The National Income Accounts

By Anne Alexander

One thing that we don’t spend as much time on in economics nowadays is national income accounting. This is just fine – a large majority of people will never ever be national income accountants. But a quick exercise to see how the national income accounts work is good to see – the national income accounts are frequently cited in the media. National income accounts are a series of accounts maintained by the U.S. Department of Commerce that show various measures of income at several "levels" of the economy. They are pretty by rote in their makeup – if you do them, you have to memorize how they are done because they’re a set of definitions. However, as Mankiw points out, don’t worry about memorizing these methods – all of the national income accounts measure well being, and GDP is the most frequently used. Just so you know how these things operate, though, here’s a quick example to show you how they work.

In order to show you the operation of national income accounts, we’ll first see a set of figures pertaining to some country (any old country) in 1997. The figures are expenditures and income categories that are frequently kept track of by the Department of Commerce. Each category’s meaning will be explained as we move along. We’ll use a step by step analysis to find each account. In each step, you’re first shown the account we’re calculating and the adjustments made to get the account. Next, we’ll define each of the adjustments. Suppose the following figures are reported for Country X in 1997:

We’ll start at the "biggest" calculations first, and work our way down:

1. 1. Nominal Gross Domestic Product = GDP = C + I + G + NX. Nominal GDP is the "income" (or expenditures) in Country X expressed in 1997 dollars, unadjusted for inflation. This is the identity you saw in your textbook, where C = personal consumption expenditures, I = gross private domestic investment, G = government expenditures, NX = exports minus imports. For Country X in 1997, GDP =$230 + $55 + $72 + ($31 – $28) = $360 million
   2. Net National Product = NNP = GDP – Depreciation. NNP is the income of Country X less depreciation, or wear and tear on capital. Yearly investment in capital that is intended to get it back up to par (repairs, upgrades, etc.) is essentially depreciation. Here, depreciation is measured by the difference between gross private domestic investment and net private domestic investment. Net private domestic investment is how much business invested in NEW capital. Therefore, the difference between this and gross investment represents how much business spent on depreciation – this is also sometimes called the capital depreciation allowance. The reason we want to take depreciation out is because it’s not really something that was spent on output – it was actually spent to keep firms up to where they were before. For Country X in 1997, NNP = $360 – ($55 – $30) = $360 – $25 = $335 million.
   3. National Income = NI = NNP – Indirect Business Taxes. NI measures how much income a nation made less taxes on business that were not levied on profits. Indirect business taxes are taxes such as payroll taxes, unemployment taxes, and so on that are not dependent on profits. For Country X in 1997, NI = $335 – $10 = $325 million.
   4. Personal Income = PI = NI + Transfers – Social Security Contributions – Corporate Taxes – Undistributed Corporate Profits. Personal income measures how much income consumers and non-corporate firms (such as small home businesses and partnerships)received over the year. Transfers are payments made by government programs to consumers such as unemployment and welfare – they are "transferred" from the less-needy to the government to the needy. Social Security Contributions are a form of personal taxes, and are therefore not included in consumer’s income UNTIL they are distributed in Social Security payments (then, they would become transfers). Corporate Taxes go to the government, not to consumers, so are not part of personal income. Undistributed Corporate Profits, or Retained Earnings, are profits that firms did not distribute through their dividend payments to households. PI measures, in the end, consumers’ and noncorporate income from wages, interest, dividends, and other sources of income. For Country X in 1997, PI = $325 + $80 – $100 – $12 – $8 = $285 million.
   5. Disposable Personal Income = DPI = PI – Personal Taxes. DPI measures how much income households and non-corporate businesses have after paying their taxes and other assessments to the government. For Country X in 1997, DPI = $285 - $15 = $270 million.

Yes, I know it’s not very fun and thrilling. However, the various national income accounts measure economic well being and are therefore quite useful. All of the accounts tend to move in the same direction as GDP (when it’s up, they’re also up, and vice versa), so most economists outside the government focus mostly on GDP. However, it’s good for you to know what the national income accounts are composed of because almost all countries in the world use it, and they are also used in contexts of valuing environmental goods in some instances. You should at least be familiar with them – but don’t worry about memorizing the methods!