NATIONAL INCOME ACCOUNTING is a measure of
aggregate economic activity.
-
It includes GDP, REAL GDP and other measures of
economic activity.
-
It is a process of counting the value of the flows
between sectors and then summing them to find the total value of
economic activity in the economy
-
It fills dollar values into the circular flow (see
Figure 3.1, Page 46).
-
It summarizes the level of production in an economy
over a specific period of time, typically a year.
GROSS DOMESTIC PRODUCT
GDP adds up all goods and services produced by the
economy. In calculating GDP, we use prices or money (dollar) value to
create a measure of total output.
GDP is the market value of all final goods and
services produced in a year within a country’s borders. It is
GEOGRAPHICALLY FOCUSED. This facilitates international comparisons.
To calculate GDP, we have to figure out the MARKET
VALUE of goods and services.
Market value is the value at market price of final
goods and services.
We count only FINAL GOODS AND SERVICES
VALUE ADDED is the increase in the market value of a
product that takes place at each stage of the production process.
-
We can compute GDP by adding the value added at
every stage of production.
-
Value added is the difference between the value of
output and the value of the intermediate goods used in the
production of that output.
In the production of a $20 shirt, there are several
steps:
The value of the cotton sold by farmer is $1, the value of the cloth
woven by textile mill is $5, the value of the shirt when the shirt
manufacturer sells wholesale to retailer is $12, and the value of
the shirt when the retail store sells it to the consumer is $20.
Adding it all together would overstate GDP. (The value
of the shirt is not really $38).
-
Instead, we find out how much value each stage of
production added to the shirt: The farmer added - $1, the Mill adds
$4, the manufacturer adds $7 and the retail store adds $8 = $20 (or
the market value of the final product).
-
So the sum of value added at each stage of
production, the total value added, is equal to the market value of
the final product.
IMPORTANT DISTINCTION: GDP is not based on ALL goods
and services but on ALL FINAL goods and services.
PRODUCED IN A YEAR
The year of production, not the year of sale determines allocation to
GDP.
Economists use CHANGES IN INVENTORY to determine the
value of goods produced in a year but not sold in that year.
-
INVENTORY is the stock of unsold goods.
Goods not sold at the end of the year increases the value of the
store’s inventory.
-
CHANGES IN INVENTORY can be planned or unplanned.
In any case it counts the output that is produced but not sold in a
given year.
GDP PER CAPITA
As we discussed in Chapter 2, Per capita GDP is the
total GDP divided by the population. GDP per capita is a measure of a
country’s standard of living. Generally, the higher the GDP per
capita, the higher the standard of living.
GDP AS OUTPUT
GDP is a measure of the market value of a nation’s
total output in a year.
Economists divide economy into 4 sectors: HOUSEHOLDS,
BUSINESSES, GOVERNMENT AND the INTERNATIONAL SECTOR.
PRIVATELY OWNED BUSINESS produces 84% of GDP
GOVERNMENT produces 11% of GDP
HOUSEHOLDS produce 5% of GDP
If there is a foreign firm operating in the U.S.,
their output is counted in the U.S. GDP because GDP is based on
GEOGRAPHICAL BORDERS.
GDP AS EXPENDITURES
GDP is not only output of goods and services from each sector but also
the PAYMENT FOR GOODS AND SERVICES.
HOUSEHOLD SPENDING = CONSUMPTION
BUSINESS SPENDING = INVESTMENT
GOVERNMENT SPENDING
NET EXPORTS (Exports – Imports)
GDP = CONSUMPTION + INVESTMENT + GOVERNMENT SPENDING +
EXPORTS – IMPORTS
GDP = C + G + I + X (-M)
CONSUMPTION accounts for around 69% OF national
expenditures.
Government spending accounts for around 18% of expenditures.
Business spending accounts for around 16% of expenditures.
Net exports are negative (23%) because IMPORTS EXCEED EXPORTS.
GDP AS INCOME
Because one sector’s output is another sectors income,
the total value of output also can be computed by adding up the income
of all sectors.
INCOME EARNED BY FACTORS OF PRODUCTION:
-
WAGES – earned by workers (58% of GDP)
-
INTEREST – net interest paid by business to
households plus the net interest received from foreigners (the
interest they pay us, minus the interest we pay them). (6% of GDP)
-
RENT – income earned from selling the use of real
property (houses, shops, farms). (2% of GDP)
-
PROFITS – the sum of corporate profits (7% of GDP)
plus proprietors’ income (income from sole proprietorships and
partnerships) (7% of GDP).
OTHER MEASURES OF OUTPUT AND INCOME
GROSS NATIONAL PRODUCT refers to the output produced
by American-owned factors of production regardless of where they are
located. It includes GDP plus receipts of factor income from the rest
of the world minus payments of factor income to the rest of the world.
(OR From residents living abroad minus income earned by foreign
residents from factors of production in the U.S.). So it includes all
U.S. business output working outside the country and excludes all
foreign-owned factors of production which are working inside the U.S.
NDP or Net Domestic Product is GDP minus depreciation
(the consumption of capital in the production process; the wearing out
of capital and equipment). It tells us how much output we could
consume without reducing our stock of capital and therewith next
year’s production possibilities.
-
Gross Investment in GDP includes expenditures to
replace capital goods consumed in current production.
-
NDP only includes expenditures on new capital goods.
-
Net investment = gross investment minus capital
consumption allowance.
NATIONAL INCOME
National income is the total income earned by U.S.
factors of production.
NI = NDP minus indirect business taxes + net foreign
factor income.
-
Captures the costs of the factors of production used
in producing output.
-
DEPRECIATION reduces GDP to NDP (NDP =
GDP-depreciation)
-
NI subtracts depreciation and indirect business
taxes. (NI = NDP – indirect business taxes)
PERSONAL INCOME
The amount of income received by households before
payment of personal taxes.
DISPOSABLE PERSONAL INCOME
DPI = personal income minus personal taxes (income
taxes, excise and real estate taxes on personal property, other
personal taxes).
NOMINAL AND REAL GDP
Nominal GDP measures output in terms of its current
dollar value. It doesn’t take inflation into account.
Real GDP is the value of final output produced in a
given year adjusted for changing price levels.
1980 = U.S. GDP equal to $2,795 billion
2001 = U.S. GDP equal to $10,082.2 billion
Did US produce 260% more goods and services in 2001
than in 1980?
No, NOMINAL GDP changes when price and when quantities
change. (NOMINAL GDP MEASURE PRICE AND OUTPUT CHANGES).
REAL GDP measures output in constant prices.
- It measures the quantity of goods and services produced after
eliminating the influence of price changes contained in nominal GDP.
In 1999 nominal GDP was $9,299 billion and in 2000 $9,963 billion
Did GDP really increase by $664 billion?
No, when we adjust for changes in price level, we can
see that the actual increase in output was LESS than $664 billion.
We can use 1999 as a BASE PERIOD or a year that we use
for comparative analysis of price changes. The price index shows how
average prices have changed between the base year and year t. Between
1999 and 2000 average prices rose 2%. This price level change is
indexed as 1.02.
The general formula for computing Real GDP is:
| Real GDP in Year t = |
Nominal GDP in year t |
|
| Price Index |
|
Real GDP in 2000 =
(1999 Prices) |
$9,963 billion |
= $9,767 billion |
| 1.02 |
So, when we compare the real GDP in 2000 to that of 1999, the change
in Real GDP was $469 billion, not $664 billion.
Real GDP is a better measure of changes in output. We
prefer more goods and services to higher prices.
