National Income Accounting (NIA). Outline: Functions of NIA Gross Domestic Product (GDP) The Value Added approach to GDP The Expenditure Approach to GDP The Factor Payments Approach to GDP Real versus Nominal GDP Problems with GDP.
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National income accounting (NIA)is the measurement of aggregate or total economic activity.
NIA is useful for assessing the performance of the macroeconomy. NIA is also helpful in evaluating the effectiveness of policy initiatives such as the Reagan tax cuts.
We measure stockvariables at a specific point intime; whereasflows are measuredper unit of time.
We measure economicactivity as aflow.
GDPis the market value of new goods and services produced in the economy in one year within the nation’s borders.
GDP is our basicmeasure of economicactivity
in the market value of a good
that takes place
at each stage of the production
To count the notebook in GDP, we count the final transaction only. Otherwise, we would be counting value added twice.
Here we simplyadd up allexpenditures fornew goods and services in oneyear
GDP = C + I + G + NX
Cis personal consumption expenditure;Iis gross private domestic investment;Gis government expenditure (local, state, and federal); andNXis net exports, or Exports minus Imports
Total spending byU.S. householdsin 1999 was astaggering $6.3trillion
Source: Economic Report of the President
Remember that investment only happens when there is production of new tangible capital goods
This mainly involves summing up incomeearned in factor markets
- net income earned abroad
+ indirect business taxes
1Includes the capital consumption allowance and statistical discrepancy
Source: Bureau of Economic Analysis (www.bea.gov
All data in billions of current dollars
All data in billions of dollars
Personal income $7,792Less: Personal tax payments 1,152Equals: PDI $6,640
PDI is the obviously one measureof ready spending powerof the household sector
Year 1(base year)
Nominal GDP = Real GDP
Year 2(quantities increase 10%)
Nominal GDP increases, Real GDP increases
Year 3(prices increase by 10%)
Nominal GDP increases, Real GDP remains constant
Nominal GDP in 1990 is computed by:
Goods & ServicesProduced in 1990 (in units)
Market Prices in 1990
Nominal GDP in 1991 is computed by:
Goods & ServicesProduced in 1991 (in units)
Market Prices in 1991
The problem is this: How do we know if the change in GDP (from ’90 to ’91) is due to a change in actual production of goods and services? That is, the increase in nominal GDP might be explained by an increase in prices.
Recessions are shaded
Notice that real GDP decreased in 1991