Economics 576
Macroeconomic Theory and Policy
Income Accounting
The best known and most widely used measure of the nation’s output
is Gross Domestic Product (GDP). The
following material is offered only as a very basic, elementary review of that
account, plus a very general summary of another account, National Income.
I. Gross Domestic Product
B. Defined
GDP is the total market value of
all final
goods and services produced in the economy in
one
year.
C. Explanation of key
terms/phrases
1.
total market
value - GDP is a nominal
or current dollar measure of output or
production. Thus the value that GDP
attaches
to a good or service is that
which
the market attaches to it—its
current
dollar market price.
It should be
noted that GDP may be adjusted
(through the Implicit
Price Index or GDP
Deflator) and
thus expressed in real or
constant dollar terms.
2. final goods or services - The intent
here
is to avoid double
counting - to
insure that all
output is included once
but only
once in GDP.
Final goods
or services are as
opposed
to those defined to be intermediate. The
rule
may be expressed variously eg., All
goods
purchased for resale - either
directly or
indirectly - with or
without further processing in the
physical
sense, are defined
as
"intermediate" and as such are excluded
from
GDP.
Alternatively, all transactions charged
to current cost may be defined as
intermediate.
NOTE: Final is NOT synonymous with
Finished. A good may well be finished
in a physical sense
but not final in
the
national income accounting sense,
or
even final in the national income
accounting
sense without being finished
in
a physical sense (eg., inventory
accumulation).
2.
in one year - Economic variables may be
stock
variables or flow variables.
Stock variables
are accumulated amounts
existing
at a particular point in time.
Flow variables are "per unit of
time"
variables. A flow occurs at a particular
rate
over time.
Which is GDP?
D. GDP Excludes
1. All intermediate
transactions*
2. Most nonmarket
transactions**
3. Purely financial
transactions
a.
purchases & sales of securities
b.
capital gains & losses
c.
secondhand sales
d.
transfers*** & subsidies
4. Illegal transactions
Explanations:
*Definitional
issue
**There are
four specific exceptions
i certain payments in kind
ii food & fuel produced &
consumed on farms
iii
rental value of owner-occupied homes
iv services provided by financial
intermediaries
without
direct charge
***Include generally:
i payments called "entitlements"
ii social security benefits
iii
interest on public debt
iv interest paid by consumers
Personal Consumption Expenditures
(Non-durables, durables, services)
plus Gross Private Domestic Investment
(Private sector spending only—
including
business fixed investment,
i.e., plant and equipment;
inventory
changes;
and residential construction)
plus Government Purchases of Goods and Services
(Federal, state and local government
spending
for
purchases—not transfer payments. Thus
much of
what is included in the federal budget
is NOT
included in GDP
plus Net Exports
(Exports less Imports)
_______________________________
equals: Gross Domestic Product
Note:
You may wish to check a Federal Reserve Bulletin, Department of
Commerce Internet Page, or other current periodical to examine
relative
magnitudes of the various components of GDP.
National
Income-
The account called National Income measures
the sum of incomes
EARNED by resource suppliers.
Since it is earned incomes, it excludes
all
transfer payments as well as a few non-income charges that are
included in GDP.
Compensation to employees
(wages
and salaries, tips,
sales
commissions, social
security
contributions, imputed
values…..)
plus Rental income to persons
(includes
imputed rental
value
of owner-occupied
homes,
copyright fees,
patent
fees, royalties…)
plus Net interest
(interest
on the public debt
is
treated as a transfer payment)
plus Profits
Proprietors’ incomes
Corporate profits
(dividends,
retained earnings, tax liability)
_____________________
equals: National Income