CHAPTER National Income Accounting

1
CHAPTER National Income
Accounting

• 2A

2
National Income Accounting

• Define GDP
• Components of GDP
• Consumption
• Investment
• Government Purchases
• Net Exports

3

• Components of National Income
• Compensation of Employees
• Proprietors Income
• Rental Income
• Corporate Profits
• Net Interest
• Other Measures
• Personal Income
• Personal Disposable Income
• Welfare Considerations

4
Gross Domestic Product
Gross Domestic Product is the market value of all
final goods and services produced within a
country within a year.
5
GDP Market Value
GDP ?(Quantity of all Product) x (Market Price
of the Products
Find GDP if the output of an economy is 10,000
computers that cost 2000 each 200,000 haircuts
that cost 15 each 30,000 bicycles that cost
400 each
10,000 x 2000 20,000,000 200,000 x
15 3,000,000 30,000 x 400
12,000,000 GDP 35,000,000
6
GDP Final Goods

• GDP includes the value of only final goods sold.
• If a car produced and first sold in 2000 is
  traded in and resold in 2001, the sale counted as
  part of GDP in 2000, but not in 2001.
• Sales of intermediate goods are not included in
  GDP.
• If McDonalds buys a bun for 10 and beef for 30,
  and sells a hamburger for 1, the contribution to
  GDP is 1, the value of the final sale.

7
GDP Within a Country

• GDP (Gross Domestic Product)
• All output produced within the borders of the
  U.S., regardless of who owns the production.
  (Although the company is owned by Japanese,
  Hondas produced in the U.S. count in U.S. GDP).
• GNP (Gross National Product)
• Output attributable to citizens of a country,
  regardless of where the production takes place.
  (Hondas produced in the U.S. count as part of
  Japans GNP).

8
GDP Within a Year

• GDP is a flow.
• Flow concepts are expressed per unit of time
• Firms produce a certain number of goods and
  services within a period of time, usually per
  week, month, quarter, or year
• Stocks are quantities measured at a particular
  point in time.
• The money in your savings account on January 1,
  2001 is a stock.

9
Components of GDP
10
Components of GDP Consumption

• Personal consumption expenditures are the largest
  component of GDP, about 68.
• Consumption expenditures are for
• Durable goods, products that last more than one
  year (cars, appliances)
• Nondurable goods, products that last less than
  one year (food, clothing)
• Services (medical care, insurance)

11
Components of GDP Investment

• Investment includes
• Business Fixed Investment
• Nonresidential - business purchases of plant and
  equipment
• Residential - construction of new houses
• Change in Business Inventories
• The difference between what a firm produces and
  what it sells within the year
• Economic investment does not include purchases of
  stocks, bonds, and other financial assets

12
Gross Private Domestic Investment 2000
13
Components of GDP Net Exports

• Net Exports
• Spending by foreigners on U.S. production
• - Spending by U.S. consumers, businesses,
  government on foreign production
• In 1998 exports were 11 of GDP, and imports were
  13 of GDP.

14
Net Exports of Goods and Services 2000
15
Components of GDP Government Spending

• Government Spending is divided into Federal
  (35) and State and Local (65) spending.
• Government expenditures may also be classified as
  consumption and investment spending.
• Government transfer payments are not included in
  GDP.

16
Government Consumption and Gross Investment, 2000
17
National Income by Type, 2000
18
Components of National Income

• Compensation of Employees
• Wages and salaries paid to individuals and
  employer contributions for social security and
  other pension and health funds
• Proprietors Income
• Earnings of sole proprietorships and partnerships
• Rental Income
• Income from property, received by households
• Net Interest
• Income private businesses pay to households that
  have lent them money
• Corporate Profits
• Revenue left after compensation to employees,
  rents, and interest have been paid

19
Relationship of National Income and Personal
Income, 2000
20
Disposable Personal Income

• Personal Disposable Income (PDI) is the amount of
  income individuals have left after paying all
  personal taxes.
• PDI is the amount of income individuals have to
  spend on goods and services.

21
Welfare Considerations of Income Accounting

• Legal nonmarket activities are excluded from GDP.
• Illegal nonmarket activities are excluded from
  GDP.
• Resource depleting activities are included in GDP.