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Q: How do we measure GDP in Reality? A: There are three equivalent approaches 1. Value-Added Approach adds up production across producers 2. Income account added across types of claimant 3. Expenditure Account adds up uses of product by type of use adds up claims against value 2013 National Accounts (billions of dollars, calendar year) Value-Added (loosely speaking, "supply") Business Nonfarm Farm Households and institutions Households Nonprofit institutions serving households General government Federal State and local TOTAL = GDP Addendum: Gross housing value added Income 12,684 12,450 234 2,079 1,177 902 2,036 667 1,369 16,800 1,558 Source: Bureau of Economic Analysis Last Revised: Mar 27, 2014. Expenditure (loosely speaking, "demand") Compensation of employees Proprietors' income Rental income Corporate profits Net interest 8,860 1,349 591 2,102 469 Personal consumption expenditures Gross private domestic investment nonresidential fixed residential fixed Change in private inventories Indirect business taxes, net of subsidies Business current transfer payments Gov enterprise surplus 1,088 124 -40 Net exports of goods and services -497 Government consumption and gross investment 3,126 Federal 1,246 State and local 1,880 Consumption of fixed capital Net income paid to ROW Statistical discrepancy TOTAL = GDP Addendum: GNP = GDP - net income paid ROW National Income = GNP - Consumption of fixed capital - statistical discrepancy 2,647 -258 -132 16,800 17,057 14,543 TOTAL = GDP 11,502 2,670 2,047 517 106 16,800 Factors of Production 1. factors of production (capital and labor) help interpret the national accounts 2. preliminaries a. b. stocks vs. flows location of factors 3. factors in the income accounts 4. factors in the expenditure accounts 5. private vs. public sectors 6. factors and value-added are connected through the production function Private vs. Public: Principles and Measurement 1. principle: add private factors with public factors 2. practice: public investment rarely measured separately from public consumption 3. principle: add public sector value-added to private sector value-added 4. practice: public sector output not sold in the marketplace, so net valueadded is assumed to be equal to public sector labor costs. It is impossible to measure aggregate public sector productivity 5. principle: add private factor incomes with public factor incomes 6. practice: public capital is not rented in a marketplace, so net public capital income is assumed to be zero 7. practice: public sector output cannot be classified as final versus intermediate need to adjust the income accounts for “indirect taxes” Government Spending Compared with Public Sector NIPA Entries 1. government spending = government purchases + transfers, only purchases included as public entry in the NIPA expenditure account 2. government purchases = purchases of items from private enterprises + purchases of items to be used by public institutions and enterprises, but only the later are included as pubic entry in the NIPA value-added account