National Income Accounting
national income accounting -- the study
of the methods of measuring the aggregate output and aggregate income of
taking the nation's economic pulse -- helps
define the relationship between an economy's total output and total income
we did not take comprehensive statistics
until 1930s (Simon Kuznets - 1971 Nobel prize)
basic principle (fundamental national accounting
identity) -- the value of total output equals the value of total income
this principle implies --the
only way to increase real income is to increase real output
This point is very important! -- real income
cannot be increased without producing more, redistributing income does
nothing to increase the amount of wealth available at any point in time
fundamental national accounting identity
indicates two methods for calculating GDP
The diagram represents
flows, not tangible goods and services which could be visualized
as flowing in the opposite direction from the arrows depicted below.
The "reddish" looking
arrows illustrate the basic circular flow of money from households to firms.
These flows are the basis for much of our national income accounting.
The "bluish" arrows
leakages -- income
that is not spent on domestically produced goods and services (savings
- S, taxes - T, imports - M)
The "greenish" arrows
injections -- expenditures
that add to the circular flow of expenditure (investment -- I, government
expenditure - G, exports - X)
The injections inject
spending into the economy that is lost with the leakages.