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.
- 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.
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.
- Flavio Comim, “Richard Stone and Measurement Criteria for National Accounts,” History of Political Economy (v.33, 2001);
- 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);
- 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);
- Edward F. McKelvey, Understanding US Economic Statistics (Goldman Sachs Economic Research Group, 2008);
- New School for Social Research, History of Economic Thought, www.cepa.newschool.edu/het (cited March 2009);
- Office for National Statistics, Great Britain, United Kingdom National Accounts 2008: The Blue Book (Palgrave Macmillan, 2008);
- Organisation for Economic Co-operation and Development, National Accounts of OECD Countries: Volume IIIb: Financial Balance Sheets—Stocks, 1995–2006, 2007 (OECD, 2008);
- Organisation for Economic Co-operation and Development, OECD Factbook 2008: Economic, Environmental and Social Statistics (OECD, 2008);
- Penn World Tables, www.pwt.econ.upenn.edu (cited March 2009);
- Richard Stone, “The Accounts of Society,” Nobel Lecture, www.nobelprize.org (cited March 2009);
- United Nations, “National Accounts: A Practical Introduction,” www. unstats.un.org (cited March 2009);
- World Bank, 2008 Little Data Book: People, Environment, Economy, States and Markets, Global Links (World Bank, 2008).
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