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National Income Accounting Explained

Including Intro to Balance of Payments

Here is a brief tutorial to aid newbie economists understand the constructs behind national income accounting and balance of payments (the two are related). To do so we’ll introduce the two measures of national income which most of you are familiar with: GDP (gross domestic product) and GNP (gross national product).

Gross Domestic Product (GDP): the total value of all FINAL goods and services produced in an economy (country) domestically in a given time period.

Gross National Product (GNP): the total value of all FINAL goods and services (G&S) produced by a countries factors of production (including labour) in a given time period.

Here is a calculation to help.

GNP = GDP + G&S produced by country's factors of production abroad - G&S produced by foreigners domestically.

Components of GNP are:

C (Consumption), G (Government Expenditures), NX (Net Exports, (Current Accounts)), I (Investment, (additional capital stock))

What is the current account? CA = Current Account.

if CA = 0, exports = imports and a trade balance exists.
if CA > 0, EX>IM (imports), trade surplus exists.
if CA < 0, EX

While on the subject, we mind as well discuss National Income and National Product.

GNP = National Income (change to GNP to get National Income).

National Income is basically comprised of:

- subtract depreciation
+unilateral transfers (aid, etc.)
-indirect business tax

So approximately, Y = GNP which approximately equals Income. More on National Income Accounting in our next installment.

[tags]national income accounting, current account, gdp, gnp, national income, gross domestic product, gross national product[/tags]

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