The Fundamentals of GDP Accounting



















The Fundamentals of GDP Accounting






Ex cerpted fr om

A Concise Guide to Macroeconomics:
What Managers, Executives, and Students Need to Know


By

David A. Moss



















Harvard Business Press
Boston, Massachusetts




ISBN-13: 978-1-4221-2851-0
2851BC

















Copyright2007 Harvard Business School Publishing Corporation
All rights reserved
Printed in the United States of America

This chapter was originally published as chapter 5 of A Concise Guide to Macroeconomics: What Managers, Executives, and Students Need to Know,
copyright 2007 Harvard Business School Publishing Corporation.

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C HAPTE R F IVE







The Fundamentals of GDP Accounting












Because outputlies at the heart of macroeconomics, considerable attention has been devoted to the question of how best to mea- sure it. In fact, macroeconomists have developed a whole ac- counting system precisely for this purpose. The goal of national economic accounting—also known as GDP accounting—is to measure the value of all output a nation produces over a particu- lar period of time, typically a year.This chapter provides a quick primer on GDP accounting and the essential challenges and tradeoffs involved in measuring national output.1









1











Selected Topics—Background and Mechanics




Three Measurement Approaches


As noted in chapter 1, economists have devised three distinct ap- proaches for determining the value of total output, which focus onvalue added, income, and expenditure.

Value added. Under the first approach, economists calculate output by summing the value added at each stage of produc- tion, where “value added” is defined simply as sales revenue minus the cost of nonlabor inputs (i.e., inputs purchased from other firms). The sum of all value added for every good and service produced within a nation will equal that nation’stotal output, or GDP.

Income. Since the value added at each stage of production must ultimately be allocated to members of the public in the form of income, another way to calculate total output is to measure total income. Specifically, the returns to an econ- omy’s productive factors—labor and capital—can be calcu- lated as the sum of wages and salaries, interest, dividends, rent, and royalties.After a few adjustments (including the addition of depreciation and indirect business taxes), total income will exactly equal total output, or GDP.

Expenditure. Under the third approach, economists measure the value of total output by calculating the nation’s spending on final goods and services. A good or service is considered final if it does not represent an input into the current produc-tion of another good or service. For example, if an individual buys coffee beans to grind and brew at home, they constitute a final product, the value of which is counted in GDP. But if
a café purchases the beans, they are considered intermediate
goods and are not included in GDP. Including both the café’s



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The Fundamentals of GDP Accounting


purchase of coffee...