National Income Accounts: Components of GDP, Slides of Economics

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National Income Accounting and the Balance of Payments

From Trade to Finance, From Microeconomics to Macroeconomics: What’s New?

• Unemployment
• Saving
• Trade imbalances
• Money and the price level

National Income Accounts

• A country’s national income accounts record how income is earned and spent.  Producers earn income by selling their goods and services to buyers.  Buyers spend what they earn from production.  The amount of expenditure by buyers = the income earned by sellers = the value of production.  National income is the total income earned by a nation’s factors of production.

Factors of Production

• What are factors of production?

 labor (workers),  physical capital (like factories and equipment),  natural resources, and  other

National Income Accounts: GDP

• GDP = total value added by producers located in the country  This is the production definition of GDP  Value added (by a producer) = market value of goods and services produced – market value of goods and services bought from other producers
• GDP = total income generated by domestic production  This is the income definition of GDP  Gross domestic income (GDI) is the name given to GDP when calculated by statisticians using the income definition  In theory GDP = GDI.  But in practice the numbers usually differ. This difference is called statistical discrepancy. - GDP = GDI + statistical discrepancy

National Income Accounts: GNP

• Gross national product (GNP) is the total income earned by the resources owned by the legal residents of a country in a given time period.
• GNP = GDP + income earned from foreign residents – income paid to foreign residents
• GNP = GDP + net income from foreign residents (NIF)  Gross national income: GNI = GDI + NIF = GNP, in theory  GNP = GNI + statistical discrepancy, in practice

GDP = Expenditure on final goods and services produced domestically

GDP = Cd^ + Id^ + Gd^ + EX = ( C – Cf ) + ( I – If ) + ( G – Gf ) + EX = C + I + G + EX – ( Cf^ + If^ +Gf ) = C + I + G + EX – IM = C + I + G + NX

Domestic expenditure

Net expenditure by foreigners

Cd^ is consumption spending on domestic goods. Cf^ is consumption spending on foreign goods.

Fig. 12-1: U.S. GNP and Its Components

America’s $13. trillion 2006 GNP and its components Source: US Dept of Commerce, Bureau of Economic Analysis.

GDP, GNP, GNDI: Recap

• GNDI is denoted Y
• Y = GNP + NUT = GDP + NIF + NUT = C + I + G + NX + NIF + NUT = C + I + G + CA
• In practice, net income from foreign residents (NIF) and net unilateral transfers from foreign residents (NUT) are usually very small in magnitude
• Therefore, GNDI, GNP and GDP are usually very similar in magnitude
• Therefore, often they will all be denoted by the symbol Y.

National Income Accounts

• GNP is not the only measure of a nation’s income: National Income and GDP are two other measures.
• Net National Product = GNP – Depreciation
  • Depreciation in a loss of income to capital owners. So the amount of depreciation of capital is the wear and tear of capital. This results is subtracted from GNP.
• National Income = NNP – statistical discrepancy  In theory, NNP and national income are the same  NNP is measured using the expenditure approach and national income (or Net National Income, NNI) is measured using the income approach, but they both measure the same thing  The different measuring techniques lead to the statistical discrepancy

US Current Account As a Percentage of GDP, 1960– 2004

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

1960 1965 1970 1975 1980 1985 1990 1995 2000

year Source: Bureau of Economic Analysis, US Department of Commerce

deficit

surplus

US Current Account, 1960– 2004

0

100 1960 1965 1970 1975 1980 1985 1990 1995 2000

year

billions of current dollars

Source: Bureau of Economic Analysis, US Department of Commerce

Net Foreign Wealth in U.S.

Fig. 12-2: U.S. Current Account and Net Foreign Wealth, 1976– 2006

Source: U.S. Department of Commerce, Bureau of Economic Analysis, June 2007 release

US Net Foreign Wealth = foreign assets owned by US residents – US assets owned by foreign residents