National Income

The Measurement and Struc

Economic Environment & Policy

National Income Accounting 

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Purpose: measure the performance of the economy for purposes of public policy Originated: 

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Efforts of Wesley Clair Mitchell and others to measure economic performance Response of the US government in WWII to assess the industrial potential of the economy to fight the war

Interpreting GDP 

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GDP measures flow of income, not the stock of wealth GDP does not measure the hidden economy (non market transactions) GDP is expressed in terms of the local currency. Hence, changes in the exchange rate may alter the value of GDP expressed in another country’s currency. GDP does not address changes in the composition of output GDP does not address environmental values

Other Measures of Economic Output 

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GNP=total value of all goods and services produced by the nation’s citizens GNP = GDP + NFP NFP = net factor payments from abroad= factor payments received from abroad less factor payments paid to foreigners Net national product (NNP) = GNP - depreciation National Income (NI) = NNP - indirect taxes + business transfer payments (gifts, etc)

Other Definitions 

Personal Income (PI) = NI - contributions to social insurance (FICA) - corporate profits minus dividends + personal interest income from the government and consumers + government transfer payments (e.g., unemployment insurance, relief, benefits to veterans)

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Disposable Income (Yd) = NI - personal taxes

Definitions of GDP Product approach: 

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Uses the value added concept, the value created at each stage of production Value added = value of product minus value of inputs

Income approach: GDP = Wages + Profits + Rents + Interest + Indirect Business Taxes

Expenditure Approach: GDP = PcC + PII + PGG + (PXX - PimIM)

Why the three approaches are equivalent 

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Total production=total income=total expenditures Different ways of viewing the same phenomenon

GNP versus GDP 

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GDP = total value of all final goods and services produced by the domestic economy in a given year GNP = total value of all final goods and services produced by domestic factors of production (nation’s citizens and capital) in a given year GDP = GNP – NFP NFP = net factor payments from abroad = income earned abroad by domestic factors minus the income earned domestically by foreign factors of production

Product approach 

Value added: an illustration

Contribution of One Loaf of Bread to Consumption Expenditures and Income Created

Expenditure approach:     

GDP = C + I + G + (X-IM) C = consumption expenditures I = Investment expenditures G = government expenditures X-IM= net exports

Types of Expenditures 

Consumption:   

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durable goods nondurable goods services

Investment   

inventories producer goods new construction

Income approach  

GDP = National income     

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Employee compensation Proprietor’s income Corporate profits Rental income Net interest

Indirect business Taxes Depreciation Net Factor Payments

Types of Income     

Compensation Corporate Profits Proprietor Profits Interest Rents

Nominal and Real GDP 8,000.0 Nominal GDP

7,000.0 Real GDP

5,000.0 4,000.0 3,000.0 2,000.0 1,000.0

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

1973

1971

1969

1967

1965

1963

1961

0.0 1959

Billions of Dollars

6,000.0

Converting Real to Nominal GDP  

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Nominal GDP: expressed in current dollars Real GDP: GDP produced in one year expressed in some base year prices Real GDP= nominal GDP/implicit GDP deflator Nominal GDP=PcYc Implicit GDP deflator=Pc/Pb  

where c stands for the current year, b the base year Pb is always set to 100