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Economics 301
Intermediate Macroeconomics

National Income Accounting

Winter 2000

Last updated: January 4, 2000

Note: These notes are preliminary and incomplete and they are not guaranteed to be free of errors. Please let me know if you find typos or other errors. 

Topics

• The circular flow of economic activity
• The National Income and Product Accounts (NIPA)
• Measuring Private/Public Income and Saving
• The Uses of National Saving
• Links

The circular flow of economic activity

Key identity: Production = Income = Expenditure

Example (pure coffee economy)

Roaster
	Wages					$15,000
	Taxes					$5,000
	Revenue					$35,000
		beans sold to public	$10,000
		beans sold to coffeebar	$25,000

Coffeebar
	Wages					$10,000
	Taxes					$2,000
	Beans bought from roaster		$25,000
	Revenue from coffee sold to public	$40,000

Income approach to measuring GDP

Note: profit = revenue - expenses

Total wages: $15,000 + $10,000 = $25,000
Total taxes: $5,000 + $2,000 = $7,000
Roaster profit = Revenue - Expenses = $35,000 - ($15,000 in wages + $5,000 in taxes) = $15,000.
Coffeebar profit = Revenue - Expenses = $40,000 - ($10,000 in wages + $2,000 in taxes + $25,000 in beans) = $3,000.
Total profit: $15,000 + $3,000 = $18,000.
Total income = Total Wages + Total Taxes + Total Profits = $25,000 + $7,000 +$18,000 = $50,000.

Expenditure approach to measuring GDP (expenditure on final goods only)

Intermediate good

Those goods and services that are used up in the production of other goods in the same time period that they themselves were produced

Final good

Those goods and services that are not intermediate goods or services.

Note: Beans sold to coffee bar are intermediate goods since they are used in the production of coffee sold to the public (final good).

Beans purchased by public (consumption expenditure) = $10,000
Coffee purchased by public (consumption expenditure) = $40,000
Total expenditure = $50,000 on final goods.

Production approach to measuring GDP (value added approach)

Value Added

Revenue earned by selling products minus the amount paid for intermediate goods

Intermediate goods

Goods that are used for the production of other goods (in the current year)

Roaster value added = $35,000 in revenue- $0 spent on intermediate goods = $35,000
Coffeebar value added = $40,000 in revenue - $25,000 spent on intermediate goods (beans) = $15,000
Total value added = $50,000.

The National Income and Product Accounts (NIPA)

Gross Domestic Product (GDP)

The market value of final goods and services newly produced within a nation during a fixed time period.

Three important components of the definition of GDP

• Market value
• Newly produced goods and services
• Final goods and services

Gross National Product (GNP)

The market value of final goods and services newly produced by nationals during a fixed time period.

By definition, the difference between GNP and GDP is what's called "net factor payments from abroad":

Net factor payments (NFP )

Income paid to domestic factors of production by the rest of the world less income paid to foreign factors of production by the domestic economy.

Expenditure approach

Key identity: Y = C + I + G + NX

Expenditure:					Percent of 1996 GDP

C = Consumption expenditure				68
	durable consmuption			8.3
	nondurable consumption			20.4
	services				39.3

I = Investment expenditure				14.7
	business fixed investment		10.4
		structures		2.8
		equipment		7.6
	housing					4.1
	inventory				0.2

G = Government expenditure				18.6
	federal					6.9
		defense			4.6
		nondefense		2.3
	state and local				11.7

NX = Net Exports = Exports - Imports			-1.3
	exports					11.3
	imports					12.6

Total = GDP						100

Income approach

Income category					Percent of 1996 GDP

Compensation of employees				58.7

Proprietor's income					6.8

Rental income of persons				1.7

Corporate profits					8.6

Net interest						5.3

	Total = National income			81.2

Plus Indirect business taxes				7.4

	Equals Net National Product		88.6

Plus depreciation (income paid to capital)		11.3

	Equals Gross National Product		99.9

Minus Net Factor Payments (NFP)				 0.1
	Payments in			3.0
	Payments out			3.1

	Equals Gross Domestic Product		100

Production approach (Total value added)

Production sector				Percent of 1992 GDP

Agriculture					1.9
Mining						1.6
Construction					3.9
Manufacturing					17.93
Transportation					8.84
Wholesale and Retail				15.85
Finance, insurance and real estate		18.17
Services					19.04
Government					12.59
Error						0.17

Total						100

Measuring Private/Public Income and Saving

Private disposable income: 

YD_pvt = Y + NFP + TR + INT - T

Private saving: 

S_pvt = YD_pvt - C

Net government (public) income:  

NGI = T - TR - INT

Government (public) saving:

  S_govt = NGI - G = T - TR - INT

National Saving:  

S_N = S_pvt + S_govt = Y + NFP - C - G

where

Y = GDP

C = Consumption

I = Investment

G = Government spending

T = Taxes

TR = Transfer payments

INT = Net interest payments

NFP = Net factor payments

Current account balance (CA)

Payments received from abroad in exchange for currently produced goods and services minus the analogous payments made to foreigners by the domestic economy (NX + NFP)

Decomposing national saving into private and public saving and making note that public saving is equal to the budget surplus (or minus the budget deficit) gives the final uses of saving identity: