The National Income Accounts

The National Income Accounts
Of central concern to macroeconomic analysis is a country’s gross national product
(GNP), the value of all final goods and services produced by the country’s factors of production
and sold on the market in a given time period. GNP, which is the basic measure of
a country’s output studied by macroeconomists, is calculated by adding up the market
value of all expenditures on final output. GNP therefore includes the value of goods like
bread sold in a supermarket and textbooks sold in a bookstore, as well as the value of services
provided by stock brokers and plumbers. Because output cannot be produced without
the aid of factor inputs, the expenditures that make up GNP are closely linked to the
employment of labor, capital, and other factors of production.
To distinguish among the different types of expenditure that make up a country’s GNP,
government economists and statisticians who compile national income accounts divide
GNP among the four possible uses for which a country’s final output is purchased:
consumption (the amount consumed by private domestic residents), investment (the
amount put aside by private firms to build new plant and equipment for future production),
government purchases (the amount used by the government), and the current account balance
(the amount of net exports of goods and services to foreigners). The term national
income accounts, rather than national output accounts, is used to describe this fourfold
classification because a country’s income in fact equals its output. Thus, the national
income accounts can be thought of as classifying each transaction that contributes to
national income according to the type of expenditure that gives rise to it. Figure 13-1
shows how U.S. GNP was divided among its four components in 2009.1
Why is it useful to divide GNP into consumption, investment, government purchases,
and the current account? One major reason is that we cannot hope to understand the cause
of a particular recession or boom without knowing how the main categories of spending
1 Our definition of the current account is not strictly accurate when a country is a net donor or recipient of foreign
gifts. This possibility, along with some others, also complicates our identification of GNP with national income.
We describe later in this chapter how the definitions of national income and the current account must be changed
in such cases.
296 PART THREE Exchange Rates and Open-Economy Macroeconomics
Billions
of dollars
12000
16000
0
–2000
2000
4000
6000
8000
10000
GNP
Consumption
Investment
14000
Current
account
Government
purchases
Figure 13-1
U.S. GNP and Its Components
America’s $14.4 trillion 2009 gross
national product can be broken down
into the four components shown.
Source: U.S. Department of Commerce,
Bureau of Economic Analysis.
have changed. And without such an understanding, we cannot recommend a sound policy
response. In addition, the national income accounts provide information essential for
studying why some countries are rich—that is, have a high level of GNP relative to population
size—while some are poor.
National Product and National Income
Our first task in understanding how economists analyze GNP is to explain in greater detail
why the GNP a country generates over some time period must equal its national income,
the income earned in that period by its factors of production.
The reason for this equality is that every dollar used to purchase goods or services automatically
ends up in somebody’s pocket. A visit to the doctor provides a simple example of
how an increase in national output raises national income by the same amount. The $75 you
pay the doctor represents the market value of the services he or she provides for you, so
your visit raises GNP by $75. But the $75 you pay the doctor also raises his or her income.
So national income rises by $75.
The principle that output and income are the same also applies to goods, even goods
that are produced with the help of many factors of production. Consider the example of an
economics textbook. When you purchase a new book from the publisher, the value of your
purchase enters GNP. But your payment enters the income of the productive factors that
cooperated in producing the book, because the publisher must pay for their services with
the proceeds of sales. First, there are the authors, editors, artists, and compositors who provide
the labor inputs necessary for the book’s production. Second, there are the publishing
company’s shareholders, who receive dividends for having financed acquisition of the capital
used in production. Finally, there are the suppliers of paper and ink, who provide the
intermediate materials used in producing the book.
CHAPTER 13 National Income Accounting and the Balance of Payments 297
The paper and ink purchased by the publishing house to produce the book are not
counted separately in GNP because their contribution to the value of national output is
already included in the book’s price. It is to avoid such double counting that we allow only
the sale of final goods and services to enter into the definition of GNP. Sales of intermediate
goods, such as paper and ink purchased by a publisher, are not counted. Notice also
that the sale of a used textbook does not enter GNP. Our definition counts only final goods
and services that are produced, and a used textbook does not qualify: It was counted in
GNP at the time it was first sold. Equivalently, the sale of a used textbook does not generate
income for any factor of production.
Capital Depreciation and International Transfers
Because we have defined GNP and national income so that they are necessarily equal,
their equality is really an identity. Two adjustments to the definition of GNP must be
made, however, before the identification of GNP and national income is entirely correct in
practice.
1. GNP does not take into account the economic loss due to the tendency of machinery
and structures to wear out as they are used. This loss, called depreciation, reduces the
income of capital owners. To calculate national income over a given period, we must
therefore subtract from GNP the depreciation of capital over the period. GNP less
depreciation is called net national product (NNP).
2. A country’s income may include gifts from residents of foreign countries, called
unilateral transfers. Examples of unilateral transfers of income are pension payments
to retired citizens living abroad, reparation payments, and foreign aid such as relief
funds donated to drought-stricken nations. For the United States in 2009, the balance
of such payments amounted to around –$130.2 billion, representing a 0.9 percent of
GNP net transfer to foreigners. Net unilateral transfers are part of a country’s income
but are not part of its product, and they must be added to NNP in calculations of
national income.
National income equals GNP less depreciation plus net unilateral transfers. The difference
between GNP and national income is by no means an insignificant amount, but
macroeconomics has little to say about it, and it is of little importance for macroeconomic
analysis. Therefore, for the purposes of this text, we usually use the terms GNP and
national income interchangeably, emphasizing the distinction between the two only when
it is essential.2
Gross Domestic Product
Most countries other than the United States have long reported gross domestic product
(GDP) rather than GNP as their primary measure of national economic activity. In 1991 the
United States began to follow this practice as well. GDP is supposed to measure the volume
of production within a country’s borders, whereas GNP equals GDP plus net receipts of
factor income from the rest of the world. For the U.S., these net receipts are primarily the
2 Strictly speaking, government statisticians refer to what we have called “national income” as national disposable
income. Their official concept of national income omits foreign net unilateral transfers. Once again, however, the
difference between national income and national disposable income is usually unimportant for macroeconomic
analysis. Unilateral transfers are alternatively referred to as secondary income payments to distinguish them from
primary income payments consisting of cross-border wage and investment income. We will see this terminology
later when we study balance of payments accounting.
298 PART THREE Exchange Rates and Open-Economy Macroeconomics
income domestic residents earn on wealth they hold in other countries less the payments
domestic residents make to foreign owners of wealth that is located in the domestic country.
GDP does not correct, as GNP does, for the portion of countries’ production carried out
using services provided by foreign-owned capital and labor. Consider an example: The earnings
of a Spanish factory with British owners are counted in Spain’s GDP but are part of
Britain’s GNP. The services British capital provides in Spain are a service export from Britain,
therefore they are added to British GDP in calculating British GNP. At the same time, to figure
Spain’s GNP, we must subtract from its GDP the corresponding service import from Britain.
As a practical matter, movements in GDP and GNP usually do not differ greatly. We
will focus on GNP in this book, however, because GNP tracks national income more
closely than GDP does, and national welfare depends more directly on national income
than on domestic product.