National Income Accounting NIA NIA is the measurement

National Income Accounting (NIA) NIA is the measurement of aggregate or total economic activity

We measure stock variables at a specific point in time; whereas flows are measured per unit of time. Stocks include: • Checking account balance • Balance owed on student loans • Inventories Flows include: • Income • Sales revenue • Output We measure economic activity as a flow.

GDP is the market value of new goods and services produced in the economy in one year with the use of both domestic and foreign-owned economic resources. GDP is our basic measure of economic activity

Three approaches to measuring GDP b The value-added approach b The final goods approach b The income approach

Value-added is the increase in the market value of a good that takes place at each stage of the production -distribution process.

àStage 1: Farmer grows wheat, sells it to the Miller for 55 cents. àStage 2: Miller mills the wheat, sells it to the Baker for 85 cents--hence value-added at the milling stage is 30 cents. àStage 3: Baker bakes the bread--sells it to the supermarket for $1. 45 --hence value-added at the baking stage is 60 cents. àStage 4: Supermarket sells the bread to the consumer for $1. 65 --hence value added at the retailing stage is 20 cents.

To count the loaf of bread in GDP, we count the final transaction only. Otherwise, we would be counting value-added twice.

Two Approaches to U. S. GDP, 1997 b b b Final Goods (in millions) Consumption $5, 486 Investment 1, 243 Government Expenditures 1, 453 Exports 957 Imports - 1, 058 b Total b b $8, 081 b Income Approach (in millions) Employee compensation $4, 704 Profits, rents, interest, etc. @ 2, 758 Indirect business taxes 619 Total $8, 081 @includes capital consumption adjustment and statistical discrepancy

All data in millions of current dollars

All data in millions of dollars