The National Income Accounts and the Government Budget Lecture 6

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Doris Russell
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1 1 The National Income Accounts and the Government Budget Lecture 6

2 National Income and Product Accounting Income and Spending on Domestic Goods Should Add to Same Total, which is also Domestic Output All Measure the Value-Added Purchased and Provided Spending=Purchases of buying groups: households, business, government, foreign buyers Income=Earnings of all types: wages, rent, interest, dividends, retained earnings, depreciation allowances 2

3 Spending=Purchases of buying groups: households, business, government, foreign 3 Don t Double Count -- Only Final Purchases by Final User Are Added Up Deduct Purchases from Foreign Suppliers and Add Purchases by Foreign Buyers GNP/GDP = All Final Purchases by Domestic Buyers - Imports + Exports GNP=Output Produced by Factors Owned by US GDP=Output Produced in Our Borders

4 Income = Earnings of all types: wages, rent, interest, dividends, retained earnings, depreciation allowances Gross Product vs. Net Product/ Income: the difference is just depreciation, the using up of output (capital) created in earlier periods a.k.a. capital consumption allowance NNP vs National Income the difference is a set of sales-like ( excise ) taxes collected before any private sector unit calculates its income 4

5 Income = Earnings of all types: wages, rent, interest, dividends, retained earnings, depreciation allowances National Income: the economic pie sliced up among the private sector participants Households earn wages, benefits, interest, rent, and entrepreneurial income (laymen call them profits, but these are not earned by a formal corporation) Corporations earn the residual: profits, and then pay part out as dividends to households Both pay some taxes, get some transfers (negative taxes) 5

6 The Relationships among the Basic 6 Spending and Income Categories C CCA INDIRECT TAX HOUSEHOLD HOUSEHOLD WAGES WAGES GROSS DISPOSABLE (PRE-TAX) (PRE-TAX) PRIVATE- INCOME GNP NNP RENT RENT SOURCE NATIONAL ENT. INC. ENT. INC. INCOME INCOME INTEREST INTEREST PERSONAL I POST-TAX DIVIDENDS DIVIDENDS & PAYROLL G PROFIT TAX PROFIT TAX PROFITS RET. EARN. TRANSFERS HH TAXES X M GROSS... DISPOSABLE GNP DOMESTIC IMPORTS INCOME PVT. SLICES PROFITS HOUSEHOLD PLUS GOVT. HOUSEHOLD PURCHASES INCOME TRANSFERS INCOME SPENDING INCOMES

7 The Relationships among the Basic 7 Spending and Income Categories 1950 SHARES OF A $300BILLION "PIE" 1999 SHARES OF A $7500 BILLION PIE OTHER NET 17% INTEREST 1% PROFITS 18% WAGES 64% NET INTEREST 6% PROFITS 11% OTHER 11% WAGES 72%

8 The Profit Share of GDP cycles around 6%, rising when the economy strengthens 8 (as indicated by a falling unemployment rate) 8% 0 Profits as % of GDP 7% 6% 5% 4% 3% 2% 1% Profit Share of GDP Unemployment Rate Unemployment Rate (Inverted scale) 0% :1 1963:1 1966:1 1969:1 1972:1 1975:1 1978:1 1981:1 1984:1 1987:1 1990:1 1993:1 1996:1 1999:1 Note: Profit Margin defined as Profits/GDP; Falling unemployment rate is viewed as a strengthening economy

9 The Relationships among the Basic 9 Spending and Income Categories 25.0% SHARES OF US NATIONAL INCOME 75.0% 22.5% 72.5% 20.0% 70.0% 17.5% 67.5% 15.0% 65.0% 12.5% 10.0% 7.5% 5.0% 2.5% 0.0% % 60.0% 57.5% 55.0% 52.5% 50.0% PROFITS NET INTEREST OTHER WAGES (Right Scale)

10 10 The Federal Budget 1995 US FEDERAL GOVERNMENT (Approximate) $BILLION RECEIPTS SPENDING $BILLION 94 INDIRECT TAXES TRANSFERS PAYROLL 177 CORP. PROFIT GRANTS-IN-AID PERSONAL PURCHASES 524 OF GOOD & SERVICES Military-Pay $135 Military-Goods $161 Other-Pay $71 Other-Goods $73 NET SUBSIDIES 32 DEFICIT NET INTEREST 262 =$205 BILLION PAID 1429 TOTAL TOTAL 1634

11 11 State & Local Budgets 1995 STATE & LOCAL GOVERNMENTS $BILLION RECEIPTS SPENDING $BILLION 71 PAYROLL TRANSFERS INDIRECT TAXES PURCHASES 738 OF GOOD & SERVICES Construction $104 Pay $ CORP. PROFIT Other $ PERSONAL 198 FEDERAL GRANTS NET INTEREST 66 received NET SUBSIDIES 32 SURPLUS =$26 BILLION 943 TOTAL TOTAL 917

National Income Accounting

National Income Accounting Notes: Net Investment = Gross Investment Deprecation Net Indirect tax= Indirect tax subsidy NFIA (Net factor Income from abroad) = Factor Income from Abroad Factor income paid