Download National Income Accounting Essentials

National Income Accounting Essentials National Income Accounting  we’ll define it as the process of developing and analyzing measures of economic output and performance  rooted in the national Income and Product Accounts (NIPA)  boosted by the need to track production of war materials in WWII Why collect all this data?  data allows us to objectively measure the economy's performance at a point in time o identify recessions and depressions  looking at lots of data over time, we begin to see relationaships o understand how the economy actually works. o develop economic theory  data helps guide fiscal and monetary policy and gauge its success Things we’d like to measure  Output or domestic product  Income Gross National Product/Gross Domestic Product  both defined as measures of the market value of all final goods and services produced by an economy during a given time period, usually one year Measures  All measures are wrong  Still useful if the errors aren’t too large Market value  You can’t add apples and oranges  You can add the value of apples and oranges  GDP/GNP are dollar figures  If there isn’t a price attached, it isn’t counted  government output valued at cost of inputs  fails to measure home production or illegal activity national income accounting essentials.doc
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Revised on: 10/19/2015
Production  The goal is to measure production, not sales  If nothing was produced, nothing gets counted Time  Things are counted in the year they are produced Final goods and services  We only count those goods and services purchased by consumers, firms, and the government for final use or consumption, not for resale or use in producing other goods  raw materials and intermediate goods are not counted  this avoids double counting Specific exclusions  Security transactions o e.g.sales ofstocks and bonds o simply a swap of financial assets o brokers fees would count as these are payment for a service  Public transfers o grants to groups or individuals o not payments for services o Social Security payments o Food Stamps  Private transfers o gifts, allowances from parents, etc.  Secondhand sales o reselling a house or car o nothing new has been produced o already counted Potential Problems  underestimates size of economy  counts “bads” as well as goods  designed to track things, not services  fails to account for population  fails to account for distribution national income accounting essentials.doc
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Differentiating between GNP and GDP  distinction based on how each measure defines “the economy”  GDP measures the value of goods and services produced within the U.S., regardless of who is producing them  think of it as a geographical definition of the economy  GNP measures the value of goods and services produced by U.S. resource owners, regardless of where they are produced  U.S. switched its reporting focus from GNP to GDP in 1991 Why use GDP?  better aligned with international measures of output o kind of like the metric system  better captures the effects of economic events on “our” economy  avoids issues of nationality , residency, ownership Net Domestic Product  production wears out machinery and equipment that must be replaced  this is known as depreciation  NDP subtracts depreciation from GDP  NDP = GDP ‐ depreciation Depreciation ‐ the value of the nations capital stock which is used up during production GDP can certainly be thought of as the sum of the market values of all final goods and services produced within a country. However, there are two other ways of thinking of GDP Expenditures Approach to Thinking About GDP  All of the output that domestic firms produce will be purchased by 4 groups: households, firms, the government, and foreign citizens. GDP
(All domestic production of final G&S)
Households Firms
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income accounting essentials.doc
Government
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Foreign Citizens Revised on: 10/19/2015
Consumption (C)  All purchases of final goods and services by households, except new homes Investment (I)  All purchase of capital goods by firms  All additions to inventory by firms  Purchases of new homes by households Government Spending on Goods and Services  All spending on goods and services by the government  Does not include transfer payments Net Exports (X‐M)  Purchases of domestic output by foereign citizens and government minus domestic purchases of foreign g&S GDP (All domestic production of final G&S)
Investment Government Net Exports Consumption Expenditures In other words, GDP can be thought of as the sum of the expenditures by these 4 groups on domestic production of final g&S or, mathematically as GDP = C + I + G + (X‐M) national income accounting essentials.doc
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Revised on: 10/19/2015
National Income (NI)  defined as the amount of income earned by U.S. resource owners (essentially citizens) Resouce Income Land (Natural Resources) Rent (r) Labor Wages (w) Capital Interest (i) Entrepreneurial Ability Profit (π)  sum of: wages + interest + rent + profit NI ≡ w + i + r + π Incomes Approach to Thinking About GDP  assume there is no government, no depreciation, and everyone lives in their own country  then all revenue from the sale of final goods and services then flows to the resources used to produce those goods and services  GDP is approximately equal to the sum of wges, interest, rent, and profit GDP ≈ w + i + r + π  only approximate due to assumptions above  therefore GDP and NI are conceptual almost the same, GDP ≈ NI  visualize as Labor GDP Revenue Capital Land or Entrepreneurial Ability GDP Revenue Wages Interest national income accounting essentials.doc
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Profit Revised on: 10/19/2015
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Revised on: 10/19/2015