Slides for Part I

National Income Accounting (NIA) NIA is the measurement of aggregate or total economic activity

We measure stock variables at a specific point in time; whereas flows are measured per unit of time. Flows include: Income Sales revenue Output Stocks include: Checking account balance Balance owed on student loans Inventories We measure economic activity as a flow.

GDP is the market value of new goods and services produced in the economy in one year with the use of both domestic and foreign-owned economic resources. GDP is our basic measure of economic activity

Three approaches to measuring GDP b The value-added approach b The final goods approach b The income approach

Value-added is the increase in the market value of a good that takes place at each stage of the production -distribution process.

àStage 1: Farmer grows wheat, sells it to the Miller for 55 cents. àStage 2: Miller mills the wheat, sells it to the Baker for 85 cents--hence value-added at the milling stage is 30 cents. àStage 3: Baker bakes the bread--sells it to the supermarket for $1.45--hence value-added at the baking stage is 60 cents. àStage 4: Supermarket sells the bread to the consumer for $1.65--hence value added at the retailing stage is 20 cents.

 To count the loaf of bread in GDP, we count the final transaction only. Otherwise, we would be counting value-added twice.

Here we simply add up all expenditures for new goods and services in one year GDP = C + I + G + X Where, C is personal consumption expenditure; I is gross private domestic investment; G is government expenditure (local, state, and federal); and X is net exports, or Exports minus Imports

Definitions áCapital consumption allowance (CCA):A monetary measure of the depreciation of the capital stock in a year due to normal wear and tear, fires, or other accidents. áNet Investment: Gross Investment minus CCA. áIndirect business taxes: taxes collected by businesses for government units, such as taxes on entertainment, motels, groceries, liquor, cigarettes, or gasoline taxes. Also called excise taxes. áNet income earned abroad: Income earned by domestic residents in foreign factor markets minus income earned by foreigners in domestic factor markets.

This mainly involves summing up income earned in factor markets GDP = Wages & Salaries + interest + rent + profits - net income earned abroad + CCA + indirect business taxes

Two Approaches to U.S. GDP, 1999 b Final Goods (in billions) b Consumption $6,257 b Investment 1,623 b Government Expenditures 1,630 b Exports 998 b Imports - 1,252 b Total $9,256 b Income Approach (in billions) b Employee compensation $5,331 b Profits, rents, interest, 3,209 b Indirect business taxes 716 b Total includes capital consumption adjustment and statistical discrepancy

All data in billions of current dollars Relation of GDP to GNP, NNP, National Income, and Personal Income

All data in billions of dollars From National Income to Personal Income

Personal disposable income (PDI) Personal income $7,792 Less: Personal tax payments 1,152 Equals: PDI $6,640 PDI is the obviously one measure of ready spending power of the household sector