CHAPTER 2A

National Income
Accounting

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 National Income Accounting
• Define GDP

• Components of GDP
– Consumption
– Investment
– Government Purchases
– Net Exports
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 • Components of National Income
– Compensation of Employees
– Proprietors’ Income
– Rental Income
– Corporate Profits
– Net Interest

• Other Measures
– Personal Income
– Personal Disposable Income

• Welfare Considerations
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 Gross Domestic Product

Gross Domestic Product is the market

value of all final goods and services
produced within a country within a
year.

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 GDP: Market Value
GDP = (Quantity of all Product) x (Market Price of the Products

Find GDP if the output of an economy is:

10,000 computers that cost $2000 each
200,000 haircuts that cost $15 each
30,000 bicycles that cost $400 each
10,000 x $2000 = $20,000,000
+ 200,000 x $15 = $ 3,000,000
+ 30,000 x $400 = $12,000,000
= GDP $35,000,000
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 GDP: Final Goods
• GDP includes the value of only final
goods sold.
– If a car produced and first sold in 2000 is
traded in and resold in 2001, the sale
counted as part of GDP in 2000, but not in
2001.
• Sales of intermediate goods are not
included in GDP.
– If McDonalds buys a bun for 10¢ and beef
for 30¢, and sells a hamburger for $1, the
contribution to GDP is $1, the value of the
final sale.
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 GDP: Within a Country
• GDP (Gross Domestic Product)
– All output produced within the borders of
the U.S., regardless of who owns the
production. (Although the company is
owned by Japanese, Hondas produced in
the U.S. count in U.S. GDP).
• GNP (Gross National Product)
– Output attributable to citizens of a
country, regardless of where the
production takes place. (Hondas produced
in the U.S. count as part of Japan’s GNP).
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 GDP: Within a Year
• GDP is a flow.
– Flow concepts are expressed per unit of time
– Firms produce a certain number of goods
and services within a period of time, usually
per week, month, quarter, or year
• Stocks are quantities measured at a
particular point in time.
– The money in your savings account on
January 1, 2001 is a stock.

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 Components of GDP

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 Components of GDP: Consumption
• Personal consumption expenditures are
the largest component of GDP, about
68%.
• Consumption expenditures are for
– Durable goods, products that last more than
one year (cars, appliances)
– Nondurable goods, products that last less
than one year (food, clothing)
– Services (medical care, insurance)

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 Components of GDP: Investment
• Investment includes:
– Business Fixed Investment
• Nonresidential - business purchases of plant and
equipment
• Residential - construction of new houses
– Change in Business Inventories
• The difference between what a firm produces
and what it sells within the year
• Economic investment does not include
purchases of stocks, bonds, and other
financial assets
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 Gross Private Domestic Investment
2000

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 Components of GDP:
Net Exports
• Net Exports
– + Spending by foreigners on U.S. production
– - Spending by U.S. consumers, businesses,
government on foreign production
• In 1998 exports were 11% of GDP, and
imports were 13% of GDP.

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 Net Exports of Goods and Services
2000

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 Components of GDP:
Government Spending
• Government Spending is divided into
Federal (35%) and State and Local
(65%) spending.
• Government expenditures may also be
classified as consumption and investment
spending.
• Government transfer payments are not
included in GDP.

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 Government Consumption and
Gross Investment, 2000

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 National Income by Type, 2000

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 Components of National Income
• Compensation of Employees
– Wages and salaries paid to individuals and employer
contributions for social security and other pension and health
funds
• Proprietors’ Income
– Earnings of sole proprietorships and partnerships
• Rental Income
– Income from property, received by households
• Net Interest
– Income private businesses pay to households that have lent
them money
• Corporate Profits
– Revenue left after compensation to employees, rents, and
interest have been paid
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 Relationship of National Income and
Personal Income, 2000

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 Disposable Personal Income
• Personal Disposable Income (PDI) is the
amount of income individuals have left
after paying all personal taxes.
• PDI is the amount of income individuals
have to spend on goods and services.

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 Welfare Considerations of Income
Accounting

• Legal nonmarket activities are excluded

from GDP.
• Illegal nonmarket activities are excluded
from GDP.
• Resource depleting activities are included
in GDP.

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