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National Income Accounting
National Income Accounting
Accounting
Chapter 7
7-2
Laugher Curve
Three econometricians went out
hunting, and came across a large deer.
The first econometrician fired, but
missed, by a meter to the left.
7-3
Laugher Curve
The second econometrician fired, but
also missed, by a meter to the right.
The third econometrician didn't fire, but
shouted in triumph, "We got it! We got
it!"
7-4
National Income
Accounting
7-5
National Income
Accounting
7-6
National Income
Accounting
7-7
Measuring Total
Economic Output of
Gross Domestic Product (GDP) is the
Goods and Services
total market value of all final goods and
services produced in an economy in a
one-year period.
It is the single most-used economic
measure.
7-8
Measuring Total
Economic Output of
Gross National Product (GNP) is the
Goods and Services
7-9
Measuring Total
Economic Output of
GDP measures the economic activity
Goods and Services
7 - 10
Measuring Total
Economic Output of
Net foreign factor income is added to
Goods and Services
GDP to create the GNP.
Net
7 - 11
Calculating GDP
7 - 12
Calculating GDP
7 - 13
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7 - 15
Canadian Financial
Flows, Fig. 7-1, p 165
3500000
3000000
D o llars
2500000
2000000
1500000
1000000
500000
0
1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004
Years
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Two Methods of
Calculating GDP
There are two methods of calculating
GDP: the expenditure approach and the
income approach.
This is because of the national income
accounting identity.
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Fig. 7-2, p
169
Wages, rents,
interest, profits
Factor services
Goods
Firms
t
n
me (production)
n
r
e
v
Government
Taxes
Go nding
pe tment
Savin
S
gs Financial markets Inves
Imp
Personal consumption
o r ts
rt s
o
p
x
E
Other countries
Household
7 - 28
The Expenditure
Approach
The expenditure approach is shown on
the bottom half of the circular flow.
Specifically, GDP is equal to the sum of
the four categories of expenditures.
GDP = C + I + G + (X - IM)
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Consumption
7 - 30
Consumption
Consumption is the largest and most
important of the flows.
It is also the most obvious way in which
income received is returned to firms.
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Investment
The portion of income that individuals
save leaves the spending stream and
goes into financial markets.
Business spending on equipment,
structures, and inventories is counted
as part of gross private investment,
together with household spending on
new owner-occupied housing.
7 - 32
Investment
Sooner or later, plant and equipment
wears out.
This wearing-out process is called
depreciation the decrease in an
asset's value.
7 - 33
Investment
Economists differentiate between total
or gross private domestic investment
and the new investment that is above
and beyond replacement investment.
Net private investment gross private
investment less depreciation.
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Government
Expenditures
7 - 35
Government
Expenditures
7 - 36
Government
Expenditures
There is a connection between the
government and the financial markets.
If the government runs a deficit, it must
borrow from financial markets to make
up the difference.
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Net Exports
7 - 38
Net Exports
Exports to foreign nations are added to
total expenditures.
These flows are usually combined into
net exports (exports minus imports).
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Expenditure Breakdown of
GDP for Selected
Countries, Table 7-2, p 171
Country
Nominal
GDP
(billions
US$)
Personal
consumptio
n
(%of GDP)
Gross
private
investment
(% of GDP)
Government
expenditures
(% of GDP)
Exports
(% of
GDP)
750
58
18
19
42
-37
10,198
69
16
18
10
-13
760
64
21
16
10
-11
Germany
2,081
58
21
19
27
-25
Japan
4,395
60
29
10
11
-10
Pakistan
60
78
15
11
15
-19
Tunisia
21
63
28
12
42
-45
72
18
13
20
-23
Canada
U.S.
Brazil
Tanzania
Imports
(-% of
GDP)
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Qualifications to the
Income Accounting
To go from GDP to national income:
Identity
Add
Subtract
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Equality of Expenditure
and Income, fig. 7-3, p 174
Net foreign
factor income
Net exports
Government
expenditures
Depreciation
Indirect taxes-subsidies
Inventory
adjustment
Farm income
Investment
Consumption
GNP
GDP
Interest and
investment income
Profits before taxes
National
Income
Wages and
salaries
(1)
Expenditures
(2)
Output
(3)
Income
2003 McGraw-Hill Ryerson Limited.
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Some Limitations of
National Income
Although Canadian national income
Accounting
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Measurement Errors
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Measurement Errors
drug sales.
Under-the-counter sales of goods to
avoid income and sales taxes.
Work performed and paid for in cash.
Unreported sales.
Prostitution, loan sharking, extortion,
and other illegal activities.
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Measurement Errors
7 - 69
Measurement Errors
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Misinterpretation of
Subcategories
The subcategories of GDP can be
misinterpreted.
For example, the line between
investment and consumption is often
fuzzy.
7 - 71
Misinterpretation of
Subcategories
Some social scientists have developed
alternatives to GDP such as the
Genuine Progress Indicator (GPI).
The GPI tries to measure pollution,
education, health concerns, as well as
GDP.
7 - 72
Conclusion
National income accounting should be
used with sophistication.
It is a powerful economic tool that
informs average citizens about the
direction of the economy.
National Income
Accounting
End of Chapter 7
2003 McGraw-Hill Ryerson Limited.