National Income Accounting

Transcription

1 National Income Accounting introduction national income accounting -- the study of the methods of measuring the aggregate output and aggregate income of an economy taking the nation's economic pulse -- helps define the relationship between an economy's total output and total income we did not take comprehensive statistics until 1930s (Simon Kuznets Nobel prize) basic principle (fundamental national accounting identity) -- the value of total output equals the value of total income this principle implies --the only way to increase real income is to increase real output This point is very important! -- real income cannot be increased without producing more, redistributing income does nothing to increase the amount of wealth available at any point in time fundamental national accounting identity indicates two methods for calculating GDP 1. expenditure approach 2. income approach circular flow diagram The diagram represents money flows, not tangible goods and services which could be visualized as flowing in the opposite direction from the arrows depicted below. The "reddish" looking arrows illustrate the basic circular flow of money from households to firms. These flows are the basis for much of our national income accounting. The "bluish" arrows depict: leakages -- income that is not spent on domestically produced goods and services (savings - S, taxes - T, imports - M) The "greenish" arrows depict:

2 injections -- expenditures that add to the circular flow of expenditure (investment -- I, government expenditure - G, exports - X) The injections inject spending into the economy that is lost with the leakages. double counting final goods (purchased by their ultimate users) -- goods that are not used up in the production of other goods in the current period -- these count toward the calculation of GDP intermediate goods (purchased for resale or use in producing another good) -- goods that are completely used up in the production of another good intermediate goods do not enter the circular flow -- remain in the business sector, hence intermediate goods are not part of total output example of double counting:

3 The data in the table below represent the selling price of the intermediate good. After converting the tree to paper the paper manufacturer sells the paper to the textbook publisher for $3. textbook production: tree $1 paper book bookstore sum of factor payments $86 How much is added to GDP? $86, $75? The correct answer is "$75". The price of the "tree", "paper", and book is included in the final selling price of the book by the bookstore. To include these amounts in GDP calculation would be to "double count." value added -- amount of "value" that is "added" at each stage of production, the value of firm's product minus the value of the resources it purchases from other firms methods for calculating GDP 1. expenditure approach -- sum the monetary value of all final goods and services 2. income approach -- sum all factor incomes two sides of the same coin expenditure approach expenditure approach -- sum the monetary value of all final goods and services

4 consumption C = personal consumption expenditures -- final goods and services, non durable and durable goods. investment I = gross private domestic investment -- expenditures that add to (or replace) the economy's capital stock (plants, equipment, structures, and inventories). investment is not an intermediate good because it is not completely used up two main categories of investment 1. inventory investment - increase or decrease (disinvestment) in the value of the stocks of inventories that businesses have on hand. 2. fixed investment -- addition of new plants, equipment, commercial buildings, and residential structures government G = local, state, federal purchases of final goods and services. final goods and services by convention valued at the cost of supply because they are not sold to final consumer therefore government expenditures does not include: transfer payments -- recipients who have not supplied current goods or services in exchange for these payments (do not represent current output), produce no income or output net exports exports minus imports X = exports (produced domestically but sold to foreigners) -- dollars in, goods out M = imports (produced by foreigners but purchased by domestic consumers) -- dollars out, goods in

5 income approach income approach -- sum all factor incomes national income -- sum of all payments made to resource owners 1. compensation of employees ~ 71% of national income 2. rental income, rent -- payment for the use of property, e.g. land, housing, office space 3. corporate profit -- return to owners of incorporated firms 1. dividends 2. retained earnings 3. corporate taxes 4. proprietor's income -- own own business 5. net interest, how capital enters the process reconciling GDP with national income measures of GDP are not identical with measures of national income personal consumption expenditure depends on disposable personal income and GDP is a much wider measure than personal disposable income -- in order understand Keynesian economics we must know how disposable personal income relates to GDP information relating to the reconciliation of GDP to disposable personal income: GDP and GNP (gross national product) are distinguished by where the output is produced and who owns the resources producing the output. GDP is computed on a geographic basis, not national citizenship. If something is produced within the geographic boundaries of a nation in counts toward GDP. A Japanese citizen living and working in the US contributes to the US's GDP. If one were computing GNP, the Japanese person in the US would add to Japan's GNP, not the United State's definitions relating to the reconciliation of GDP to disposable personal income:

6 depreciation -- value of existing capital stock used up indirect business taxes -- not levied on the firm directly, rather on a good or service (sales taxes, excise taxes, customs duties, property taxes, fees) the following equation indicates how to reconcile GDP to disposable personal income