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

2. We measure economic activity as a flow.
Stocks versus Flows
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:
We measure economic activity as a flow.
Checking account balance
Balance owed on student loans
Inventories

3. GDP is our basic measure of economic activity
Gross Domestic Product (GDP)
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

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

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

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

7. Don't double count!
To count the loaf of bread in GDP, we count the final transaction only. Otherwise, we would be counting value-added twice.

8. Two Approaches to U.S. GDP, 1997
Source: Bureau of Economic Analysis (
Final Goods (in millions)
Consumption $5,486
Investment ,243
Government Expenditures ,453
Exports
Imports ,058
Total $8,081
Income Approach (in millions)
Employee compensation $4,704
Profits, rents, interest, etc. @ ,758
Indirect business taxes
Total $8,081 @includes capital consumption adjustment and statistical discrepancy

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

10. From National Income to Personal Income
Source: Bureau of Economic Analaysis (
From National Income to Personal Income
All data in millions of dollars