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National Income Accounting
The statistics for Gross Domestic Product (GDP) are
computed as part of the National Income and Product
Accounts. This national accounting system, developed during
the 1940s and 1950s, is the most ambitious collection of
economic data by the United States government and is the
source of much of the information we have about the economy.
Like business accounting, national-income accounting uses a
double-entry approach. Because each transaction has two
sides, involving both a sale and a purchase, there are two
ways to divide up GDP. One can look at the expenditures for
output, or one can look at the incomes that the production of output generates.
Let us look at how this double-entry system works.
Suppose you are a computer programmer who creates a game
that you distribute over the Internet. You have no costs of
packaging--you only input is your skill and time as a
programmer. Lots of teenagers buy your game and you earn
$50,000 dollars for the year. You have produced something of
value. How should we account for this production?
The double-entry system says that the expenditures made
on the product, which is the source of funds to the
producer, should equal the uses of funds by the producer,
which are the incomes that flow from production. Because
ordinary people bought this game, the expenditures made are
by households. They are called consumption
expenditures. We will increase them by $50,000. You pay
yourself, but is what you earn wages or profit? For an
unincorporated business there is a special category for
earnings called proprietors' income, and it will increase by $50,000
Expenditures Made on Output
(Source of Funds)
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Incomes Generated in Production
(Uses of Funds)
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Consumption $50000
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Proprietors' Income $50000
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Suppose instead that you incorporate yourself as a
business and your product is educational software sold only
to public schools. What will change? The expenditures are no
longer consumption because they are not made by the
household sector. There are three other sectors of the
economy used in national income accounting: government,
business, and the rest of the world. Public schools are an
important part of the government, so now these sales will be
classified as government expenditures. Since you are
incorporated, you will have to file a tax form that
separates wages from your profit. Suppose you tell the IRS
that you paid yourself $40,000 and that the profit of your
business was $10,000. On the Income side of the accounts,
employee compensation goes up $40,000 and
corporate profits goes up $10,000.
Expenditures Made on Output
(Source of Funds)
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Incomes Generated in Production
(Uses of Funds)
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Government Spending $50000
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Employee Compensation $40000
Corporate Profit $10000
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Finally, suppose you retire and receive $15,000 per year
from Social Security. What will we do in this case? The
answer is, "Nothing," because nothing has been produced.
This income is a transfer payment. It was taken from
someone through taxes (euphemistically called a contribution
in the case of Social Security, but there was nothing
voluntary about it) and given to you. In an exchange, both
parties must give to get. In a transfer, one party gives and
the other gets--no service or product is returned to the giving party.
Now that we have seen the logic behind these accounts, let us see what they look like in a bit more detail.
Copyright Robert Schenk
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