econ 202: chapter 5

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Chapter 05:National Income Accounting

Copyright © 2013 by The McGraw-Hill Companies, Inc !ll rights reser"e# McGraw-Hill$Irwin

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National Income Accounting

• In order to formulate a policy to “x” aproblem, decision makers need toidentify the extent of the problem. – To measure economic performance.

• National income accounting as createdto pro!ide ansers to the folloing" – #o much output is being produced$ %hat

is it being used for$ – #o much income is being generated in the

marketplace$ – %hat&s happening to prices and ages$

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'earning (b)ecti!es

• *+*-. no hat /01 measures 2and hat it doesn&t.

• *+*3. no the di4erence beteenreal and nominal /01.

• *+*5. no hy aggregate income

e6uals aggregate output.• *+*7. no the ma)or submeasures

of output and income.

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8easures of (utput

• 9ach good and ser!ice produced andbrought to market has a price, hich

ser!es as a measure of its !alue.• Gross domestic product (GDP):

the total dollar !alue of all nal

output produced ithin a nation&sborders in a gi!en time period,usually one year.

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%hy “:inal (utput”$

• /01 measurements excludeintermediate goods. – Intermediate goods: goods or ser!ices

purchased for use as an input in theproduction of nal goods or in ser!ices.

– Value added: the increase in the market!alue of a product that takes place at each

stage of production.• The !alue added by each intermediate

good is captured in the market price ofthe nal good produced.

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The 8easurement of (utputLast Year’s Output Amount This Year’s Output Amount

In physical terms In physical terms

Oranges 2 billion Oranges 3 billion

Bicycles 2 million Bicycles 4 million

Rock concerts !! Rock concerts "!!

Total# ? Total# ?

In monetary terms In monetary terms

2 billion oranges $ %!&2! each %4!! million 3 billion oranges $ %!&2! each %"!! million

2 million bicycles $ %'! each (!! million 4 million bicycles $ %'! each 2!! million

!! rock concerts $ %( million each !! million "!! rock concerts $ %( million each "!! million

Total# %(2!! million Total# %(4!! million

It is impossible to add up all output hen output is counted in physical terms.Accordingly, total output is measured in monetary terms, ith each good orser!ice !alued at its market price.

Last Year’s Output Amount This Year’s Output Amount

In )hysical Terms In )hysical Terms

Oranges 2 billion Oranges 3 billion

Bicycles 2 million Bicycles 4 million

Rock concerts !! Rock concerts "!!

Total# ? Total# ?

In *onetary Terms In *onetary Terms

2 billion oranges $ %!&2! each %4!! million 3 billion oranges $ %!&2! each %"!! million

2 million bicycles $ %'! each (!! million 4 million bicycles $ %'! each 2!! million

!! rock concerts $ %( million each !! million "!! rock concerts $ %( million each "!! million

Total# %(+2!! million Total# %(+4!! million

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International

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/01 per

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8easurement 1roblems

• Nonmaret acti!ities: /01 measuresexclude most goods and ser!ices producedbut not sold in the market.

• 1roduction not included" – =npaid production done at home or by

!olunteer orkers. – =nreported production done “o4 the books” or

in the underground economy.

• The o?cial /01 measurement signicantlyunderstates actual production in thecountry.

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@eal /01 and Nominal /01

• A signicant use of /01 is to measure hoproduction changes from year to year.

• 1rice changes from year to year make itdi?cult to compare one year&s /01 iththe next year&s /01. – oth output le!els and prices can change. – %e ant to see only the change in output

le!els. – ecause of this, e must remo!e the e4ects ofprice changes from the /01 measurements.

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@eal /01 and Nominal /01

• Nominal GDP: the !alue of nal outputproduced in a gi!en period, measured inthe prices of that period Bcurrent pricesC. – The e4ects of price changes are included.

• "eal GDP: the !alue of nal outputproduced in a gi!en period, ad)usted forchanging prices. – The e4ects of price changes are remo!ed.

• The current year market !alues arerecalculated in base year dollars.

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9xercise -

•

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9xercise 3

•

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Net 0omestic 1roduct

• Net domestic product (NDP): /01 lessdepreciation.

• %hen e produce, e ear out some of ourcapital, hich must be replaced.

– 0epreciation measures the !alue of capital e useup.

• N01 is the amount of output e couldconsume ithout reducing our stock of capital.

NDP % GDP Depreciation

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Net 0omestic 1roduct

• The distinction beteen /01 and N01is mirrored in the di4erence beteengross in!estment and net in!estment" – Gross in!estment: total in!estment

expenditure in a gi!en time period.

– Net in!estment: gross in!estment lessdepreciation.• %hen net in!estment is positi!e, the economy

gros.

• %hen net in!estment is negati!e, the economydeclines.

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The circular flow of nations economy

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*$pes o+ Income *$pes o+ ,&penditure'and" @ent #ouseholds"

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The =ses of (utput

• The users of output indicate hat mix ofoutput has been selected Bansering %#ATto produceC" –

Consumption (C): goods and ser!ices usedby households Babout tothirds of /01C.

– In!estment (I): plant, machinery, ande6uipment produced Babout -+O of /01C.

– Go!ernment spending (G): resourcespurchased by the public sector Babout onefthof /01C.

– Net e&ports (- .): the !alue of exports BCminus the !alue of imports B8C.

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Net 9xports

• Imports (.): goods and ser!ices madein foreign lands but purchased in the=nited Ltates.

• ,&ports (-): goods and ser!icesproduced in the =nited Ltates butpurchased in foreign lands.

• %e add exports to our /01, butsubtract imports from our /01.

• The di4erence beteen exports andimports is called net exports B 2 8C.

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/01

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8easures of Income

• There are to ays to measure /01"

– 8easure expenditures Bdemand sideC.

– 8easure income Bsupply sideC.• The total !alue of market incomes must

e6ual the total !alue of nal output, or/01.

• y tracking income in the economy, esee :(@ %#(8 the output is produced.

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The 96ui!alence of 9xpenditure andIncome

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8easures of Income

• (utput F Income.

• The spending that establishes the

!alue of output also determines the!alue of incomes.

• %e can track the distribution of funds

from /01 to disposable income.

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:rom /01 to 0isposable

Income• /01 2 0epreciation F Net domestic

product BN01C

• N01 M Net foreign factor income FNational income BNIC

• National income (NI) is the total

income earned by =.L. factors ofproduction.

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Income• There are se!eral ad)ustments that ha!e to be

made to national income in order to get to personalincome.

• Lubtract – Indirect business taxes.

–

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Income• Personal income (PI) is pretax income

recei!ed by households.• Disposa1le income (DI) is hat

remains of personal income after taxesare paid. – 1I 2 1ersonal taxes BTC F 0I.

• %e can do to things ith our 0I" spend it

or sa!e it. – 0I F

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Income Lummary

• #ouseholds recei!e personal incomeB1IC as payment for the resources theyon and pro!ide.

• #o do households dispose of theirIncome$ – They spend" consumption B

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The :lo of Income

• /01, on the income side, ends updistributed in this ay"

– To households, in the form of disposable income.

• @eturned to /01 as consumer spending.

– To businesses, in the form of retained earningsand depreciation alloances.

• @eturned to /01 as business in!estment spending.

– To go!ernment, in the form of taxes.

• @eturned to /01 as go!ernment spending.

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The 9conomy Tomorro

• Puality of life.

• 0o the /01 accounts tell us anything about the6uality of life$

– /01 per capita is one measure of the standard ofli!ing.

– It, hoe!er, ignores intangible pleasures thatimpro!e the 6uality of life.

–

Locial ellbeing and economic ellbeing aren&talays synonymous.

– The 6uality of life depends on hat specic mix ofgood and ser!ices that /01 includes.

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@e!isiting the 'earning

(b)ecti!es• *+*-. no hat /01 measures 2 and

hat it doesn&t.

–It measures annual output and income >os.

– There are se!eral forms of production thatare not included.

– It is measured in dollar terms, so there must

be a correction made for price changes. Thecorrected !alue is called real /01.

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(b)ecti!es• *+*3. no the di4erence beteen

real and nominal /01.

– Nominal /01" as measured ith thee4ects of price changes included.

– @eal /01" the e4ects of price changesha!e been remo!ed.

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(b)ecti!es• *+*5. no hy aggregate income

e6uals aggregate output.

– All income generated by market sales 2that is, /01 2 is recei!ed by someone.

– Thus the !alue of aggregate outputmust e6ual the !alue of aggregateincome.

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(b)ecti!es• *+*7. no the ma)or submeasures of

output and income. – Net domestic product" N01 is /01 less

depreciation. – National income" NI is N10 plus net foreign

factor income. – 1ersonal income" 1I is NI less se!eral taxes

and corporate prot plus transfer paymentsand capital income.

– 0isposable income" 0I is 1I less personalincome taxes.

econ 202: chapter 5

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