National Income Accounting Dr. Dennis Foster

Total Expenditures Approach GDP = Gross Domestic Product Market value of final goods & services Equals the sum of … Consumption (by households) Investment (by businesses) Government (by government) Net exports (exports minus imports; by foreign sector) 2017 Q4 = $19.74 t (Current $) Top 5 have 50% of world total – US, China, Japan, Germany & France.

Consumption = Durable goods ($1.52 t) Non-durable goods ($2.89 t) Cars ($298 b), electronics, clothes, others Non-durable goods ($2.89 t) Food ($915 b), gasoline ($306 b), others Services ($9.24 t) Household consumption ($8.86 t) Housing & utilities ($2.48), health care ($2.3), transportation ($.40), recreation ($.52 t), others 2017 Q4 = $13.65 t

Gross Private Investment = Nonresidential ($2.51 t) Equipment & software ($1.14 t), structures ($564 b) Residential ($765 b) = Fixed Investment ($3.28 t) Change in business inventories ($8.8 b) 2017 Q4 = $3.29 t

FRED – Total Business Inventories Nov. 2017 $1.895 tr.

Government = Federal ($1.28 t) State and Local ($2.13 t) National defense ($760 b) State and Local ($2.13 t) Transfer payments (SS, Medicare, et. al) are not included in government expenditures. For 2017 Q4 this was $2.9 t. (annual rate). 2017 Q4 = $3.40 t

Net Exports = Exports ($2.42 t) Imports ($3.02 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. 2017 Q4 = -$599 b

FRED – Net Exports (Real $) Q4 2017 -$652 b.

FRED – Net Exports (Constant $) Q4 2017 -$599 b.

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

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

Interpreting the GDP Further rearrange to get: I = S + (T-G) + (Im-Ex) Investment comes from three sources: Private sector savings. Government “savings.” Foreign sector savings. From the 2013 ERP: Table B-32 shows private sector savings as $2.83 t (net plus CCA, 1.24 + 1.59) and government as -$1 t (net plus CCA, -1.34 + .35) and total gross domestic investment (private + government) as $2.34 t. From Table B-1, we get net exports as -$570 b, so the foreign sector saving is shown as +$570 b. Where economic growth is primarily determined by investment . . . 2011: $2.34 t ≈ $2.83 t - $1.0 t + $570 b

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 Growth = 741−662.5 662.5 2013: GDP = $662.50

GDP: Nominal vs. Real Nominal = “current dollar” value Real = “constant dollar” value Keep new quantities Use old prices Growth = 688.5−662.5 662.5

From the following information calculate: C, I, G, net X and GDP GDP – Work Problem 1 From the following information calculate: C, I, G, net X and GDP

GDP – Work Problem 2 Consider a very limited economy that is comprised of the following 6 good. We have data on prices and quantities of each good for years 1, 2 and 3. Use this to: a. Calculate Nominal GDP for each year. b. Calculate Real GDP for each year using year 1 prices. c. Calculate the nominal and real growth rates from year 1 to year 2. d. Calculate the nominal and real growth rates from year 2 to year 3.

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