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National Income Accounting (NIA) NIA is the measurement of aggregate or total economic activity We measure stock variables at a specific point in time; whereas flows are measured per unit of time. Stocks include: •Checking account balance •Balance owed on student loans •Inventories Flows include: •Income •Sales revenue •Output We measure economic activity as a flow. GDP is the market value of new goods and services produced in the economy in one year with the use of both domestic and foreign-owned economic resources. GDP is our basic measure of economic activity Three approaches to measuring GDP The value-added approach The final goods approach The income approach Value-added is the increase in the market value of a good that takes place at each stage of the production -distribution process. Stage 1: Farmer grows wheat, sells it to the Miller for 55 cents. Stage 2: Miller mills the wheat, sells it to the Baker for 85 cents--hence value-added at the milling stage is 30 cents. Stage 3: Baker bakes the bread--sells it to the supermarket for $1.45--hence value-added at the baking stage is 60 cents. Stage 4: Supermarket sells the bread to the consumer for $1.65--hence value added at the retailing stage is 20 cents. To count the loaf of bread in GDP, we count the final transaction only. Otherwise, we would be counting value-added twice. Two Approaches to U.S. GDP, 1997 Final Goods (in millions) Consumption $5,486 Investment 1,243 Government Expenditures 1,453 Exports 957 Imports - 1,058 Total Income Approach (in millions) Employee compensation $4,704 Profits, rents, interest, etc. @ 2,758 Indirect business taxes 619 $8,081 Total $8,081 @includes capital consumption adjustment and statistical discrepancy All data in millions of current dollars Gross domestic product Plus: Net income earned abroad Equals: Gross national product Less: consumption of fixed capital Equals: Net national product Less: Indirect business taxes Plus: Subsidies less current surplus of government enterprises Equals: National income $8,081 (20) 8,061 868 6,192 619 26 6,649.7 National Income $6,650 Less: undistributed corporate profits 144 Less: corporate profit taxes 249 Less: contributions For social insurance 732 Plus: transfer payments 1,121 Equals: Personal Income $6,646 All data in millions of dollars