National Income Accounting and the Balance of Payments
National Income Accounts
Gross National Product is the value of all final goods and services produced by its factors of production and sold on the mkt in a given time period. It can be divided into: 1. consumption 2. investment 3. govn’t purchase 4. current account balance
Capital Depreciation and National Transfers
GNP has to be equal to national income. In order for this to hold we need to make some adjustments.
1. GNP doesn’t take into account the economic loss due to the tendency of machinery and structures to wear out as they are used – depreciation. It tends to reduce the income of capital owners.
GNP – depreciation = Net National Product 2. Unilateral transfers are pensions to retired citizens living abroad, foreign aid, etc. 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 = NNP + Unilateral Transfers
Gross Domestic Product
The gross domestic product (GDP), a basic measure of an economy's economic performance, is the market value of all final goods and services produced within the borders of a nation in a year. GDP is supposed to measure the volume of production within a country’s borders. GNP = GDP + net receipts of factor income from the rest of the world. The net receipts are primarily the 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 doesn’t correct (GNP does) for the portion of countries’ production carried out using services provided by foreign-owned capital.
NATIONAL INCOME ACCOUNTING FOR AN OPEN ECONOMY
Consumption – the portion of GDP purchased by private households.
Investment – the part of output used by private firms to produce future output is called investment.