1 National Income and Product Accounting Gross vs. Net Domestic vs. National Product vs. Income

2 National Income and Product Accounting Gross vs. Net –Net of what??? Net of depreciation Gross Private Domestic Investment (I) includes all equipment, structures, and net additions to inventory produced in a year –But some capital stock depreciates in the process of producing this year’s output Net National Product nets depreciation from Gross National Product –NNP reflects net investment

3 National Income and Product Accounting Domestic vs. National G D P refers to all final goods and services produced within a country’s borders G N P refers to all final goods and services produced by the nationals of a country regardless of where they produce it. GNP = GDP + Net Factor Income From Abroad

4 National Income and Product Accounting Product vs. Income National Income (NI) includes the wages, interest, rents, and profits earned from producing the year’s Net National Product. –We don’t add income and product together … that would be double counting NI = NNP – Indirect Business Taxes Sales taxes are included in what we pay for things but go to the government. They’re not part of anyone’s income

5 GDP  “Output” Gross Domestic Product (GDP)Gross Domestic Product (GDP): the market value of all final goods and services produced in a country during a year. n Market Value: The worth of a thing is the price it will bring. Only Final Goods and Services Count GDP = C + I + G +X n GDP excludes financial transactions and income transfers – these do not reflect production. n GDP must be produced within our borders n Net additions to inventory are current output so they are also included in GDP.

6 Income earned from production and GDP Payments for final goods and services: n Wages and benefits paid to workers n + Proprietors’ income n + Rents n + Interest n + Corporate profits  National Income n PLUS n Indirect business taxes  NNP n PLUS n Capital consumption allowance  GNP n Minus n Net factor income from abroad  GDP

7 GDP – GNP – NNP – NI – PI – DI

8 Personal Income (PI) is national income –Plus net income received but not earned (e.g., interest on gov’t debt, transfer payments like social security) –Minus net income earned but not received (e.g., retained corporate earnings). Disposable Personal Income (DI) is PI minus personal taxes. –We divide our disposable income (DI) between consumption expenditure (C) and saving (S)