National Income Accounting

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National Income Accounting
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Simon Kuznets

• 1901-1985
• Nobel Prize 1971

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Sir Richard Stone

• 1913-1991
• Nobel Prize 1984

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James Meade

• 1907-1995
• Nobel Prize 1977

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National Income Accounting

• GDP Defined
• Nominal vs. Real GDP

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National Income Accounting

• Measuring Total Economic Output of Goods and
  Services
• Gross Domestic Product (GDP) is the total value
  of all final goods and services produced in an
  economy in a one-year period.

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National Income Accounting

• GDP Defined
• Nominal vs. Real GDP

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National Income Accounting

• Real and Nominal GDP
• Nominal GDP is GDP calculated at existing prices.

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National Income Accounting

• Real and Nominal GDP
• Real GDP is nominal GDP adjusted for inflation.
• Real GDP is important to society because it
  measures what is really produced.

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National Income Accounting

• Real GDP is nominal GDP adjusted for inflation.

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National Income Accounting

• Circular Flow
• Income Method
• Expenditure Method
• Limitations

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National Income Accounting The Circular Flow

• Output Income
• Every dollar of output equals a dollar of income
  in the form of
• wages, salaries
• interest, dividends
• rent, profit

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National Income Accounting The Circular Flow
Firms
Households
(production
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National Income Accounting The Circular Flow
Goods
Households
Firms

Production
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National Income Accounting The Circular Flow
F
actor services
Goods
Firms

Households
Production
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National Income Accounting The Circular Flow
F
actor services
Goods
Household
Fir
ms
(production
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National Income Accounting The Circular Flow
F
actor services
Goods
Household
Fir
ms
(production
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National Income Accounting The Circular Flow
F
actor services
Goods
Household
Fir
ms
(production
Investment
Saving
Financial mar
k
ets
P
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4
)
s
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National Income Accounting
Taxes
Taxes
Spending
F
actor services
Goods
Household
Fir
ms
(production
Investment
Saving
Financial mar
k
ets
P
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r
4
)
s
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National Income Accounting The Circular Flow
Exports
USA
China
Imports
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National Income Accounting

• Circular Flow
• Two Methods of Measuring
• Avoid Double Counting

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National Income Accounting

• Two Methods of Measuring
• The Income Approach
• The Expenditure Approach

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National Income Accounting

• The Income Method
• The income approach is shown on the top half of
  the circular flow.

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National Income Accounting
F
actor services
Goods
Household
Fir
ms
(production
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National Income Accounting

• The Income Method
• National income is the total income earned by
  citizens and businesses in a country in one year.

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National Income Accounting

• The Income Method
• Salaries and wages.
• Rents are payments for use of land and buildings
• Interest includes payments for loans by
  households to firms.
• Profits are payments to the owners of firms.

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National Income Accounting

• The Expenditure Method
• The expenditure approach is shown on the bottom
  half of the circular flow.

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National Income Accounting
Government
F
actor services
Taxes
Spending
Goods
Household
Fir
ms
(production
Investment
Saving
Financial mar
k
ets
P
e
r
4
)
s
o
i
o
n
(
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National Income Accounting

• The Expenditure Approach
• Specifically, GDP is equal to the sum of the four
  categories of expenditures.
• GDP C I G (X - M)

C represents Consumer Spending
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Consumer Spending
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Consumer Spending

• Household Consumption Types
• Durable Goods (last gt 1 year)
• Non durable Goods
• Services

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National Income Accounting

• The Expenditure Approach
• Consumption
• When individuals receive income, they can spend
  it on domestic goods, save it it, pay taxes, or
  buy foreign goods.
• This is the largest part of GDP

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Consumer Spending
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Consumer Spending

• Options for Savings
• Bank Savings Account
• CD or NOW Account
• Money Market Account
• U.S. Treasury Account
• Stock or Bond Investment
• Real Estate

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National Income Accounting

• The Expenditure Approach
• GDP C I G (X - M)

I represents Business Investment Spending
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National Income Accounting

• The Expenditure Approach
• Investment
• The portion of their income that individuals save
  leaves the income stream and goes into financial
  markets.

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National Income Accounting

• The Expenditure Approach
• Investment Spending Includes
• Business spending on capital goods such as
  equipment
• All construction spending
• Residential
• Non Residential
• Net Change in Business Inventories

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Investment Spending

• Source of funds for Investment
• Sale of Stock
• Sale of Bonds
• Loans from Financial Institutions
• Commercial Paper
• Retained Earnings (business saving)
• Net income after taxes and expenses
• Depreciation (capital consumption allowance)

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Investment Spending

• Construction
• Residential / Commercial
• Capital Equipment
• Machinery, Tools, Computers, Etc.
• Net Change in Inventory

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National Income Accounting

• The Expenditure Approach
• GDP C I G (X - M)

G represents Government Spending
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National Income Accounting

• The Expenditure Approach
• Government consumption and investment
• When individuals pay taxes, those taxes are
  either spent by government on goods and services
  or are returned to individuals in the form of
  transfer payments.

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National Income Accounting

• The Expenditure Approach
• Government consumption and investment
• When the federal government runs a deficit, it
  must borrow from financial markets to make up the
  difference. Borrowing occurs through the sale of
  U.S. Treasury securities
• T-Bills (short-term debt)
• T-Notes (intermediate term debt)
• T-Bonds (long-term debt)

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National Income Accounting

• The Expenditure Approach
• GDP C I G (X - M)

X represents Export Spending M represent Import
Spending
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National Income Accounting
Exports
USA
China
Imports
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National Income Accounting

• The Expenditure Approach
• Net exports
• Spending on foreign goods produced in a foreign
  country escapes the system and does not add to
  domestic production, thus spending on imports are
  subtracted from total expenditures.

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National Income Accounting

• The Expenditure Approach
• Net exports
• Exports to foreign nations are added to total
  expenditures.
• Imports from foreign nations are subtracted from
  total expenditures.
• These flows are usually combined into net exports.

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National Income Accounting

• Equality of Income and Expenditure
• Income and expenditures must be equal because of
  the rules of double-entry bookkeeping.
• Profit is the balancing item.

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National Income Accounting

• Equality of Income and Expenditure
• The national income accounting identity allows
  GDP to be calculated either by adding up all
  values of final output or by adding up the values
  of all earnings or income.

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Limitations of GDP

• Household and Underground Output not counted.
• Capital goods used up in production
  (depreciation) is included Overstates real
  output.
• Quality of output is unknown.

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End of Presentation