>	Econ 100b Created 4/30/1996 Go to Brad De Long's Home Page

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Lecture Two

National Income and Product Accounts
(Economics 100b; Spring 1996)

Brad DeLong
Associate Professor of Economics, 601 Evans
University of California
Berkeley, CA 94720
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
http://www.j-bradford-delong.net

January 22, 1996

• The total income of everyone in the economy
• The total expenditure on final goods and services in the economy
• The total value added in the (marketed sectors of) the economy

How can it be all these three things at once? Because we define them that way, so that the only difference between total economy-wide incomeand total expenditure is the "statistical discrepancy".

Three parts of the "circular flow" diagram:

• Income (salaries, interest, profit, rent; received by factors of production in exchange for the provision of labor, capital, entrepreneurship and risk, and land)
• But everyone's income is someone else's Expenditure (what if you hoard--try to hide your income under the mattress; but someone else had that cash beforehand, and is thus dishoarding)
• And everyone's expenditure is for some purpose--in exchange for some Value Added

Windfall gains and losses on asset prices; increases in the value of your house; the "wealth" created by Netscape's IPO do not enter into this circular flow set of definitions at all.

Why make the definitions this way? So you can measure things a number of different ways. You can use accounting identities to check that things add up.

• Digression on the Spanish alcabala...

• The peculiar treatment of owner-occupied housing
• The peculiar treatment of government (no productivity growth: value of government output is the value of the factors of production used)
• GDP calculated quarterly; frequently revised substantially...

Conclusion: GDP is a most imperfect measure of economic activity, but its imperfections do not change much from quarter-to-quarter or year-to-year.

• Consumption (services; non-durables; durable consumption)(roughly 40%; 20%; 8% of GDP)
• Investment (depreciation; net residential investment; net non-residential investment; inventory investment)(roughly 9%; 2%; 5%; 1% of GDP)
• Government purchases of goods and services (roughly 17% of GDP)
• Net Exports (-2% of GDP these days)

Economists' peculiar definition of "investment": does not include capital gains (or losses) on property already existing. Focuses on tangible property.

• Consider when Ford Motor Company "invented" the assembly line, and spent a lot of time and resources getting it to run smoothly. That kind of "investment" does not show up in the GDP acounts.

• Gross Domestic Product vs. Gross National Product
• Gross Domestic Product vs. Net Domestic Product
• National Income = Net National Product Minus Indirect Business Taxes
• Personal Income = NI - (profits - dividends) + government transfers + (personal interest - net interest) - social insurance contributions

Some numbers relating measures of output and income:

• GDP almost identical to GNP (which is odd, given that the U.S. "owes" roughly a trillion dollars to the rest of the world)
• NNP is some 89% of GNP
• National Income is some 83% of GNP

Out of National Income:

• Wages and salaries (plus benefits and employer-provided social insurance contributions) are 75%
• Proprietors' incomes are roughly 8%
• Net rent is maybe 0.5%
• Corporate profits are 9%
• Net interest is the rest (perhaps 8%)

• For years closer to the present than the base year, real GDP tends to overstate rates of economic growth.
• For yeas further in the past than the base year, real GDP tends to understate rates of economic growth.