Download National Income and Product Accounts – a Double

Chapter 2
National Income and Product
Accounts
Difference Between National and
Personal Income
• National Income – earned by all factors of
production
• Personal income – received by individuals,
includes transfer payments. Capital gains
income not included at all.
• Difference between GDP and NI is
primarily depreciation and indirect
business taxes
Basic Concepts of NIPA
• Product Side – all goods and services
purchased for final demand (except
inventory investment)
• No intermediate goods or services
included, since that would be double
counting
• Income Side – all income earned by
various factors of production
• No transfer payments are included
Components of GDP
•
•
•
•
Consumption
Durables
Nondurables
Services
Investment
Capital Spending (Plant and Equipment)
Residential Construction
Inventory Investment
Net Exports
Exports
Imports
Government purchases (NOT expenditures)
National defense
Other Federal
State and Local (mainly wages and salaries)
Consumer Spending
• Durable goods: last 3 years or more
Mainly motor vehicles and appliances
• Nondurables: used up quickly
Mainly food, gasoline, household supplies
Clothing is in between, has more
characteristics of a durable but not listed in
that category
• Services: mainly housing and utilities,
transportation, medical, and recreational
• Housing is on a rent-equivalency basis; not the
actual mortgage payments
Investment – Capital Spending
•
•
Producers Durable Equipment
High-Tech Equipment
Computers
Software
Telecommunications
Industrial Equipment
Transportation Equipment
Includes leased cars
Other Equipment
Natural resources
Office equipment
Nonresidential Construction
Buildings
Utilities
Oil drilling
Most roads, etc. in the public sector
Investment – Residential
Construction
•
•
•
•
New Single-Family Homes
New Multi-Family Homes
Major Additions and Alterations
Brokerage Commissions
Inventory Investment
• Actually not final demand, but included in
GDP because factors of production have
already been paid to produce these items.
• Only about 1% of GDP, but accounts for
more than 50% of the fluctuations in real
GDP during recessions. In the 2001
recession, it accounted for more than
100%, meaning that final sales continued
to rise during the downturn.
Intermediate Goods and Services
• Mostly parts and materials used in the
production of final goods
• For example, steel for autos, lumber for housing,
natural gas for petrochemicals.
• Office supplies (paper clips) but not capital
equipment, which is part of final demand
• Some intermediate services as well
• For example, airline travel and restaurant meal
expenditures by businesses. If an individual
made the same purchase, it would be part of
final demand
National Income
• Wages and salaries
• Supplements to wages and salaries
Employer contributions to social security
Contributions to pension plans
• Proprietors income
• Net interest income
• Rental income
• Corporate profits adjusted for IVA and CCA
Different Measures of Corporate
Profits
• BEA tries to measure “economic profits”,
which are defined as profits from ongoing
operations
• Excludes one-time writeoffs
• Excludes capital gains or losses
• Excludes inventory profits or losses due to
changes in prices
• Measures depreciation on an economic
rather than accounting basis
Difference Between GDP and GNP
• GDP includes profits from all plants located in
the U.S., whether owned by U.S. or foreign
entities
• GNP includes profits from all plants owned by
U.S. entities, whether or not they are located in
the U.S.
• GDP is the better measure. When Daimler-Benz
bought Chrysler there was no change in
economic activity or production, and no change
in GDP, but GNP fell.
Components of Personal Income
• NOT the same as the amount of income that individuals receive.
• Capital gains or losses are excluded
• Contributions to pensions plans are part of PI, but people generally
receive and spend the money after retirement. Those payments are
not included in PI.
• Money from refinancing your home is not included.
• Most interest income is not interest received on bank accounts or
bonds, but the buildup of interest income in pension plans.
• Most of the changes in farm income are changes in physical
quantities of inventories
• Better to use wages and salaries as a measure of spendable power
than the BEA figures for personal income
What is the Personal Saving Rate?
• It should be the percentage of income that
consumers save.
• However, because so many items are excluded
from PI, it is a deficient measure.
• BEA figures show the personal saving rate
declined sharply during the 1990s. However,
BLS figures, based on survey data, show no
change over the same period. The BLS figures
probably provide a better indication of what
really happened to consumer saving patterns.
The Concept of Value Added
• NIPA is a double-entry system, but there is
also a third method of calculation.
• That is the “value added” at each stage of
production. Value added for all industries
in the economy is equal to GDP except for
the statistical discrepancy.
• More important in Europe, where a
specific portion of value added is taxed at
each state of production.
Items Excluded from GDP and NI
•
•
•
•
All income from transfers of assets
All capital gains and losses
Barter of goods and services
Actual mortgage payments are replaced by an
estimate of what the rental value of the house
would be if it were rented
• The underground economy. Illegal and
unreported transactions. While no one knows
the exact size, most estimates are put at 5% to
10% of GDP in the US, or $500 billion to $ 1
trillion.
How Useful is GDP to Business
Managers?
• It is the single figure most often quoted to
measure the performance of the economy
• However, quarterly changes include a large
random element, and revisions are usually in the
range of 1% to 2%. That means a 1% increase
might be revised to a 1% decrease.
• Severe budget cutbacks in recent years have
decimated the data collection effort and the
quality of the data have deteriorated.