National Income and Product Accounting
• Gross vs. Net
• Domestic vs. National
• Product vs. Income
1
National Income and Product Accounting
• Gross vs. Net
– Net of what???
• Net of depreciation
• Gross Private Domestic Investment (I)
includes all equipment, structures, and net
additions to inventory produced in a year
– But some capital stock depreciates in the
process of producing this year’s output
• Net National Product nets depreciation
from Gross National Product
– NNP reflects net investment
2
National Income and Product Accounting
• Domestic vs. National
• GDP refers to all final goods and
services produced within a country’s
borders
• GNP refers to all final goods and
services produced by the nationals of a
country regardless of where they
produce it.
GNP = GDP + Net Factor Income From Abroad
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National Income and Product Accounting
• Product vs. Income
• National Income (NI) includes the wages,
interest, rents, and profits earned from
producing the year’s Net National Product.
– We don’t add income and product together
… that would be double counting
• NI = NNP – Indirect Business Taxes
• Sales taxes are included in what we pay for
things but go to the government.
• They’re not part of anyone’s income
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GDP  “Output”
• Gross Domestic Product (GDP): the market
value of all final goods and services produced
in a country during a year.
Market Value: The worth of a thing is the price it
will bring.
Only Final Goods and Services Count

GDP = C + I + G +X


GDP excludes financial transactions and
income transfers – these do not reflect
production.
GDP must be produced within our borders
 Net additions to inventory are current output
so they are also included in GDP.
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Income earned from production and GDP
Payments for final goods and services:
 Wages and benefits paid to workers
 + Proprietors’ income
 + Rents
 + Interest
 + Corporate profits  National Income


Indirect business taxes  NNP


PLUS
Capital consumption allowance  GNP


PLUS
Minus
Net factor income from abroad  GDP6
GDP – GNP – NNP – NI – PI – DI
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• Personal Income (PI) is national income
– Plus net income received but not earned
(e.g., interest on gov’t debt, transfer
payments like social security)
– Minus net income earned but not received
(e.g., retained corporate earnings).
• Disposable Personal Income (DI) is PI
minus personal taxes.
– We divide our disposable income (DI)
between consumption expenditure (C) and
saving (S)
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