1. National Income Accounting
National Income and Product Accounts (NIPA) measure output and income in the U.S.
Simon Kuznets led team that established and estimated national income accounts.
Developed in 1930s at NBER and U.S. Department of Commerce
During World War II, Kuznets was an associate director at the U.S. War Production Board.

2. GDP  “Output”
Gross Domestic Product (GDP) is the market value of final goods and services produced within a country during a year.
Market Value: The worth of a thing is the price it will bring.
Only Final Goods and Services Count: Counting intermediate goods would result in double counting.
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.

4. GDP: What’s Produced
GDP includes final output sold plus goods produced but not sold.
Inventory is a firm’s stock of unsold goods.
Planned inventory changes add or reduce working capital  investment
Unplanned inventory changes are also treated as current period investment or disinvestment

5. GDP as Valued-Added

6. Two Ways of Measuring GDP
Expenditures
on Final Goods
= GDP =
Income Received for producing Final Goods

7. GDP as Expenditures (1) Components of GDP (Final expenditures):
personal consumption expenditures (C)
gross private domestic investment (I)
government purchases (G) of goods and services
net exports (X or NX) (exports - imports)
GDP = C + I + G + X

8. GDP as Expenditures: C + I + G + X

9. GDP as Expenditures Who Produces it?

10. GDP Produced by Households?
According to international convention – the System of National Accounts (SNA)
Household production included in GDP
Housing services by owner occupiers
Subsistence agriculture
Production of foodstuffs and clothing for own use
Household production not included in GDP
Care of family members
Meal preparation
Home improvements
Most household “production”

11. GDP: Income earned from production
The sum of the income (including profits) received in producing final goods and services equals value of what’s produced.
Payments include:
Wages and benefits paid to workers
Proprietors’ income
Rents
Interest
Corporate profits
Capital consumption allowance
Indirect business taxes
Net factor income from abroad  GNP

12. GDP vs. GNP
Gross Domestic Product (GDP): total value of final goods and services produced within a country … regardless of who produces it
Gross National Product (GNP): total value of final goods and services produced by the citizens (residents) of a country and by the capital stock they own no matter where it’s produced.
Earnings of Americans working abroad add to our GNP but not to our GDP
Foreign interest and profits earned by U.S. residents and firms add to our GNP but not our GDP

13. GDP (GNP) as Income

14. GDP – GNP – NNP – NI – PI – DI

15. Net National Product (NNP) is GNP net of depreciation.
NNP includes net investment, not gross investment.
National Income (NI) is income that actually goes to factors of production (wages of labor, etc.)
NI excludes indirect business taxes firms collect but don’t keep
NI also excludes depreciation that subtracts from the profits firms truly earn
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.
DI is divided between consumption expenditure (C) and saving (S)

16. Real and Nominal GDP “Real“ GDP adjusts for inflation.
Nominal GDP ($GDP) measures national output based on current prices of goods and services.
Real GDP measures of the quantity of final goods and services produced
Real GDP measures current output at constant prices
Real GDP eliminates the influence of price changes from nominal GDP.

17. Did GDP Really Increase?

18. Consumer Price Index (CPI)
measures the cost over time of a typical bundle of goods and services purchased by households.
Producer Price Index (PPI)
measures average prices received by producers over time for raw materials, intermediate, and final goods.
GDP Price Deflator (GDP Price Index, GDPPI)
measures average prices over time of all goods and services included in GDP.
includes prices of things government buys, capital goods businesses buy, things foreigners buy from us, etc.

19. Price Indexes
The value of a price index in any year indicates how prices have changed relative to a base year.
The index is 100  the percent change in prices from the base year.
CPI suffers from substitution bias
buyers change the mix of goods they buy in response to price changes.
Chain-type indexes of real GDP correct for this bias.

20. Composition of CPI: The Shopping Basket

21. GDPPI (GDP Price Deflator), CPI, and PPI