LectureonChapter12–NationalIncomeAccountingand.docVIP

Lecture on Chapter 12 – National Income Accounting and the Balance of Payments This chapter introduces accounting concepts used by economists to describe a country’s level of production and its international transactions. National Income Accounts The GNP (Y) is the total value of all final goods and services produced by a country’s factors of production. (bread and textbooks sold, salaries paid, etc). We only use final goods to avoid double counting; don’t count the cost of the flour in a Domino’s pizza, as this is already in the cost of the pizza. Would get different numbers with more middlemen. We also don’t count sales of used products in GNP, as these have already been counted in GNP when first sold. “Produced by a country’s factors” means that if a Ford factory in Mexico is owned by a U.S. company, the profits go back to the U.S., reflecting the role that the U.S.-owned capital played in producing the final output. (If we count what is produced within U.S. borders regardless of ownership, this is GDP. GDP is not usually very different than GNP, and we will focus on GNP, as it tracks national income more closely than GDP). It is useful to break GNP down into components. Knowing how the major categories of spending have changed may help make clear the cause of a recession or boom, and facilitate a sound policy response. The four components are: Consumption (C) – Purchases by the private sector for current wants. Investment (I) – the amount put aside by private firms to build new plants and equipment for future production. Note that an individual buying stocks or bonds is not considered an investment by this economic definition. Instead, when the company you bought stock from uses the money you gave them to buy capital machinery, this is called investment. Government purchases (G) – goods and services purchased by the public sector. If a government buys tanks for a war, this is counted. However, government transfer payments such as welfare expenditure