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

• GDP refers to all final goods and services produced within a country’s borders

• GNP 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 (Gross Domestic Product (GDPGDP)): the market

value of all final goods and services produced in a country during a year. Market Value: The worth of a thing is the price it

will bring.

Only Final Goods and Services Count GDP = C + I + G +X

GDP excludes financial transactions and income transfers – these do not reflect production.

GDP must be produced within our borders 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:

Wages and benefits paid to workers + Proprietors’ income + Rents + Interest + Corporate profits National Income

PLUS Indirect business taxes NNP

PLUS Capital consumption allowance GNP

Minus 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)