Chapter 2

National Income and Product Accounts

Difference Between National and Personal Income

National Income earned by all factors of

production
Personal income received by individuals,

includes transfer payments. Capital gains income not included at all.

Difference between GDP and NI is primarily

depreciation and indirect business taxes

Basic Concepts of NIPA

Product Side all goods and services purchased

for final demand (except inventory investment)

No intermediate goods or services included, since

that would be double counting

Income Side all income earned by various

factors of production
No transfer payments are included

Components of GDP
Consumption

Durables

Nondurables
Services Investment Capital Spending (Plant and Equipment) Residential Construction Inventory Investment Net Exports Exports Imports Government purchases (NOT expenditures) National defense Other Federal State and Local (mainly wages and salaries)

Consumer Spending
Durable goods: last 3 years or more

Mainly motor vehicles and appliances Nondurables: used up quickly Mainly food, gasoline, household supplies Clothing is in between, has more characteristics of a durable but not listed in that category Services: mainly housing and utilities, transportation, medical, and recreational Housing is on a rent-equivalency basis; not the actual mortgage payments

Investment Capital Spending

Producers Durable Equipment

High-Tech Equipment Computers Software Telecommunications Industrial Equipment Transportation Equipment Includes leased cars Other Equipment Natural resources Office equipment Nonresidential Construction Buildings Utilities Oil drilling Most roads, etc. in the public sector

Investment Residential Construction

New Single-Family Homes

New Multi-Family Homes

Major Additions and Alterations Brokerage Commissions

Inventory Investment
Actually not final demand, but included in GDP

because factors of production have already been paid to produce these items. Only about 1% of GDP, but accounts for more than 50% of the fluctuations in real GDP during recessions. In the 2001 recession, it accounted for more than 100%, meaning that final sales continued to rise during the downturn.

Intermediate Goods and Services

Mostly parts and materials used in the

production of final goods For example, steel for autos, cement for housing, natural gas for petrochemicals. Office supplies (paper clips) but not capital equipment, which is part of final demand Some intermediate services as well For example, airline travel and restaurant meal expenditures by businesses. If an individual made the same purchase, it would be part of final demand

National Income
Wages and salaries

Supplements to wages and salaries

Employer contributions to social security Contributions to pension plans Proprietors income Net interest income Rental income Corporate profits adjusted for IVA and CCA

Different Measures of Corporate Profits

BEA tries to measure economic profits, which

are defined as profits from ongoing operations Excludes one-time writeoffs Excludes capital gains or losses Excludes inventory profits or losses due to changes in prices Measures depreciation on an economic rather than accounting basis

Difference Between GDP and GNP

GDP includes profits from all plants located in

the U.S., whether owned by U.S. or foreign entities GNP includes profits from all plants owned by U.S. entities, whether or not they are located in the U.S. GDP is the better measure. When DaimlerBenz bought Chrysler there was no change in economic activity or production, and no change in GDP, but GNP fell.

Components of Personal Income

NOT the same as the amount of income that

individuals receive. Capital gains or losses are excluded Contributions to pensions plans are part of PI, but people generally receive and spend the money after retirement. Those payments are not included in PI. Money from refinancing your home is not included. Most interest income is not interest received on bank accounts or bonds, but the buildup of interest income in pension plans. Most of the changes in farm income are changes in physical quantities of inventories Better to use wages and salaries as a measure of spendable power than the BEA figures for personal income

What is the Personal Saving Rate?

It should be the percentage of income that

consumers save. However, because so many items are excluded from PI, it is a deficient measure. BEA figures show the personal saving rate declined sharply during the 1990s. However, BLS figures, based on survey data, show no change over the same period. The BLS figures probably provide a better indication of what really happened to consumer saving patterns.

The Concept of Value Added

NIPA is a double-entry system, but there is also a

third method of calculation. That is the value added at each stage of production. Value added for all industries in the economy is equal to GDP except for the statistical discrepancy. More important in Europe, where a specific portion of value added is taxed at each state of production.

Items Excluded from GDP and NI

All income from transfers of assets All capital gains and losses Barter of goods and services Actual mortgage payments are replaced by an estimate of what the rental value of the house would be if it were rented The underground economy. Illegal and unreported transactions. While no one knows the exact size, most estimates are put at 5% to 10% of GDP in the US, or $500 billion to $ 1 trillion.

How Useful is GDP to Business Managers?

It is the single figure most often quoted to

measure the performance of the economy However, quarterly changes include a large random element, and revisions are usually in the range of 1% to 2%. That means a 1% increase might be revised to a 1% decrease. Severe budget cutbacks in recent years have decimated the data collection effort and the quality of the data have deteriorated.