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National Income Accounting National Income Accounting
Depression—Surprise!Depression—Surprise!
After being blind-sided by the Great Depression, policymakers decidedthat they needed measures of economic activity.
A Keynesian economist, Simon Kuznets, was charged with establishingthe methodology for this in the late 1930s.
Kuznets later received the Nobel Prize for his efforts.
National Income Accounting National Income Accounting
The framework that summarizes and categorizes productiveactivity over a specific period of time, usually a year.
The National Income and Product Accounts (NIPA) is the “tableof accounts” for maintaining this information in the U.S.
GDP – “Output”GDP – “Output”
Gross Domestic Product (Gross Domestic Product (
GDP GDP
)) is the market value of final goods and servicesproduced within a country during a specific time pe
riod, usually a year.
s
Valued at Market Value
s
Only Final Goods and Services Count
:
Sales at intermediate stages of production are not counted as their value is embodied within thefinal-user good. Their inclusion would result in double counting.
s
Excludes financial transactions and income transfers
since these do not reflect production.
s
Must be produced within the geographic boundaries of the country.
s
Net additions to inventory
are current period output so are also included.
Final Goods and ServicesFinal Goods and Services
•
The term
final goods and services
in GDP refers to goods andservices produced for final use.
•
Intermediate goods
are goods produced by one firm for use in further processing by another firm.
GDP as Output ProducedGDP as Output Produced
GDP includes all output sold
plus
all goods produced but not sold.
Inventory is a firm’s stock of unsold goods
.
–
Planned inventory changes reflect management’s decision to add to or to reduce its on-hand stock.
–
Unplanned inventory changes reflect the results of unexpected salesvariations.
GDP as Valued-AddedGDP as Valued-Added
•
Value added
is the difference between the value of goods as theyleave a stage of production and the cost of the goods as they enteredthat stage.
•In calculating GDP, we can either sum up the value added ateach stage of production, or we can take the value of final sales.
Exclusions of Used Goods and PaperExclusions of Used Goods and Paper TransactionsTransactions
•GDP ignores all transactions in which money or goods change hands but in which no new goods and services are produced.
Exclusion of Output Produced Abroadby Domestically Owned Factors of Production
•
GDP is the value of output produced by factors of production locatedwithin a country. Output produced by a country’s citizens, regardlessof where the output is produced, is measured by gross national product (GNP
).
The Underground Economy
•
The
underground economy
is the part of an economy in whichtransactions take place and in which income is generated that isunreported and therefore not counted in GDP.
Two Methods of Computing An Economy’sTwo Methods of Computing An Economy’s IncomeIncome
Expenditure Approach
:
–
Sum the total expenditures by households (from the topportion of the circular flow).
Resource Cost or Income Approach:
–
Sum the total wages and profit paid by firms for resources(from the bottom portion of the circular flow).
Expenditureson Final Goods= GDP =Income Received forproducing Final Goods
GDP as ExpendituresGDP as Expenditures
ss
GDP is the sum of expenditures on final user goods and services byGDP is the sum of expenditures on final user goods and services by households, investors, governments, and foreigners (net).households, investors, governments, and foreigners (net).
ss
There are four components of GDP:There are four components of GDP:
ss
personal consumption expenditures (C), personal consumption expenditures (C),
ss
gross private domestic investment (I),gross private domestic investment (I),
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