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National Income�and Product Accounts

National income and product accounts are data collected and published by the government describing the various components of national income and output in the economy.
The Department of Commerce is responsible for producing and maintaining the “National Income and Product Accounts” that keep track of GDP.

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Gross Domestic Product

Gross domestic product (GDP) is the total market value of all final goods and services produced within a given period by factors of production located within a country.

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Final Goods and Services

The term final goods and services refers to goods and services produced for final use.
Intermediate goods are goods produced by one firm for use in further processing by another firm.

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Value Added

Value added is the difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage.

In calculating GDP, we can either sum up the value added at each stage of production, or we can take the value of final sales. We do not use the value of total sales in an economy to measure how much output has been produced.

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Value Added

Value Added in the Production of a Gallon of Gasoline� (Hypothetical Numbers)
STAGE OF PRODUCTION		VALUE OF SALES		VALUE ADDED
(1)	Oil drilling	$	.50	$	.50
(2)	Refining		.65		.15
(3)	Shipping		.80		.15
(4)	Retail sale		1.00		.20
	Total value added			$	1.00

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Exclusions from GDP

GDP ignores all transactions in which money or goods change hands but in which no new goods and services are produced.

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GDP Versus GNP

GDP is the value of output produced by factors of production located within a country. Output produced by a country’s citizens, regardless of where the output is produced, is measured by gross national product (GNP).

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Calculating GDP

GDP can be computed in two ways:

The expenditure approach: A method of computing GDP that measures the amount spent on all final goods during a given period.
The income approach: A method of computing GDP that measures the income—wages, rents, interest, and profits—received by all factors of production in producing final goods.

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The Expenditure Approach

Expenditure categories:

Personal consumption expenditures (C)—household spending on consumer goods.

Gross private domestic investment (I)—spending by firms and households on new capital: plant, equipment, inventory, and new residential structures.

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The Expenditure Approach

Government consumption and gross investment (G)

Expenditure categories:

Net exports (EX – IM)—net spending by the rest of the world, or exports (EX) minus imports (IM)

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The Expenditure Approach

The expenditure approach calculates GDP by adding together these four components of spending. In equation form:

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Personal Consumption Expenditures

Personal consumption expenditures (C) are expenditures by consumers on the following:

Durable goods: Goods that last a relatively long time, such as cars and household appliances.
Nondurable goods: Goods that are used up fairly quickly, such as food and clothing.
Services: The things that we buy that do not involve the production of physical things, such as legal and medical services and education.

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Components of GDP, 1999:�The Expenditure Approach

Components of GDP, 1999: The Expenditure Approach
		BILLIONS OF�DOLLARS	PERCENTAGE�OF GDP
Total gross domestic product		9,299.2	100.0
Personal consumption expenditures (C)		6,268.7	67.4
	Durable goods	761.3	8.2
	Nondurable goods	1,845.5	19.8
	Services	3,661.9	39.4
Gross private domestic investment (l)		1,650.1	17.7
	Nonresidential	1,203.1	12.9
	Residential	403.8	4.3
	Change in business inventories	43.3	0.5
Government consumption and gross investment (G)		1,634.4	17.6
	Federal	568.6	6.1
	State and local	1,065.8	11.5
Net exports (EX – IM)		− 254.0	− 2.7
	Exports (EX)	990.2	10.6
	Imports (IM)	1,244.2	13.4
Note: Numbers may not add exactly because of rounding.�Source: U.S. Department of Commerce, Bureau of Economic Analysis.

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Gross Private Domestic Investment

Investment refers to the purchase of new capital.
Total investment by the private sector is called gross private domestic investment. It includes the purchase of new housing, plants, equipment, and inventory by the private (or non-government) sector.

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Gross Private Domestic Investment

Nonresidential investment includes expenditures by firms for machines, tools, plants, and so on.
Residential investment includes expenditures by households and firms on new houses and apartment buildings.
Change in inventories computes the amount by which firms’ inventories change during a given period. Inventories are the goods that firms produce now but intend to sell later.

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Gross Investment versus�Net Investment

Gross investment is the total value of all newly produced capital goods (plant, equipment, housing, and inventory) produced in a given period.
Depreciation is the amount by which an asset’s value falls in a given period.
Net investment equals gross investment minus depreciation.

capital_{end of period} = capital_{beginning of period} + net investment

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Government Consumption and�Gross Investment

Government consumption and gross investment (G) counts expenditures by federal, state, and local governments for final goods and services.

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Net Exports

Net exports (EX – IM) is the difference between exports (sales to foreigners of U.S.-produced goods and services) and imports (U.S. purchases of goods and services from abroad). The figure can be positive or negative.

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The Income Approach

National income is the total income earned by the factors of production owned by a country’s citizens.
The income approach to GDP breaks down GDP into four components:

GDP = national income + depreciation + (indirect taxes – subsidies) + net factor payments to the rest of the world + other

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The Income Approach

Components of GDP, 1999: The Income Approach
		BILLIONS OF�DOLLARS	PERCENTAGE�OF GDP
Gross domestic product		9,299.2	100.0
National income		7,469.7	80.3
	Compensation of employees	5,299.8	57.0
	Proprietors’ income	663.5	7.1
	Corporate profits	856.0	9.2
	Net interest	507.1	5.5
	Rental income	143.4	1.5
Depreciation		1,161.0	12.5
Indirect taxes minus subsidies		689.7	7.4
Net factor payments to the rest of the world		11.0	0.1
Other		− 32.2	− 0.3
Source: See Table 17.2.

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From GDP to Disposable Income

GDP, GNP, NNP, National Income, Personal Income, and Disposable Personal Income, 1999
		DOLLARS�(BILLIONS)
GDP		9,299.2
	Plus: receipts of factor income from the rest of the world	+ 305.9
	Less: payments of factor income to the rest of the world	− 316.9
Equals: GNP		9,288.2
	Less: depreciation	− 1,161.0
Equals: net national product (NNP)		8,127.1
	Less: indirect taxes minus subsidies plus other	− 675.5
Equals: national income		7,469.7
	Less: corporate profits minus dividends	− 485.7
	Less: social insurance payments	− 662.1
	Plus: personal interest income received from the government and consumers	+ 456.6
	Plus: transfer payments to persons	+1,011.0
Equals: personal income		7,789.6
	Less: personal taxes	− 1,152.0
Equals: disposable personal income		6,637.7
Source: See Table 17.2.

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From GDP to Disposable Income

Net national product equals gross national product minus depreciation; a nation’s total product minus what is required to maintain the value of its capital stock.

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From GDP to Disposable Income

Personal income is the total income of households. Equals (national income) minus (corporate profits minus dividends) minus (social insurance payments) plus (interest income received from the government and households).
Personal income is the income received by households after paying social insurance taxes but before paying personal income taxes.

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Disposable Personal Income and Personal Saving

Disposable Personal Income and Personal Saving, 1999
		DOLLARS�(BILLIONS)
Disposable personal income		6,637.7
Less:
	Personal consumption expenditures	− 6,268.7
	Interest paid by consumers to business	− 194.8
	Personal transfer payments to foreigners	− 26.6
Equals: personal saving		147.6
Personal savings as a percentage of disposable personal income:		2.2%
Source: See Table 17.2.

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Disposable Personal Income and Personal Saving

The personal saving rate is the percentage of disposable personal income that is saved. If the personal saving rate is low, households are spending a large amount relative to their incomes; if it is high, households are spending cautiously.

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Nominal versus Real GDP

Nominal GDP is GDP measured in current dollars, or the current prices we pay for things. Nominal GDP includes all the components of GDP valued at their current prices.
When a variable is measured in current dollars, it is described in nominal terms.

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Calculating Real GDP

A weight is the importance attached to an item within a group of items.
A base year is the year chosen for the weights in a fixed-weight procedure.
A fixed-weight procedure uses weights from a given base year.

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Calculating Real GDP

A Three-Good Economy
	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)
					GDP IN	GDP IN	GDP IN	GDP IN
					YEAR 1	YEAR 2	YEAR 1	YEAR 2
					IN	IN	IN	IN
	PRODUCTION		PRICE PER UNIT		YEAR 1	YEAR 1	YEAR 2	YEAR 2
	YEAR 1	YEAR 2	YEAR 1	YEAR 2	PRICES	PRICES	PRICES	PRICES
	Q₁	Q₂	P₁	P₂	P₁ x Q₁	P₁ x Q₂	P₂ x Q₁	P₂ X Q₂
Good A	6	11	$.50	$ .40	$3.00	$5.50	$2.40	$4.40
Good B	7	4	.30	1.00	2.10	1.20	7.00	4.00
Good C	10	12	.70	.90	7.00	8.40	9.00	10.80
Total					$12.10	$15.10	$18.40	$19.20
					Nominal GDP�in year 1			Nominal GDP�in year 2

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Calculating the GDP Price Index

The GDP price index is one measure of the overall price level.
The old procedure used by the Bureau of Economic Analysis (BEA) to estimate changes in the overall price level used the quantities produced in a chosen year (the base year) as weights. But overall price increases are sensitive to the choice of the base year. The new procedure, known as the chained price index, avoids the problems associated with the use of fixed weights.

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The Problems of Fixed Weights

Structural changes in the economy.
Supply shifts, which cause large decreases in price and large increases in quantity supplied.
The substitution effect of price increases.

The use of fixed price weights to estimate real GDP leads to problems because it ignores:

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Limitations of the GDP Concept

Society is better off when crime decreases, but a decrease in crime is not reflected in GDP.
An increase in leisure is an increase in social welfare, not counted in GDP.
Nonmarket and domestic activities are not counted even though they amount to real production.

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Limitations of the GDP Concept

GDP accounting rules do not adjust for production that pollutes the environment.
GDP has nothing to say about the distribution of output. Redistributive income policies have no direct impact on GDP.
GDP is neutral to the kinds of goods an economy produces.

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The Underground Economy

The underground economy is the part of an economy in which transactions take place and in which income is generated that is unreported and therefore not counted in GDP.

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Per Capita GDP/GNP

Per capita GDP or GNP measures a country’s GDP or GNP divided by its population.
Per capita GDP is a better measure of well-being for the average person that its total GDP or GNP.

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Per Capita GDP/GNP

Per Capita GNP for Selected Countries, 1998
COUNTRY	U.S. DOLLARS	COUNTRY	U.S. DOLLARS
Switzerland	40,080	Portugal	10,690
Norway	34,330	Argentina	8,970
Denmark	33,260	South Korea	7,970
Japan	32,380	Czech Republic	5,040
United States	29,340	Brazil	4,570
Austria	26,850	Mexico	3,970
Germany	25,850	Turkey	3,160
Sweden	25,620	South Africa	2,880
Belgium	25,380	Colombia	2,600
France	24,940	Jordan	1,520
Netherlands	24,760	Romania	1,390
Finland	24,110	Philippines	1,050
United Kingdom	21,400	China	750
Australia	20,300	Indonesia	680
Italy	20,250	Pakistan	480
Canada	20,020	India	430
Ireland	18,340	Rwanda	230
Israel	15,940	Nepal	210
Spain	14,080	Ethiopia	100
Greece	11,650
Source: The World Bank Atlas, 2000.