National Income

The concepts of national income and the conventions that have been established for estimating it serve as the basis for a formal set of accounts and supporting statements. These are the estimates of national income and are typically presented, as in the United States, in the form of an income and product account.

The account is constructed to exhibit two measures of the nation's economic activity - national income and gross national product.

National income is measured at factor cost as the aggregate earnings of labor and property that arise in the current production of the nation's good and services.

Gross national product (GNP) is the market value of the output of goods and services, before deducting depreciation charges and other allowances for the consumption of durable capital goods. These two basic measures are sometimes distinguished by the terms "national income at factor cost" (NI) and "national income at market price" (which is one way of expressing GNP).

Three other measures of income can be derived directly from the account or with the help of supplemental data. These are net national product, personal income, and disposable personal income. The income and product account is constructed as a double-entry system. The left side consists of estimates of the income of the factors of production — the income going to land, labor, and capital, together with the adjustments that will equate national income to gross national product. The right side of the account shows the product output of the economy, in accordance with the truism that income equals output.

The double-entry system is convenient for cross checking because the two sides of the account must add to the same total. But the double-entry system is more than a convenience; its use emphasizes the dual nature of economic activity. For every additional dollar of product in the economy there must be a corresponding income entry. This is comparable to the 2-sides nature of all economic ransactions. The house-wife's expenditure of 30 cents for a lot of bread is measured by the grocer as 30 cents of income. The double-entry system is also comparable to the principles of commercial accounting. When the grocer sells a loaf of bread he makes two entries on his books. The cash account is debited for 30 cents and, and the sales account is credited for 30 cents. Only one element or unit of economic activity has occurred, but it is recorded in two ways.

It is appropriate, in this context, to conceive of the national economy as if it were a pipeline. Into the entrance to the pipe (left side of the account) flow all contributions of the factors of production-labor, and the current flow of services from land and capital. At the other end of the pipe (the right side), the products of the economy emerge-the goods and services produced by the factors. Unless there is some change in the volume of output that remains within the pipeline-that is, an increase in inventories-the inputs must equal the outputs.

In constructing the income and product account, statisticians must rely on a wide variety of data sources. There are periodic censuses of manufacturing, wholesale trade, and retail trade, compiled by the U. S. Bureau of the Census, which are the benchmark data. Annual information is secured from tax returns and from Social Security data. The U.S. Treasury reports on federal revenue and expenditure, and state and local governments report their revenue and expenditure to the U. S. Bureau of the Census. Government agencies report on foreign trade statistics, and private trade associations and industrial associations publish reports on activities of their industries. All this information makes up the data base for the estimates in the accounts.

Gross National Product

The right side of the national income and product account shows the four product components of the national output of goods and services-GNP. These are the sectors of final demand-households (personal consumption expenditures), business firms for investment purposes, net exports, and governments (federal, state, and local). The items themselves are generally self-explanatory.

Personal consumption expenditures are made up of outlays for durable goods, such as automobiles and household equipment; nondurable goods, such as food and clothing; and services, such as rent, household operation, and transportation.

Gross private domestic investment consists of outlays for construction of new housing and outlays by business firms for new structures and for producers' durables, such as machine tools and trucks and automobiles purchased for business use.

Net exports are the algebraic sum of two entries: exports less imports. The reason for this treatment is that the country's exports are a part of its output and give rise to income within the economy. The automobile that is sold abroad has a value matched by incomes generated at home, wages and salaries, profits, and rent paid to those who produce the automobile. Imports are not a part of the nation's output. Nevertheless, they will appear under personal consumption expenditures, as individuals in the United States buy imported goods or as business firms purchase capital equipment from abroad. Because imports do not give rise to matching incomes in the United States, they must be deducted from the sum of exports.

Government purchases of goods and services are subdivided into federal outlays and the outlays of state and local governments. Interest on government bonds is omitted, and all transfer payments that are not a payment for currently produced goods and services are similarly omitted. This excludes welfare payments veterans' pensions and benefits, and social security insurance payments, because the recipients àre not currently "working for" government.

Thus four components-personal consumption expenditures, gross private domestic investment, net exports, and government purchases-add up to the gross national product.

The Income Entries

On the left side of the national income and product account there are five entries that represent factor cost. These five add up to the national income. They are compensation of employees, proprietors' income rental income, corporate profits and inventory valuation, and net interest. There are subcategories under compensation of employees and corporate profits.

Compensation of employees is composed of the wage payments made by employers and the supplements to these wages, such as the payments made by employers to social insurance funds and pension funds.

Proprietors' income is the income of unincorporated enterprises-those firms operated by their owners, or partnerships, such as in most of agriculture and much of retailing. This consists of a mixture of income from property and from labor services.

Rental income consists of the payments to landlords for housing and other structures together with the imputed or estimated value of owner-occupied housing.

Corporate profits are represented as the sum of three entries that add up to corporate profits before tax-the profits tax, dividends, and undistributed profits-together with the inventory valuation adjustment. The last item brings the corporate profits estimate into line with the flow of current output by making allowance for profits or losses by corporations on their inventory holdings. This is an adjustment comparable to eliminating, from national income estimates, all transactions related to the purchase and sale of existing assets.

Net interest is defined to include only private interest payments. The payment of interest on federal, state, and local bonds is excluded from this entry.

The remaining entries on the income side of the account are described as nonfactor costs. In general, these costs enter into market price-that is, they are reflected on the right side of the account but are not paid to specific factors of production. These include some minor entries, such as business transfer payments, which reflect bad debt losses by business firms, and subsidies less current surplus of government enterprise. This item adjusts the income side of the account for such matters as the post office deficit or the profits of a municipally owned public utility.

There are two major nonfactor costs. The first of these- indirect business tax and nontax liability-consists of taxes paid by business firms that are shifted forward and reflected in the market price of the product. These include sales taxes, property taxes paid by firms, and excise taxes, such it's those on cigarettes and alcoholic beverages. The taxes are, of course, paid to government agencies, and thus will not appear in the incomes of the factors that are already counted in national income. Capital consumption allowances, the second major non-factor cost, consist of the depreciation charges and accidental damage to fixed capital that are incurred by the use of capital facilities during the year. Again, this is a charge that is incorporated in the market price of goods and ser vices. Statistical discrepancy is simply a measure of the unallocated error in the estimates.

Net National Product
For some purpose it is desirable to estimate the net national product (NNP) of the economy during the year - that is, the output after making allowance for capital consumption. This can be derived by deducting the capital consumption allowance from GNP. This can be derived by deducting the capital consumption allowances from GNP, The difference between GNP and NNP can be illustrated by the case of a farmer who plants four bushels of seed corn in the spring and harvests 100 bushels of corn in the fall. His "CNP" is 100, but his "NNP" is 96. The farmer has used up four bushels of "capital" in obtaining his output.

Personal Income
None of the measures defined thus far shows how much income ends up in the hands of individual consumers. This estimate, known as personal income, can be derived by de-ducting from national income the items that are included there but that are not paid directly to individuals. These items are undistributed corporate profits, corporate profits taxes, and Social Security taxes paid by employers. To this must be added the transfer payments received by individuals, such as pensions and benefits, together with the interest on government obligations. This algebraic sum is the income that is received by or can be claimed by individuals.

Disposable Personal Income
The fifth measure of national income, in addition to gross national product, net national product, national income itself, and personal income, is the amount that individuals have remaining after the payment of personal taxes, such as income and Social Security taxes. This is known as disposable personal income and is the amount available either for personal consumption expenditure or for personal saving.