National Income Accounting Dr. Dennis Foster

Total Expenditures Approach GDP = Gross Domestic Product GDP = Gross Domestic Product Market value of final goods & services Equals the sum of … – Consumption – Consumption (by households) – Investment – Investment (by businesses) – Government – Government (by government) – Net exports – Net exports (exports minus imports; by foreign sector) 2012 = $15.7 t

Consumption = Durable goods Durable goods ($1.22 t) – Cars ($410 b), electronics, clothes, others Non-durable goods Non-durable goods ($2.56 t) – Food ($830 b), gasoline ($440 b), others Services Services ($7.34 t) – Household consumption ($7.0 t) Housing & utilities ($1.9), health care ($1.8), insurance ($.8 t), others 2012 = $11.12 t

Gross Private Investment = Nonresidential Nonresidential ($1.68 t) – Equipment & software ($1.16 t), structures ($460 b) Residential Residential ($383 b) = Fixed Investment = Fixed Investment ($2.0 t) Change in business inventories Change in business inventories ($57.7 b) 2012 = $2.06 t

FRED – Total Business Inventories

Government = Federal Federal ($1.2 t) – National defense ($810 b) State and Local State and Local ($1.85 t) Transfer payments (SS, Medicare, et. al) are not included in government expenditures. For 2012 this was $2.4 t = $3.06 t

Net Exports = Exports ($2.2 t) Imports ($2.7 t) This category can be negative! What happens if we import more than we export? The difference must be used to buy U.S. real/financial assets. -$560 b 2012 = -$560 b

FRED – Net Exports (Constant $ & not)

Linking Expenditures to Incomes GDP, GNP, NNP and NI (2011) GNP GNP = GDP + income inflow - income outflow $15.33 t = $15.07 t + $.78 t - $.53 t NNP NNP = GNP – Depreciation $13.39 t = $15.33 t - $1.94 t [Depreciation includes that on gov’t.] National Income National Income = NNP – misc. $13.36 t NI NI = wages + rent + profits + interest + IBT $8.3 $1.65 $1.83 $.53 $1.1 in trillions of $

All Government Receipts & Expenditures Billions of $, seasonally adjusted, annual rates

Federal Government Receipts & Expenditures Billions of $, seasonally adjusted, annual rates

Interpreting the GDP From the circular flow, we get: Income = Y = C + S + T Income = Expenditures Y = C + I + G + (Ex-Im) Substitute, cancel C and rearrange to get: S + T + Im = I + G + Ex Leakages = Injections

Further rearrange to get: I = S + (T-G) + (Im-Ex) Investment comes from three sources: – Private sector savings. – Government “savings.” – Foreign sector savings. Where economic growth is primarily determined by investment : $2.34 t ≈ $2.83 t - $1.0 t + $570 b Interpreting the GDP

GDP as the sum of “values added” Finding C, I, G and net X is difficult. Values are estimated based on statistical analysis. GDP is calculated by adding up all values added. VA = (sales revenue) – (cost of inputs) This data is obtainable from tax info.

GDP: Nominal vs. Real Nominal = “current dollar” value Real = “constant dollar” value

GDP: Nominal vs. Real Nominal = “current dollar” value Real = “constant dollar” value

GDP: Nominal vs. Real Nominal = “current dollar” value Real = “constant dollar” value Use old prices Keep new quantities

Next – GDP Issues What are we really measuring? What are we trying to measure? How good a job to we do at this? What gets left out? Are there better measures? Why do we even want to measure economic activity?

National Income Accounting Dr. Dennis Foster

From the following information calculate the GDP GDP – Work Problem