Econ 3040 Section 1. National Income and Product Accounts. Tilahun Emiru. Cornell University. January 29, 2016
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1 Econ 3040 Section 1 National Income and Product Accounts Tilahun Emiru Cornell University January 29, 2016 Tilahun Emiru (Cornell University) Econ 3040 Section 1 January 29, / 23
2 Outline 1 Overview of Gross Domestic Product 2 Measurement and Components of GDP 3 The National Income and Product Accounts Tilahun Emiru (Cornell University) Econ 3040 Section 1 January 29, / 23
3 Overview of Gross Domestic Product Gross Domestic Product The broadest and most commonly used metric of aggregate economic activity is gross domestic product (GDP). GDP measures the market value of final goods and services newly produced within a country in a fixed period of time Non-marketed goods and services do not show up in GDP. Think of goods and services in the underground economy, home production, clean air, government services, and so on. Only the final goods and services to avoid double counting intermediate goods. GDP only measures what is produced by labor and property physically located in the country Tilahun Emiru (Cornell University) Econ 3040 Section 1 January 29, / 23
4 Overview of Gross Domestic Product Gross National Product Another related, gross national product (GNP), measures the market value of final goods and services newly produced by factors of production owned by citizens and firms of the home country. GNP is equal to GDP adjusted for net factor payments (NFP): the income paid to domestic factors of production from the rest of the world, minus income paid to foriegn factors of production from the domestic economy GNP = GDP + NFP Tilahun Emiru (Cornell University) Econ 3040 Section 1 January 29, / 23
5 Overview of Gross Domestic Product GDP vs GNP Output from Mexican workers in the United States would be counted as U.S. GDP and Mexican GNP, not U.S. GNP The value added from American capital and management in producing GM cars in China (as opposed to Chinese labor or capital) would be counted as U.S. GNP and Chinese GDP, not U.S. GDP For smaller countries with many workers living abroad, the difference between GDP and GNP can be quite significant: Remittances to Tajikistan totaled 42% of GDP in 2014, while for the U.S., it was only about 0.04% Tilahun Emiru (Cornell University) Econ 3040 Section 1 January 29, / 23
6 Measurement and Components of GDP The Fundamental Identity of National Income Accounting Total Production = Total Income = Total Expenditure The income-expenditure identity: Y = total production (GDP) = total income = total expenditure C = consumption I = investment Y C I G NX G = government purchases of goods and services NX = net exports of goods and services Tilahun Emiru (Cornell University) Econ 3040 Section 1 January 29, / 23
7 Measurement and Components of GDP Consumption (C) Personal consumption expenditure measures spending by domestic residents on final goods and services, including those produced abroad. It is categorized into: 1 Durables: long-lived consumer items (e.g., cars, televisions, refrigerators, and so on) 2 Non-durables: short-lived consumer items (e.g., groceries, fuel, and so on) 3 Services, such as education, health care, financial services, and transportation. Tilahun Emiru (Cornell University) Econ 3040 Section 1 January 29, / 23
8 Measurement and Components of GDP Investment (I) Gross private domestic investment measures spending on new capital goods (fixed investment) and inventory holdings (inventory investment): 1 Nonresidential fixed investment measures new spending on structures, equipment, and intellectual property Structures include factories, office buildings and so on Equipment such as machinary, vehicles, and so on Intellectual property includes software as well as research and development (R&D) 2 Residential fixed investment includes the construction of new houses and appartment buildings 3 The change in private inventories is the change in the inventory of unsold final goods owned by businesses at average market value over the period Tilahun Emiru (Cornell University) Econ 3040 Section 1 January 29, / 23
9 Measurement and Components of GDP Government Purchases (G) and Net EXports (NX) Government purchases of goods and services include any expenditure by the government for a currently produced good or service, foreign or domestic. It is categorized into federal, state and local. Transfers are excluded since they are not made in exchange for goods and services. Net Exports: exports minus imports Exports are added because they represent spending by foreigners on home-produced goods. Imports are subtracted because they represent spending by domestic citizens on foreign-produced goods. Tilahun Emiru (Cornell University) Econ 3040 Section 1 January 29, / 23
10 Measurement and Components of GDP U.S. GDP 2012 Tilahun Emiru (Cornell University) Econ 3040 Section 1 January 29, / 23
11 Measurement and Components of GDP Measuring GDP: The Income Approach One agent s spending is another agent s income. National income (NI) measures income earned in prodcution which is distributed as follows: Compensation of employees Proprietors income Rental income of persons Corporate profits Net interest Taxes on production and imports Business current transfer payments Current surplus of government enterprises Tilahun Emiru (Cornell University) Econ 3040 Section 1 January 29, / 23
12 Measurement and Components of GDP Gross National Income The flipside to GNP is gross national income (GNI), which measures national income plus depreciation - the costs incurred in the production of GNP GNI = NI + Depreciation In theory GNI equals GNP, but income is compiled from different data sources, leaving a small statistical discrepency between the two measures GNI GNP Analogously to GNP, GNI measures income generated by factors of production owned by citizens and firms of the country, regardless of their location Tilahun Emiru (Cornell University) Econ 3040 Section 1 January 29, / 23
13 Measurement and Components of GDP Relation of GDP, GNP, and NI Tilahun Emiru (Cornell University) Econ 3040 Section 1 January 29, / 23
14 Measurement and Components of GDP Gross Domestic Income Similarly, the flipside to GDP is gross domestic income (GDI), which measures national income adjusted for depreciation and net factor payments: GDI = NI + Depreciation + NFP In theory GDI equals GDP, but they differ by the same statistical discrepency as between GNI and GNP GDI GDP Analogously to GDP, GDI only reflects income generated by labor and property physically located in the country Tilahun Emiru (Cornell University) Econ 3040 Section 1 January 29, / 23
15 The National Income and Product Accounts The National Income and Product Accounts GDP, GDI, GNP, and GNI are all major aggregate components of the National Income and Product Accounts (NIPAs): The NIPAs are a system of integrated accounts detailing the composition of production and the distribution of incomes earned in production The accounts are a doubly-entry system, meaning that every component recorded as an expenditure (or use of resources) appears elsewhere as a source of income (or receipt) For example, the taxes paid by households and businesses show up as the receipts for levels of government Tilahun Emiru (Cornell University) Econ 3040 Section 1 January 29, / 23
16 The National Income and Product Accounts Source: Measuring the Economy: A Primer on GDP and the National Income and Product Accounts Tilahun Emiru (Cornell University) Econ 3040 Section 1 January 29, / 23 NIPAs All Together: C + I + G + NX = GDP GDI
17 The National Income and Product Accounts National Income Accounting Data for the U.S. The U.S. NIPAs are produced by the Bureau of Economic Analysis: The data underlying these slides can be found in: Table Percent Change From Preceding Period in Real Gross Domestic Product Table Contributions to Percent Change in Real Gross Domestic Product Table Real Gross Domestic Product Table Real Gross Domestic Product, Chained Dollars Table Relation of Gross Domestic Product, Gross National Product, Net National Product, National Income, and Personal Income Table 1.10 Gross Domestic Income by Type of Income Table 7.1 Selected Per Capita Product and Income Series in Current and Chained Dollars Tilahun Emiru (Cornell University) Econ 3040 Section 1 January 29, / 23
18 The National Income and Product Accounts Tilahun Emiru (Cornell University) Econ 3040 Section 1 January 29, / 23
19 The National Income and Product Accounts Tilahun Emiru (Cornell University) Econ 3040 Section 1 January 29, / 23
20 The National Income and Product Accounts Tilahun Emiru (Cornell University) Econ 3040 Section 1 January 29, / 23
21 The National Income and Product Accounts Tilahun Emiru (Cornell University) Econ 3040 Section 1 January 29, / 23
22 The National Income and Product Accounts FRED You can also find U.S. NIPA data and just about every macroeconomic time series at FRED, the Federal Reserve Economic Data website of the Federal Reserve Bank of St. Louis: 240,000+ data series Easily create custom graphs and charts Download any data series to excel or extract figures to pdf, png, or jpg formats Tilahun Emiru (Cornell University) Econ 3040 Section 1 January 29, / 23
23 The National Income and Product Accounts Tilahun Emiru (Cornell University) Econ 3040 Section 1 January 29, / 23
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