National Income Accounting

Measuring the total income and spending in an economy

National Income AccountingGives us information on how the economy is doingdefn: the whole process of measuring and recording various economic aggregates that give some indication of the economic health of the country over time.It is the responsibility of the governmentprovides information on economic activityused to formulate good policies

TOTAL OUTPUT The economy’s total production of goods and services is a good measure of the country’s economic well being.

AKA -- “GDP”

Gross Domestic Product

GROSS DOMESTIC PRODUCT Is the market value of all FINAL goods

and services produced in the economy during a period of time. It is a “flow concept” -- flow of output during the year.It is expressed in monetary terms $.Using money as a common denominator and adding the value in monetary terms of all items produced during the year -- “market value”.

GROSS DOMESTIC PRODUCT Example: Simple Economy

100,000 kg of potatoes at $0.50

8000 bottles of juice at $2.00

500 bikes at $50.00

GDP = $91,000

Measuring GDP

output can be measured in 2 ways

1. Income approach

2. Expenditure approach both should give the same result because the “total expenditure on the economy’s output = total income earned in producing it.

The INCOME approach Wages, rent, profit and interest make up the Canadian incomesThese four payments form the basis of GDP using the income approach. Statistics Canada uses its own classification of income: wages and salaries, corporate profits, interest income, and proprietor’s incomes (including rent).It also adds in direct taxes, depreciation , and a statistical discrepancy account.

Wages and Salaries Wages and salaries are the largest income category, representing 51% of GDP. This includes direct payments to workers in both business and government, as well s employer benefits such as contributions to employer pension funds.

Corporate Profits this includes all corporate profits declared to the government (profits paid as income tax, dividends, and retained earnings.)adjustments to the value of businesses’ unsold products are also included.

Interest Income Includes interest paid on business loans and bonds. Does NOT include interest payments made by consumers and government. (these are transfers of purchasing power)

Proprietor’s Income and Rent this includes the earnings of sole proprietorships and partnerships.The income of landlords from renting property is also included in this category.

Indirect Taxes Provincial sales taxes are charged on products rather than levied against households or business, therefore, their monetary value is NOT included in the main income components of GDP using the income approachThis value is included in the expenditure approach

Depreciation Assets such as buildings, equipment, tools, and automobiles, depreciate and need to be replaced. This is considered a cost of doing business and therefore shows up in product prices as well as the expenditure approach

Statistical Discrepancy Since businesses’ and individuals’ records might be missing or incorrect, GDP figures for the two approaches differ. Therefore, GDP is actually an estimate and will have a discrepancy. To balance the figures, Stats Canada divides the difference between the two approaches (expenditure and income approaches).

The EXPENDITURE approach Is the sum of purchases in product marketsPurchases included in GDP calculations fall under four categories: 1. Personal consumption (C), 2. Gross Investment (I), 3. Government purchases (G), 4. Net Exports (X-M).

GDP = C+I+G+(X-M)

Personal Consumption is the largest component of total spendingNon-Durable Goods such as food are consumed only onceDurable Goods such as cars and bikes are consumed repeatedly over time

Gross InvestmentThis includes purchases of assets that produce revenue -- equipment and machines used by businesses.Includes changes in the dollar value of unsold goods and materials (inventories). These are income-producing assets, therefore an increase in an economy’s inventories over a given year is positive investment spending. Similarly, a decrease in inventories is seen as negative investment spending.

Gross Investment the construction of all buildings, houses and apartments is gross investmentNet investment (gross investment minus depreciation) represents the yearly change in the economy’s stock of capital, thus is included in gross investment.

Government Purchases includes all spending by all levels of government on goods and services. (eg. Federal government buys a helicopter for the Army.)Government transfer payments, subsidies, expenditures by government agencies are excluded because these amounts are considered part of gross investment.

Net ExportsThis is the final category of purchases.Includes purchases by foreignors (exports). For example, if an Italian consumer buys a Canadian computer, or an American tourist spends a night in a Canadian hotel, the payments for these transactions remain in the Canadian flow of money, therefore contributing to GDP.

Net ExportsImports are also accounted for. For example, if a Canadian automaker buys American steel, the transaction leaves the Canadian circular flow of money. Thus, the import spending is subtracted from GDP. Stats Canada uses Net Exports (X-M) to reconcile spending inside and outside the Canadian economy in calculating GDP.

PROBLEMS WITH GDP AS A RELIABLE MEASURE

1. Does not measure all economic output

(underground economy, work at home)

2. Other Exclustions

(second hand sales, sales of stocks, bonds

(if they do not represent payments of

production)

PROBLEMS WITH GDP AS A RELIABLE MEASURE

3. Not a measure of quality of life

(excludes leisure, increase in well-being)

4. Does not measure living standards

(Does not tell us anything about the number of people who must share in the total output of Good and Services)

PROBLEMS WITH GDP AS A RELIABLE MEASUREFor example, China has a huge GDP per year, but low GDP per person, therefore it is very misleading

Real GDP per capita would tell us how much each individual in the country would receive if the total output was divided equally among them

REAL GDP per Capita = real GDP Population

OTHER ECONOMIC MEASURES1. GNP - Gross National Product

2. NDI - Net Domestic Income

3. Personal Income

4. Disposable and Discretionary Income

GNP - Gross National Product

GNP is the market value of all goods and services produced by Canadian factors, regardless of where those factors are located.

GNP focuses on the EARNINGS of Canadians

GNP - Gross National Product

Foreignors who produce in Canada are NOT included in GNP -- they are included in GDP

Canadian owned production abroad is included in GNP -- they are not included in GDP

GDP + Net Investment income from non-residents = GNP