic variables may be
stock variables or flow variables.
Stock variables are accumulated amounts
existing at a particular point in time.
Flow variables are "per unit of time"
variables.
A flow occurs at a particular
rate over time.
Which is GDP?
D. GDP Excludes
1. All intermediate transactions*
2. Most nonmarket transactions**
3. Purely financial transactions
a. purchases & sales of securities
b. capital gains & losses
c. secondhand sales
d. transfers*** & subsidies
4. Illegal transactions
Explanations:
*Definitional
issue
**There
i
ii
iii
iv
are four specific exceptions
certain payments in kind
food & fuel produced & consumed on farms
rental value of owner-occupied homes
services provided by financial intermediaries
without direct charge
***Include
i
ii
iii
iv
generally:
payments called "entitlements"
social security benefits
interest on public debt
interest paid by consumers
GDP—Adding it up
Personal Consumption Expenditures
(Non-durables, durables, services)
plus
Gross Private Domestic Investment
(Private sector spending only—
including business fixed investment,
i.e., plant and equipment; inventory
changes; and residential construction)
plus
Government Purchases of Goods and Services
(Federal, state and local government spending
for purchases—not transfer payments. Thus
much of what is included in the federal budget
is NOT included in GDP
plus
Net Exports
(Exports less Imports)
_______________________________
equals:
Gross Domestic Product
Note: You may wish to check a Federal Reserve Bulletin, Department of
Commerce Internet Page, or other current periodical to examine
relative magnitudes of the various components of GDP.
National IncomeThe account called National Income measures the sum of incomes
EARNED by resource suppliers. Since it is earned incomes, it excludes
all transfer payments as well as a few non-income charges that are
included in GDP.
Compensation to employees
(wages and salaries, tips,
sales commissions, social
security contributions, imputed
values…..)
plus
Rental income to persons
(includes imputed rental
value of owner-occupied
homes, copyright fees,
patent fees, royalties…)
plus
Net interest
(interest on the public debt
is treated as a transfer payment)
plus
Profits
Proprietors’ incomes
Corporate profits
(dividends, retained earnings, tax liability)
_____________________
equals:
National Income