Lecture 8
NATIONAL INCOME ACCOUNTING

A. Circular diagram of an economy

  • Linkages among:
    • Households
    • Firms
    • Government
    • Foreign sector

B. Measuring GDP: The Expenditure Aproach

  1. Four components of aggregate expenditure [Table 1]
    2.

    a. Consumption (C)

    • Spending on consumption goods and services
    • Examples: Mineral water, "Full Monty"

    b. Investment (I)
    • Spending on capital goods
    • Examples: Computers, 18-wheelers, houses

    c. Government spending (G)
    • Spending by the govt. on goods and services
    • Examples: Toilet seats, submarines
    • Note: G Does not include transfer payments (WHY?)

    d. Net exports (X-IM)
    • Net demand by foreigners for our goods and services
    • Exports (X): Wheat, "Baywatch"
    • Imports (IM): Cars, VCRs

  2. GDP = Aggregate expenditure

      3. Y = C + I + G + (X - IM)


C. Measuring GDP: The Factor Incomes Approach

  1. Begin with National income [Table 2]
    • Compensation of employees
    • Net interest
    • Rental income
    • Corporate profits
    • Proprietors' income

  2. Obtain Net National Product [Table 3]
    • NNP = NI + Indirect taxes - Subsidies

  3. Obtain Gross National Product
    • GNP = NNP + Depreciation

  4. Obtain Gross Domestic Product
    • GDP = GNP - Net factor income from abroad


D. Incomes

  1. National Income
    2.
    • NI = Wages + Interest + Profits + Rent + Proprietors' income

  2. Personal income
    • Personal income is the income received by, or on behalf of, all persons from all sources: from participation as laborers in production, from owning a home or business, from the ownership of financial assets, and from government and business in the form of transfers. It includes income from domestic sources as well as the rest of world. It does not include realized or unrealized capital gains or losses.
    • PI = NI - (Corporate profits taxes + Payroll taxes etc.) + Transfer payments

  3. Disposable personal income
    • Disposable personal income is the income available to persons for spending or saving. It is equal to personal income less personal current taxes.
    • DI = Personal income - Personal taxes

    Personal consumption expenditures (PCE) is the value of the goods and services purchased by, or on the behalf of, “persons” who reside in the United States.

    Personal outlays is the sum of PCE, personal interest payments, and personal current transfer payments.

    Personal saving is personal income less personal outlays and personal current taxes.

    The personal saving rate is personal saving as a percentage of disposable personal income.


E. Saving

  1. Household saving
    2.
    • S = Y - T - C

  2. Government saving
    • T - G
    • Budget surplus/deficit

  3. National saving
    • S + (T - G)

  4. Borrowing from abroad
    • IM - X
    • Trade deficit/surplus


F. The Saving-Investment Relationship

  • S = I + (G - T) + (X - IM)
Table 1. Gross Domestic Product
[billions of dollars]
Line      2001   
1       Gross domestic product 10,082.2
2 Personal consumption expenditures 6,987.0
3    Durable goods 835.9
4    Nondurable goods 2,041.3
5    Services 4,109.9
6 Gross private domestic investment 1,586.0
7    Fixed investment 1,646.3
8       Nonresidential 1,201.6
9          Structures 324.5
10          Equipment and software 877.1
11       Residential 444.8
12    Change in private inventories -60.3
13 Net exports of goods and services -348.9
14    Exports 1,034.1
15       Goods 733.5
16       Services 300.6
17    Imports 1,383.0
18       Goods 1,167.2
19       Services 215.8
20 Government consumption expenditures and gross investment 1,858.0
21    Federal 628.1
22       National defense 399.9
23       Nondefense 228.2
24    State and local 1,229.9

Table 2. National Income by Type of Income
[billions of dollars]
Line      2001   
1       National income 8,122.0
2 Compensation of employees 5,874.9
3    Wage and salary accruals 4,950.6
4       Government 810.8
5       Other 4,139.8
6    Supplements to wages and salaries 924.3
7       Employer contributions for social insurance 353.9
8       Other labor income 570.4
9 Proprietors' income with inventory valuation and capital
    consumption adjustments		 727.9
10    Farm 19.0
11       Proprietors' income with inventory valuation
          adjustment		 26.7
12       Capital consumption adjustment -7.7
13    Nonfarm 708.8
14       Proprietors' income 621.6
15       Inventory valuation adjustment .9
16       Capital consumption adjustment 86.3
17 Rental income of persons with capital consumption adjustment 137.9
18    Rental income of persons 204.4
19    Capital consumption adjustment -66.5
20 Corporate profits with inventory valuation and capital
    consumption adjustments		 731.6
21    Corporate profits with inventory valuation adjustment 675.1
22       Profits before tax 670.2
23          Profits tax liability 199.3
24          Profits after tax 470.9
25             Dividends 409.6
26             Undistributed profits 61.2
27       Inventory valuation adjustment 5.0
28    Capital consumption adjustment 56.5
29 Net interest 649.8
   Addenda:
30    Corporate profits after tax with inventory valuation
       and capital consumption adjustments		 532.3
31    Net cash flow with inventory valuation and capital
       consumption adjustments		 911.8
32       Undistributed profits with inventory valuation and
          capital consumption adjustments		 122.7
33       Consumption of fixed capital 789.1
34    Less: Inventory valuation adjustment 5.0
35    Equals: Net cash flow 906.8

Table 3. Gross Domestic Product, Gross National Product, Net National Product, National Income, and Personal Income
[billions of dollars]
Line      2001   
1 Gross domestic product 10,082.2
2 Plus: Income receipts from the rest of the world 316.9
3 Less: Income payments to the rest of the world 295.0
4 Equals: Gross national product 10,104.1
5 Less: Consumption of fixed capital 1,329.3
6             Private 1,106.8
7                Capital consumption allowances 1,168.4
8                Less: Capital consumption adjustment 61.6
9             Government 222.4
10                General government 187.7
11                Government enterprises 34.8
12 Equals: Net national product 8,774.8
13 Less: Indirect business tax and nontax liability 774.8
14          Business transfer payments 42.5
15          Statistical discrepancy -117.3
16 Plus: Subsidies less current surplus of government
    enterprises		 47.3
17 Equals: National income 8,122.0
18 Less: Corporate profits with inventory valuation and
    capital consumption adjustments		 731.6
19          Net interest 649.8
20          Contributions for social insurance 726.1
21          Wage accruals less disbursements .0
22 Plus: Personal interest income 1,091.3
23          Personal dividend income 409.2
24          Government transfer payments to persons 1,137.0
25          Business transfer payments to persons 33.4
26 Equals: Personal income 8,685.3
   Addenda:
27    Gross domestic income 10,199.4
28    Gross national income 10,221.4
29    Net domestic product 8,752.9

Source: Bureau of Economic Analysis

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