Download The Three Macroeconomic Ills

National Income Accounting (NIA)
Outline:
1. Functions of NIA
2. Gross Domestic Product (GDP)
3. The Value Added approach to GDP
4. The Expenditure Approach to GDP
5. The Factor Payments Approach to GDP
6. Real versus Nominal GDP
7. Problems with GDP
National income accounting (NIA) is the
measurement of aggregate or total economic activity.
NIA is useful for assessing the
performance of the
macroeconomy. NIA is also
helpful in evaluating the
effectiveness of policy initiatives
such as the Reagan tax cuts.
Stocks vs. Flows
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.
Gross Domestic Product (GDP)
GDP is the market value of new goods and
services produced in the economy in one year
within the nation’s borders.
GDP is our basic
measure of economic
activity
Three approaches to measuring GDP
The value-added
approach
The expenditure
approach
The factor payments
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.
$1.00
Wood
Chips
Lumber
Mill
$1.50
Raw
Paper
Paper
Mill
$2.25
Notebook
Paper
Office Supplies
Manufacturer
$3.50
Notebook
Paper
Wholesaler
$5.00
Notebook
Paper
Retailer
Summing the value-added at each stage
Stage
Lumber milling
Value Added
$1.00
Paper processing
.50
Office Supply
Manufacturing
Wholesaling
.75
1.25
Retailing
1.50
Total
$5.00
To count the
notebook in GDP,
we count the final
transaction only.
Otherwise, we
would be counting
value added twice.
The expenditure approach
Here we simply
add up all
expenditures for
new goods
and services in one
year
GDP = C + I + G + NX
Where,
C is personal consumption expenditure;
I is gross private domestic investment;
G is government expenditure (local, state, and federal);
and
NX is net exports, or Exports minus Imports
Consumption
Household spending for newly-produced
goods and services is defined as
consumption. We distinguish between 3
categories or types:
Spending for consumer durables
Spending for consumer nondurables
Spending for consumer services.
Consumer Spending by Type, 1999 (in billions)
Category
Durables
Spending in
1999
Percent
(billions) of Total
$759
12
Nondurables
1,842
29
Services
3,656
59
Source: Economic Report of the President
Total spending by
U.S. households
in 1999 was a
staggering $6.3
trillion
7000
6000
www.bls.gov
5000
4000
3000
2000
1000
0
76 78 80 82 84 86 88 90 92 94 96 98
Consumption in current dollars
What is investment?
All spending by business firms for
newly built equipment and business
structures.
All changes in business inventories of
raw materials, semifinished articles, and
finished goods.
All spending by households for newly
constructed residential housing
Investment does NOT include
•The purchase of stocks, bonds, or
other financial assets.
•Secondhand sales
Remember that
investment only happens
when there is production
of new tangible capital
goods
Components of Business Fixed Investment, 1982-97
billio ns of chain-weighted 1992 dollars
700
600
500
400
300
200
Structures
100
Durable equipment
0
Computers
1982
1985
1988
1991
1994
Yea r
Source: Economic Report of the President
1997
Definitions
Capital consumption allowance (CCA):A monetary
measure of the depreciation of the capital stock in a year due
to normal wear and tear, fires, or other accidents.
Net Investment: Gross Investment minus CCA.
Indirect business taxes: taxes collected by businesses for
government units, such as taxes on entertainment, motels,
groceries, liquor, cigarettes, or gasoline taxes. Also called
excise taxes.
Net income earned abroad: Income earned by domestic
residents in foreign factor markets minus income earned by
foreigners in domestic factor markets.
The Factor Payments Approach
This mainly involves
summing up income
earned in factor
markets
GDP =
Employee compensation
+ interest
+ rent
+ profits
- net income earned abroad
+ CCA
+ indirect business taxes
Two Approaches to U.S. GDP, 1999
Expenditure Approach
Consumption
$6,257
Investment
1,623
Government expenditure 1,630
Exports
998
Imports
-1,252
Total
$9,256
Factor payments Approach
Employee compensation
$5,331
Profits, rent, interest, etc.(see note 1) 3,209
Indirect business taxes
716
Total
$9,256
1Includes the capital consumption allowance and statistical discrepancy
Source: Bureau of Economic Analysis (www.bea.gov
Relation of GDP to GNP, NNP, National Income,
and Personal Income, 1999
All data in billions 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
Plus: Statistical discrepancy
Equals: National income
$9,256
(20)
9,236
1,136
8,100
716
27
85
$7,496
From National Income to Personal Income
All data in billions of dollars
National Income
$7,496
Less: Corporate profits
Less: Net interest
893
468
Less: contributions for social 658
insurance
Plus: transfer payments
1019
Plus: Dividend income
364
Plus: Personal interest
income
932
Equals: Personal Income
$7,792
Personal disposable income (PDI)
Personal income
Less: Personal tax payments
Equals: PDI
PDI is the obviously one
measure
of ready spending power
of the household sector
$7,792
1,152
$6,640
Real versus Nominal GDP
•We use money to measure the market value of new
goods and services produced produced in the economy.
•The value (or purchasing power) of money is subject to
change over time.
•Hence we need to adjust nominal GDP (that is, GDP
measured at current prices) for changes in the value of
money.
•GDP adjusted for changes in the value of money is called
real GDP.
Price 
Quantity = Market Value of Output
.50
100 oranges
1.00
300 coconuts
8.00
2,000 pizzas
$16,350
Year 1
(base year)
Nominal GDP = Real GDP
.50
110 oranges
1.00
330 coconuts
8.00
2,200 pizzas
$17,985
Nominal GDP increases, Real GDP increases
Year 2
(quantities
increase
10%)
Price 
Quantity = Market Value of Output
.55
100 oranges
1.10
300 coconuts
8.80
2,000 pizzas
$17,985
Year 3
(prices
increase by
10%)
Nominal GDP increases, Real GDP remains constant
Nominal GDP in 1990 is computed by:
Goods & Services
Produced in 1990
(in units)
Market Prices
in 1990
$5,748.3 billion
Nominal GDP in 1991 is computed by:
Goods & Services
Produced in 1991
(in units)
Market Prices
in 1991
$5,916.7 billion
The problem is this: How do we
know if the change in GDP
(from ’90 to ’91) is due to a
change in actual production of
goods and services? That is, the
increase in nominal GDP might
be explained by an increase in
prices.
GDP in the United States (in millions)
8000
www.bea.gov
6000
4000
2000
0
60
65
70
75
80
Nominal GDP
85
90
95
Chained 1996 dollars
GDP per Person in the United States
35000
www.economagic.com
30000
25000
20000
15000
10000
5000
0
60
65
70
75
80
Nominal
85
90
95
Chained 1996 dollars
GDP in the U.S. (millions of chained 1996 dollars)
7000
Recessions are shaded
www.bea.gov
6000
Notice that real GDP
decreased in 1991
5000
4000
3000
2000
70
75
80
85
90
95
•GDP does not take full account of qualitative changes
in output.
•GDP does not take account of the underground
economy.
•GDP does not account for nonmarket production—
that is, goods produced but not sold in the
marketplace.