7 National Accounts
Objectives
- Compute measures of the economy
- Gross National Expenditure
- Gross Domestic Product
- Gross National Income
- Gross Disposable National Income
7.1 Introduction
This section studies how we measure different economies from an international perspective. We begin with Gross National Expenditure (GNE), which measures the total expenditure on final goods and services by home consumers, businesses, and government. We can think of GNE as the total ‘consumption’ of the economy. We then develop three measures using external transactions: Gross Domestic Product (GDP), Gross National Income (GNI), and Gross National Disposable Income (GNDI).
Gross Domestic Product (GDP) measures the total value of goods and services produced within a country. From an international perspective, we compute it by adding exports and subtracting imports from GNE. Gross National Income (GNI) measures the total earned income of the economy. From an international perspective, we compute it by adding factor service exports and subtracting factor service imports. Gross National Disposable Income (GNDI) measures the total disposable income of the economy. From an international perspective, we compute it by adding net unilateral transfers to GNI.
7.2 GDP Components
| Measure | Description |
|---|---|
| Consumption \(C\) | Total spending by private households on final goods and services, including nondurables |
| Investment \(I\) | Total spending by firms or households on final goods and services to make additions to the stock of capital |
| Government Expenditures \(G\) | Spending by the public sector on final goods and services |
| Trade Balance \(TB\) | Net exports of goods and services, defined as exports minus imports \(EX - IM\) |
7.3 Measures of the Economy
| Name | Measure | Formula | Description |
|---|---|---|---|
| Gross National Expenditure | GNE | \(C + I + G\) | Total expenditure on final goods and services by home consumers, businesses, and government |
| Gross Domestic Product | GDP | \(GDP = GNE + (EX - IM)\) | Total value of goods and services produced |
| Gross National Income | GNI | \[\begin{align}&GDP + (EX_{FS} - IM_{FS})\end{align}\] | Total earned income of the economy |
| Gross Disposable National Income | GNDI | \[\begin{align}&GNI + (UT_{IN} - UT_{OUT})\end{align}\] | Total disposable income of the economy |
7.3.1 Gross Domestic product
We start by develop gross domestic product, which measures the overall production of the economy. We begin with our gross national expenditure measure. We make two changes. First, we add exports because an exported product was produced but not consumed. Second, we subtract imports because imported products were consumed but not produced. This provides the total production of the economy.
7.3.2 Gross National Income
We now move to our measure of the economy’s income. We add and subtract two measures of income. First, we add factor service exports: income earned by domestic citizens abroad. This income isn’t registered domestically or in exports and imports. Second, we remove factor service imports: income paid to foreign entities for owning capital, labor, and land within the home economy.
7.3.3 Gross National Disposable Income
We move to our last measure, Gross National Disposable Income, which measures the total income resources available to the economy. This comes from net unilateral transfers, income payments that are not exchanged for a particular good or service.