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National-income accounting refers to the measurement of aggregate economic activity, particularly national income and its components.

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Gross domestic product ( GDP ) is the total market value of final goods and services produced within a nation’s borders in a given time period. (Usually a year)

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Total Market Value means the dollar value of every one of the good or service produced during the period of time.
Final goods and service means that production is only counted in the final stage.
This is to keep things such as a car’s engine from being counted twice.

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Gross National Product ( GNP ) refers to output produced by American-owned factors regardless of location.
GDP refers to output produced within
America’s borders.

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GDP is geographically focused, including all output produced within a nation’s borders regardless of whose factors of production are used to produce it.
Japanese companies producing in America count, but not American companies abroad.

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GDP per capita is total GDP divided by total population–average GDP.
GDP per capita is commonly used as a measure of a country’s standard of living.
However, it is not always an accurate measure.

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There are three major exceptions when creating GDP.
◦ Non-Market Activities
◦ Unreported Incomes
◦ Intermediate Goods

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GDP measures exclude most goods and services produced that are not sold in the market.
◦ A homemaker who cleans, washes, gardens, shops and cooks produces goods of value.
◦ Because they are not exchanged in the market they are not included in GDP.

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The GDP statistics fail to capture market activities that are not reported to tax or census authorities.
The underground economy is motivated by tax avoidance or to conceal illegal activities.

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Intermediate goods are goods or services purchased for use as input in the production of final goods or services.
For example, the engine or chassis of a car are not counted, so as to keep them from being counted twice.

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Value added is the increase in the market value of a product that takes place at each stage of the production process.

Stages of Production
1. Farmer grows wheat, sells it to miller
2. Miller converts wheat to flour, sells it to baker
3. Baker bakes bagel, sells it to bagel store
4. Bagel store sells bagel to consumer
Total
Value of
Transactions
$0.12
0.28
0.60
0.75
$1.75
Value Added
$0.12
0.16
0.32
0.15
$0.75

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Compute the value of the final output.
Count only the production.
value added at each stage of

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Nominal GDP is the value of final output produced in a given period, measured in the prices of that period.
 Real GDP

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The base period is the time period used for comparative analysis.
From this base year, we find the GDP deflator for other years.
The GDP deflator is a measure of price changes over time.

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The general formula for computing real GDP is:
Real GDP in year t = nominal GDP in year t price index
Real GDP in 2000 =
$9,963 billion
1.02

$9,767 billion

$10000
9000
8000
7000
6000
5000
4000
3000
1980 1985
Nominal GDP
1990 1995 1996 2000

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Changes in real GDP tell us how much the economy’s output is growing.
Growth is at the expense of future output unless factors of production are replaced.

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Depreciation is the consumption of capital in the production process — the wearing out of plant and equipment.

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Net domestic product is the amount of output we could consume without reducing our stock of capital.
NDP = GDP – depreciation

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Investment is spending on (production of) new plant, equipment, and structures (capital) in a given time period, plus changes in business inventories.
The distinction between GDP and NDP is mirrored in the difference between gross investment and net investment.

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Gross investment is total investment expenditure in a given time period.
 Net investment

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The stock of capital — the total collection of plant and equipment — will not grow unless gross investment exceeds depreciation.

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The GDP accounts also tell us what mix of output has been selected, that is, society’s answer to the core issue of WHAT to produce.

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The major uses of total output conform to the four sets of market participants: consumers, business firms, government, and foreigners.

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Goods and services used by households are called consumption goods .
Consumer spending claims nearly two-thirds of our annual output.

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Investment goods are the plant, machinery, and equipment that we produce.
Also includes net inventory changes and new residential construction.

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Resources purchased by the government sector are unavailable for consumption or investment purposes.

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Exports are goods and services sold to foreign buyers.
Imports are goods and services purchased from foreign sources.

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Exports are added to GDP and imports are subtracted.
 Net Exports

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Where:
C
= Consumption expenditure
X
= exports
I
= investment expenditure
IM
= imports
G
= government expenditure

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GDP accounts have two sides.
◦ One side focuses on expenditure – the demand side.
◦ The other side focuses on income – the supply side.

VALUE OF OUTPUT
Consumer spending
Investment spending
Government spending
Net exports
Product market
VALUE OF INCOME
Factor market
Wages
Profits
Interest
Rent
Sales taxes
Depreciation

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By charting the flow of income through the economy, we see FOR WHOM the output is produced.

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Depreciation charges reduce GDP to the level of NDP (Net Domestic Product) before any income is available to current factors of production.

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Wages, interest, and profits paid to foreigners are not part of U.S. income.
They need to be flow.
subtracted from the income

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Incomes earned by U.S. citizens in other nations represents an inflow of income to U.S. households and are added .

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Once depreciation charges and indirect business taxes are subtracted from GDP and net foreign income is added, we have national income.

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National income ( NI ) is total income earned by current factors of production.
NI = NDP – indirect business taxes + net foreign factor income

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Personal income ( PI ) is the income received by households before payment of personal taxes.
Personal income = National income –
(corporate taxes + retained earnings +
Social Security taxes)
+ (transfer payments + net interest)

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Disposable income ( DI ) is the after-tax income of households.
It is personal income less personal taxes.
Disposable income = personal income – personal taxes

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Saving is that part of disposable income not spent on current consumption –disposable income less consumption.

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All disposable income is either consumed or saved.
Disposable income = Consumption +
Saving

Income flow
Gross domestic product
(GDP)
Less depreciation
Net domestic product
(NDP)
Less indirect business taxes
National income (NI)
Amount
(in billions)
$9,963
(1,257)
8,706
(770)
8,002
Income flow
National income (NI)
Less corporate taxes
Less retained earnings
Less Social Security taxes
Plus transfer payments
Plus net interest
Personal income (PI)
Less personal taxes
Disposable income
Amount
(in billions)
8,002
(284)
(244)
(827)
1,068
567
8,282
(1,292)
6,990

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To households income.
, in the form of disposable
To businesses , in the form of retained earnings and depreciation allowances.
To government , in the form of taxes.