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Chapter 6
National Income
Accounting
Economics, 7th Edition
Boyes/Melvin
Measuring Economic Activity
• After being blind-sided by the Great Depression,
policymakers decided that they needed
measures of economic activity.
• Simon Kuznets collected and organized the
national income accounts of the United States in
the late 1930s.
• Kuznets later received the Nobel Prize for his
efforts.
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National Income Accounting
• Economists use National Income
Accounting to evaluate the economic
condition of a country and to compare
conditions across time and countries.
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GDP – “Output”
• Gross Domestic Product (GDP) is the market
value of final goods and services produced
within a country during a specific time period,
usually a year.
• Valued at Market Value
• Only Final Goods and Services Count:
Sales at intermediate stages of production are not counted as
their value is embodied within the final-user good. Their inclusion
would result in double counting.
• Excludes financial transactions and income transfers since
these do not reflect production.
• Must be produced within the geographic boundaries of the
country.
• Net additions to inventory are current period output so are also
included.
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The Circular Flow
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Value Added
• It is possible to compute GDP by
computing the value added at each stage
of production.
• Value added is the difference between the
value of output and the value of the
intermediate goods used in the
production of that output.
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Value Added
Steel and cement have value, but not as much
value as a bridge.
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GDP as Value-Added
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GDP as Output Produced
• Inventory is a firm’s stock of unsold
goods.
• GDP includes all output sold plus all
goods produced but not sold.
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Inventory affects GDP in Japan
Japan's economic growth slowed recently as
companies such as Toshiba Corp. ate into
inventory to satisfy demand.
Japan's largest chipmaker could only supply
90 % of customer demand during the second
quarter of ’06. Expectations were that the level
might fall to as low as 70% in the remaining
half of ‘06.
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Two Ways of Measuring GDP
Expenditures
on Final Goods
Income received for
= GDP = producing Final Goods
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GDP as Expenditures
• GDP is the sum of the amount each sector
(households, investors, governments, and
foreigners) spends on final user goods and
services.
• There are four components of GDP:
• personal consumption expenditures (C),
• gross private domestic investment (I),
• government purchases (G) of goods and
services, and,
• net exports (X) ( exports - imports )
• GDP = C + I + G + X
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GDP as Expenditures
Who Produces It?
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U.S. Gross Domestic
Product as Expenditures
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GDP as Income
The total value of output also can be computed by
adding up the income of all sectors:
• Wages including benefits
• Interest--net interest paid by businesses to households
plus net interest received from foreigners.
• Rent--income earned from selling the use of real estate.
• Profits--the sum of corporate profits plus proprietors’
income.
• Capital Consumption Allowance--the estimated value of
capital goods used up or worn out in production
(depreciation) plus the value of accidental damage to
capital goods
• Indirect business taxes--taxes collected by businesses
and turned over to governments.
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U.S. Gross Domestic
Product as Income Received
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National Income Accounts
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GDP vs. GNP
• Gross Domestic Product (GDP) is the total
value of final goods and services produced
during a given period within the geographic
boundaries of a country regardless of by
whom. The goods and services are produced
domestically.
• Gross National Product (GNP) is the total
value of final goods and services produced
during a given period by the citizens of a
country no matter where they live. The goods
and services are produced by the “nationals” of
the country.
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Net National Product
• Net National Product (NNP) is GDP that is net
of depreciation.
• NNP includes net investment instead of gross
investment.
– Gross investment is total investment, which includes
investment expenditures that simply replace worn out
capital goods. Such replacement investment does not
add to the total capital stock.
– Net investment excludes replacement investment.
That is, it is gross investment minus CCA.
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National Income
• National Income (NI) is NNP less
business taxes.
• NI is a measure of the income payments
that actually go to resources.
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Personal Income and
Personal Disposable Income
• Personal Income (PI) is national income
plus income currently received but not
earned, minus income currently earned
but not received.
• Disposable Personal Income is PI minus
personal taxes.
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Real and Nominal GDP
• Nominal GDP is a measure of national
output based on the current prices of
goods and services.
• Real GDP is a measure of the quantity of
final goods and services produced,
obtained by eliminating the influence of
price changes from nominal GDP
statistics.
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Prices and
Quantities in
a Hypothetical
Economy
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Real GDP Growth in
Some Industrial Countries
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Three Key Price Indexes
• Consumer Price Index (CPI)
– measures the impact of price changes on the cost of
the typical bundle of goods and services purchased
by households.
• Producer Price Index (PPI)
– A measure of the average prices received by
producers for raw materials, intermediate, and final
goods. The PPI used to be called the Wholesale Price
Index (WPI).
• GDP Deflator (GDP Price Index or GDPPI)
– Is a broader price index than the CPI. It is designed to
measure the change in the average price of all the
goods and services included in GDP.
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Price Indexes
• The value of a price index in any particular year indicates
how prices have changed relative to a base year.
• The base year is the year against which all other years
are compared.
• The index is 100  the percent change in prices from the
base year.
• This type of index suffers from substitution bias as
some buyers will change the mix of goods that they buy
in response to price changes.
• Chain-type indexes of real GDP were created to correct
for this bias. Such an index uses the mean of the growth
rates using beginning and ending year prices.
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The GDP, PPI, and CPI
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