ECONOMICS U$A
Episode 3

NATIONAL INCOME ACCOUNTING
PURPOSE:
To introduce the viewers to GDP and other concepts of the National Income accounts and to show how they help us understand the extraordinary growth of the U.S. economy in the 20th century.

OBJECTIVES:
1. Gross national product (GNP) in current prices is the sum of all final transactions in the product markets.
a) Gross national product in constant prices represents real GNP from which the effects of inflationary price changes have been removed.
b) GNP involves only final transactions (eliminating intermediate goods) or, equivalently, values-added (eliminating purchases by firms from other firms).

2. The total production of an economy and the total income of the economy represent two different ways of looking at the same thing, as represented in the circular flow.
a) In a simplified economy, from the product side, GNP is composed of consumer goods (C), investment goods (I) and government purchases of goods and services (C).
b) In a simplified economy, from the income side, GNP is composed of: before-tax wages and salaries, rents, interest and profits; or consumption (C), saving (S), and taxes (T).

3. The growth of real GDP and GDP per capita over this century has meant vast increases in U.S. living standards. However;
a) continued growth of GDP is not automatic, but involves continuing development of new products and methods; and
b) the growth of GNP itself involves important costs, and thus GNP is a very imperfect measure of economic well-being.

KEY ECONOMIC CONCEPTS:
circular flow, taxes, government spending
current prices, gross national product
constant prices, real vs. money, consumption, economic growth
investment, product = income, saving, double-counting.

Contemporary Issues
US Economics Growth (GNP)

In the late 1990s that was a good deal of debate about the possibility that the U.S. national income accounts over-estimated inflation and under-estimated real growth. There were at least two possible culprits. First, some analysts suggested that the little inflation that was measured in the booming high-tech markets was all due to quality improvements. Second, the national income accounts still do not have good output or productivity measures for the services sectors (which account for about 75% of the U.S. economy). Why is it important, especially from a policy perspective, to measure inflation as accurately as possible?

For a complete transcript of this video program download TVpdf#3

The Birth of GNP
It wasn’t until the Great Depression that the accounting system known as GNP was developed. When the bottom dropped out of the stock market in 1929, precipitating the Great Depression, Congress was at a loss to know how much it was really costing the American economy.

A report, National Income 1919 to 1932 was put together by a team from the Department of Commerce in response to a Congressional Demand for more information. The man called in to direct the official government study was Simon Kuznets.

One of Kuznets basic concepts was to limit measurement to the marketplace. In order to avoid inaccuracies due to counting the same money several times, Kuznets decided to use only final sales. Also, he excluded housework (cooking, cleaning, childcare) because it was too hard to measure and because of the work it represented. Illegal activities were also excluded because he considered them a disservice. He only wanted to measure the goods in society. And goods and services that are exchanged or bartered are also not included because they cannot be measured. So, money had to be paid for the product or service to be included.

On January 4, 1934, the completed report was sent to the Senate and the nation had its most comprehensive measure: one that brought home that the National income had fallen more than $40 billion since 1929. This concept, would be renamed the Gross National Product and when it was adjusted for inflation, REAL GNP would give an accurate measure of growth in the volume of the economy’s production.

Simon Kuznets was honored with the Nobel Prize for his work on national income and economic growth. The GNP is the ultimate benchmark that measures the expansion and contraction of our economy.

Comment and Analysis by Richard Gill
Analyst Richard Gill describes economic transactions by means of what economists call the circular flow. Business produce goods and services—GNP—and sell them to consumers (called households). The same households sell their services – their labor or example—to businesses that use these services to create goods and other services. The businesses pay the households for this labor, thus creating a flow of money income to the households. The households use this income to buy the goods and services produced by the businesses in a circular flow of supply and demand.

How GNP Helped Win WWII
The measurements of GNP were important tools in President Franklin D. Roosevelt’s decision to help the Allies and enter WWII. It helped him answer the critical question: how much could the economy produce and how fast and how many goods would be left over for civilian consumption.

The GNP provided data about how much of the American resources could be diverted to the war effort without jeopardizing the basic supply of food, clothing, housing, and transportation. This information also assisted in determining realistic production goals, goals such as how many planes, tanks, anti-aircraft guns could be produced.

Comment and Analysis by Richard Gill
Richard Gill directs attention toward looking at the circular flow. Production would normally flow from businesses to households who would pay for these goods with their money incomes generated by that production. Now the government steps in. At one point, we were using half our GNP for war production. And suddenly we faced a problem. Consumers still have big incomes, but they have a smaller trickle of consumer goods coming to them.

Without knowing the size of our REAL GNP, it would have been virtually impossible to judge how much war production was possible.

GNP and Pollution
In the years following WWII, the US economy was the envy of the world. Americans worked and consumed at record levels.

From 1950 to 1970, American bought 141 new cars and added thousand of miles of new roads and the GNP tripled to $977 billion.

But by the end of the 1960’s the hidden costs of growth started appearing. Automobiles were dumping 230 thousand tons of carbon monoxide a day into the air. Drilling for oil created spills which fouled beaches. Pesticides threatened wildlife.

The GNP does not take into account the cost of pollution. If we dirty the atmosphere, pollute the air, and that makes people sick, it can cause the GNP to decrease. GNP is based primarily a production measure. It doesn’t address the issue what’s better for society: increased production or a cleaner environment.

Comment and Analysis by Richard Gill
Economists when they measure GNP and its growth over time, tend to concentrate on goods and services that have market prices, numbers that can be added up, subtracted, multiplied, divided and so on.

The more intangible benefits and costs of growth, however much they affect our economic welfare, are much harder to assess. This is because there are personal evaluations of the desirability or undesirability of economic growth.