National Accounts Essay

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Science advances through the interaction between theory and measurement. Without  appropriate  measurement, there is no way to assess the accuracy of theory quantitatively.  Thus, it is no  surprise  that  efforts to measure economic activity date back centuries. Among the early attempts to gauge national income were those of William Petty in the 17th century. By today’s standards, Petty’s statistics were extremely simplified, but the genesis of the idea was there. Nearly a century later, François Quesnay developed his Tableau Économique, which analyzed intersectoral  flows. Quesnay’s Tableau was a forerunner of modern day input-output analysis of the type pioneered  by Wassily Leontief and is still practiced to this day.

The next major advances in national income accounting  came  in the  early 20th  century.  Economists  on both  sides of the  Atlantic  began to break down  systematically  the  income  and  expenditures of the national economy into categories such as consumption, saving, investment,  government,  and trade. Motivation for the development of the national accounts  during  this  period  was the  desire  among policy makers for accurate, timely information  about the  performance  of the  economy  during  the  Great Depression and World War II.

  1. L. Bowley and Colin Clark performed some of the early work in this area in the United Kingdom, but British efforts to create a system of national accounts took a giant step forward with the work of Richard Stone. Working with Clark and others in the British government during  the  World  War  II years, Stone helped create the major definitions used in national income  accounting   and  set  up  the  basic  balance sheet concepts. The basic categories of spending and income were quickly incorporated into the growing body of macroeconomic theory research.

In  the  United  States  in  1913, the  first  director of research at the National Bureau of Economic Research, Wesley C. Mitchell, created one of the first definitive treatises on the business cycle. Though it was not actually national  income accounting  as we know  it  today,  Mitchell’s work  aimed  to  quantify cyclical behavior in different sectors. Mitchell’s student  Simon Kuznets would carry the work further and  complete  a  system  of national  accounts  that resembles the system currently in use.

Both Kuznets and Stone received the Sveriges Riksbank Prize  in  Economic  Sciences in  Memory of  Alfred  Nobel  (Kuznets  in  1971  and  Stone  in 1984). Stone’s Nobel citation specifically singles out his  work  on  national  accounts.  Kuznets  received the  prize  for  his  empirical  research  on  economic growth—research  that was informed and shaped by his work on national accounts.

Methodology

The crucial measure for any system of national accounts is gross domestic product  (GDP), the value of final goods and services produced in a country in a year. GDP has replaced gross national product (GNP) as the primary indicator  for countries  in the United Nations  (UN) National  Accounts  Main  Aggregates Database. The difference between GDP and GNP is simply the net factor flows into or out of the country. Wages paid to foreign workers in the country, for example, are counted  in GDP, not in GNP. Another way to look at it is that  GNP measures  the value of output  produced,  using domestic  factors of production regardless of where they reside. With factor flows making up a significant component of economic activity, the difference between GDP and GNP is no longer trivial, and GDP is a better measure of the economic activity taking place within the country’s borders.

In  the   systems  of  national   accounts   used  by most  nations  as well as by the  UN, GDP is calculated  by three  methods: the  expenditure  approach, the income  approach,  and the production (or value added) approach. All three methods must sum to the same amount. Each method has several categories of income, production, or expenditure. The precise headings of each of these categories vary among nations. The UN System of National  Accounts,  for example, lists government  expenditures  as a subcategory  of final consumption expenditures. In the United States, the National  Income  and Product  Accounts  (NIPA) system lists government  expenditures  as a major category heading. When making international comparisons, one must take care to reconcile these minor differences. Sources of international data such as the UN and the Penn World Tables make those adjustments for consistency.

In the expenditure  approach  for the NIPA in the United States, total spending is broken down according to the type of spending. Consumption refers to spending by households  to purchase  goods and services for immediate consumption. Gross private domestic  investment  is the  term  given to spending by nongovernment entities (generally, businesses) to purchase capital goods. Real estate investment,  both commercial  and residential,  is also included  in this measure.  The trade  account—net  exports—refers  to the country’s external  trade  balance, generally computed by using data from customs and from the country’s balance-of-payments accounts. Government consumption and investment  is a top-level category in the NIPA, including all transactions  involving purchases of goods and services by any level of government  but  not  including  transfer  payments  such  as Social Security payments.

The   income   approach   adds   compensation   of employees, proprietors’ income, rent, corporate profits, net interest, and other sources to arrive at national income. Adding depreciation  of capital yields GNP; finally, adding net factor payments  yields GDP. The production approach, less commonly cited in the literature, adds the value added by sector. All methods must  yield the  same result.  Because the  data  come from different sources, some disagreement  is inevitable. In the NIPA, a line item called statistical discrepancy, which usually is very small relative to GDP, is included  to reconcile  the  difference between  the expenditure  and income approaches.

Along with the  problem  of classifying spending and income, the construction of price indexes often accompanies  the  task of national  income  accounting. Additionally, one must recognize that  national income accounting  and the calculation  of GDP are imperfect measures of national welfare. GDP by definition  does not  count  home  production,  illegal transactions,  or the value of leisure time. National income  accounting  deals  only  in  market  transactions  and values the  goods and services at market prices without  offering any normative  judgment  as to the social value of the activity.

 

Bibliography:

  1. Flavio Comim, “Richard Stone and Measurement Criteria for National Accounts,” History of Political  Economy  (v.33, 2001);
  2. Solomon  Fabricant,  “Toward a Firmer Basis of Economic Policy: The Founding  of the National Bureau of Economic Research,” National Bureau of Economic Research, www.nber.org (cited March 2009);
  3. Steven Landefeld, Eugene P. Seskin, and Barbara M. Fraumeni, “Taking the Pulse of the Economy: Measuring GDP,” Journal of Economic Perspectives (v.22/2, 2008);
  4. Edward F. McKelvey, Understanding US Economic Statistics (Goldman Sachs Economic Research Group, 2008);
  5. New School for Social Research, History of Economic Thought, www.cepa.newschool.edu/het (cited March  2009);
  6. Office for National Statistics, Great Britain, United Kingdom National Accounts 2008: The Blue Book (Palgrave Macmillan, 2008);
  7. Organisation for Economic Co-operation and Development, National   Accounts  of  OECD  Countries:  Volume IIIb: Financial Balance Sheets—Stocks, 1995–2006,  2007 (OECD, 2008);
  8. Organisation for Economic  Co-operation and Development, OECD Factbook 2008: Economic, Environmental and Social Statistics (OECD, 2008);
  9. Penn World Tables, www.pwt.econ.upenn.edu (cited March 2009);
  10. Richard Stone, “The Accounts of Society,” Nobel Lecture, www.nobelprize.org (cited March 2009);
  11. United Nations, “National Accounts: A Practical Introduction,” www. unstats.un.org (cited March 2009);
  12. World Bank, 2008 Little Data Book: People, Environment, Economy, States and Markets, Global Links (World Bank, 2008).

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