National Income Accounting (NIA)
NIA is the measurement
of aggregate or total
economic activity
We measure stock
variables at a
specific point in
time; whereas
flows are measured
per unit of time.
Stocks include:
•Checking account
balance
•Balance owed on
student loans
•Inventories
Flows include:
•Income
•Sales revenue
•Output
We measure
economic
activity as a
flow.
GDP is the market value of new goods and
services produced in the economy in one year
with the use of both domestic and foreign-owned
economic resources.
GDP is our basic
measure of economic
activity
Three approaches to measuring GDP
The value-added
approach
 The final goods
approach
 The income approach

Value-added is the increase
in the market value of a good
that takes place
at each stage of the production
-distribution process.
Stage 1: Farmer grows wheat, sells it to the
Miller for 55 cents.
Stage 2: Miller mills the wheat, sells it to the
Baker for 85 cents--hence value-added at the
milling stage is 30 cents.
Stage 3: Baker bakes the bread--sells it to the
supermarket for $1.45--hence value-added at the
baking stage is 60 cents.
Stage 4: Supermarket sells the bread to the
consumer for $1.65--hence value added at the
retailing stage is 20 cents.
To count the loaf
of bread in GDP,
we count the final
transaction only.
Otherwise, we
would be counting
value-added twice.
Two Approaches to U.S. GDP, 1997






Final Goods (in millions)
Consumption
$5,486
Investment
1,243
Government Expenditures
1,453
Exports
957
Imports
- 1,058

Total




Income Approach (in millions)
Employee
compensation
$4,704
Profits, rents,
interest, etc. @
2,758
Indirect business
taxes
619
$8,081

Total
$8,081
@includes capital consumption
adjustment and statistical
discrepancy
All data in millions of current dollars
Gross domestic product
Plus: Net income earned abroad
Equals: Gross national product
Less: consumption of fixed capital
Equals: Net national product
Less: Indirect business taxes
Plus: Subsidies less current surplus of
government enterprises
Equals: National income
$8,081
(20)
8,061
868
6,192
619
26
6,649.7
National Income
$6,650
Less: undistributed
corporate profits
144
Less: corporate profit taxes
249
Less: contributions
For social insurance
732
Plus: transfer payments
1,121
Equals: Personal
Income
$6,646
All data in
millions of
dollars