Transcript Q: How do we measure GDP in RealitY? A: There are three

Q: How do we measure GDP in Reality?
A: There are three equivalent approaches
1. Value-Added Approach
adds up production
2. Income account
adds up claims against
across producers
value added across types of claimant
3. Expenditure Account
adds up uses of product by type of use
2013 National Accounts (billions of dollars, calendar year)
Value-Added
(loosely speaking, "supply")
Business
Nonfarm
Farm
Households and institutions
Households
Nonprofit institutions
serving households
General government
Federal
State and local
TOTAL = GDP
Addendum:
Gross housing value added
Income
12,684
12,450
234
2,079
1,177
902
2,036
667
1,369
16,800
1,558
Source: Bureau of Economic Analysis
Last Revised: Mar 27, 2014.
Expenditure
(loosely speaking, "demand")
Compensation of employees
Proprietors' income
Rental income
Corporate profits
Net interest
8,860
1,349
591
2,102
469
Personal consumption expenditures
Gross private domestic investment
nonresidential fixed
residential fixed
Change in private inventories
Indirect business taxes, net of subsidies
Business current transfer payments
Gov enterprise surplus
1,088
124
-40
Net exports of goods and services
-497
Government consumption and gross investment
3,126
Federal
1,246
State and local
1,880
Consumption of fixed capital
Net income paid to ROW
Statistical discrepancy
TOTAL = GDP
Addendum:
GNP = GDP - net income paid ROW
National Income = GNP - Consumption of
fixed capital - statistical discrepancy
2,647
-258
-132
16,800
17,057
14,543
TOTAL = GDP
11,502
2,670
2,047
517
106
16,800
Factors of Production
1. factors of production (capital and labor) help interpret the national accounts
2. preliminaries
a.
b.
stocks vs. flows
location of factors
3. factors in the income accounts
4. factors in the expenditure accounts
5. private vs. public sectors
6. factors and value-added are connected through the production function
Private vs. Public:
Principles and Measurement
1. principle: add private factors with public factors
2. practice: public investment rarely measured separately from public consumption
3. principle: add public sector value-added to private sector value-added
4. practice: public sector output not sold in the marketplace, so net value-added is
assumed to be equal to public sector labor costs. It is impossible to measure
aggregate public sector productivity
5. principle: add private factor incomes with public factor incomes
6. practice: public capital is not rented in a marketplace, so net public capital income
is assumed to be zero
7. practice: public sector output cannot be classified as final versus intermediate 
need to adjust the income accounts for “indirect taxes”
Government Spending Compared
with Public Sector NIPA Entries
1. government spending = government purchases + transfers, only purchases
included as public entry in the NIPA expenditure account
2. government purchases = purchases of items from private enterprises + purchases
of items to be used by public institutions and enterprises, but only the later are
included as pubic entry in the NIPA value-added account