Measuring the Economy : A Primer on GDP and the National Income and Product Accounts

Measuring the Economy
A Primer on GDP and the National Income and Product Accounts
U.S. DEPARTMENT OF COMMERCE
Carlos M. Gutierrez
Secretary
ECONOMICS AND STATISTICS ADMINISTRATION
Cynthia A. Glassman
Under Secretary for Economic Affairs
BUREAU OF ECONOMIC ANALYSIS
J. Steven Landefeld
Director
Rosemary D. Marcuss
Deputy Director
September 2007
www.bea.gov

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Acknowledgments
Stephanie H. McCulla and Shelly Smith of the National Income and Wealth Division, Bureau of
Economic Analysis (BEA), U.S. Department of Commerce, prepared this Primer.
Brent R. Moulton, Associate Director for National Economic Accounts at BEA, and Carol E. Moylan,
Chief of the National Income and Wealth Division at BEA, provided overall guidance.
Preface
This paper introduces new users to the basics of the U.S. national income and product accounts
(NIPAs). It discusses the economic concepts that underlie the NIPAs, and it describes the seven NIPA
summary accounts. The Primer also provides a brief overview of the derivation of the NIPA measures
and a list of references for further information.
Comments and questions about the NIPA Primer are invited. Please contact BEA’s National Income
and Wealth Division, 1441 L St. NW, BE–54, Washington, DC 20230 or by e-mail at
<GDPniwd@BEA.gov>.
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Measuring the Economy
A Primer on GDP and the National Income and Product Accounts
HOW fast is the economy growing? Is it speeding up or slowing down? How does the trade deficit affect eco­
nomic growth? What’s happening to the pattern of spending on goods and services in the economy?
To answer these types of questions about the economy, economists and policymakers turn to the national in­
come and product accounts (NIPAs) produced by the Bureau of Economic Analysis (BEA). The NIPAs are a set
of economic accounts that provide information on the value and composition of output produced in the United
States during a given period and on the distribution and uses of the income generated by that production. Fea­
tured in the NIPAs is gross domestic product (GDP), which measures the value of the goods and services pro­
duced by the U.S. economy in a given time period.
GDP is one of the most comprehensive and closely watched economic statistics: It is used by the White House
and Congress to prepare the Federal budget, by the Federal Reserve to formulate monetary policy, by Wall Street
as an indicator of economic activity, and by the business community to prepare forecasts of economic perfor­
mance that provide the basis for production, investment, and employment planning.
But to fully understand an economy’s performance, one must ask not only “What is GDP?” (or “What is the
value of the economy’s output?”), but other questions such as: “How much of the increase in GDP is the result of
inflation and how much is an increase in real output?” “Who is producing the output of the economy?” “What
output are they producing?” “What income is generated as a result of that production?” and “How is that income
used (to consume more output, to invest, or to save for future consumption or investment)?”
Thus, while GDP is the featured measure of the economy’s output, it is only one summary measure. The an­
swers to the follow-up questions are found by looking at other measures found in the NIPAs; these include per­
sonal income, corporate profits, and government spending. Because the economy is so complex, the NIPAs
simplify the information by organizing it in a way that illustrates the processes taking place.
This paper is intended as an introduction to the NIPAs for the new user. It begins by considering the transac­
tions that occur in a simple economy in order to introduce the economic concepts that underlie the NIPAs. Next,
it describes the NIPA sectors for which economic activity is measured and the use of T-accounts to illustrate eco­
nomic flows. The third section introduces the seven summary accounts of the NIPAs and includes descriptions of
the significant aggregates that they contain. The fourth section provides an overview of the derivation of the
NIPA measures, including inflation-adjusted, or “real,” estimates. The last section provides references, organized
by subject area, for users interested in moving beyond an introduction to more in-depth or advanced informa­
tion about economic accounting and the NIPAs.
1

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2
Conceptual Basis of the Accounts
The circular flow of income and expenditures
this simple illustration of the economy are the other
To better understand the economy and the NIPAs, resources used in the production of output such as in­
consider a simple economy consisting solely of busi­
vestment in physical capital (fixed assets such as equip­
nesses and individuals, as reflected in the circular flow ment, structures, and software), flows of financial
diagram below:
capital (such as stocks, bonds, and bank deposits), and
the contributions of these flows to the accumulation of
fixed assets.
The Circular Flow
The NIPAs provide a framework for presenting ac­
Goods and Services
tual measures of these economic flows.
Output
Expenditures
The featured measure of output in the NIPAs is GDP.
GDP measures the value of final goods and services
produced in the United States in a given period of
Individuals
Businesses
time. While GDP is used as an indicator of economic
progress, it is not a measure of well-being (for exam­
ple, it does not account for rates of poverty, crime, or
Income
literacy).
The following are several points to keep in mind
Labor
when considering the output of the economy.
1. GDP includes market production and some non-
In this simple economy, individuals provide the la­
market production.
bor that enables businesses to produce goods and ser­
GDP is composed of goods and services that are
vices. These activities are represented by the green lines produced for sale in the “market”—the generic term
in the diagram above.
referring to the forum for economic transactions—and
Alternatively, one can think of these transactions in of nonmarket goods and services—those that are not
terms of the monetary flows that occur. Businesses sold in the market, such as the defense services pro­
provide individuals with income (in the form of com­
vided by the Federal Government, the education ser­
pensation) in exchange for their labor. That income is, vices provided by local governments, the emergency
in turn, spent on the goods and services businesses housing or health care services provided by nonprofit
produce. These activities are represented by the blue institutions serving households (such as the Red
lines in the diagram above.
Cross), and the housing services provided by and for
persons who own and live in their home (referred to as
Economic concepts in the NIPAs
“owner-occupants”). However, not all productive ac­
The circular flow diagram illustrates the interdepen­
tivity is included in GDP. Some activities, such as the
dence of the “flows,” or activities, that occur in the care of one's own children, unpaid volunteer work for
economy, such as the production of goods and services charities, or illegal or black-market activities, are not
(or the “output” of the economy) and the income gen­
included because they are difficult to accurately mea­
erated from that production. The circular flow also il­
sure and value.
lustrates the equality between the income earned from
production and the value of goods and services pro­
2. Whenever possible, GDP is valued at market prices.
duced.
The NIPAs value market goods and services using
Of course, the total economy is much more compli­
prices set by the market. This approach provides a
cated than the illustration above. An economy involves common unit of measurement (dollars) that facilitates
interaction between not only individuals and busi­
comparisons of the various goods and services that
nesses, but also Federal, state, and local governments make up economic activity. Using market values also
and residents of the rest of the world. Not shown in facilitates the analysis of the impacts on the economy

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NIPA Primer
3
of events such as the implementation of government
2. The wheat is used by a miller to produce flour,
programs or the occurrence of natural disasters.
which is sold for $3; and
In some cases, market prices do not fully reflect the
3. The flour is used by a baker to produce bread,
value of a good or service, and may include some types
which is sold to a consumer for $7.
of services where an actual exchange has not occurred.
This information is summarized in exhibit 1:
In these cases, the value of the good or service pro­
duced is “imputed” from similar market transactions.
Exhibit 1
Imputations measure the value of goods and services
that are not fully reflected in market prices. Examples
of imputed measures in the NIPAs include the value of
Intermediate
Income
Sales
compensation-in-kind (such as meals provided by em­
product
ployers) and the value of owner-occupied housing. For
more information on owner-occupied housing, see the
box on page 5, “An Imputation for the Services of
Farmer, wheat
$0
$1
$1
Owner-Occupied Housing.”
In cases where there are no similar market transac­
tions available to impute a value of the goods or service
being produced, the output of these services is valued
Miller, flour
$1
$2
$3
by estimating the input costs (such as employee com­
pensation and purchases of materials and supplies) of
providing the services.
Baker, bread
$3
$4
$7
3. GDP is a measure of current production, not sales.
In the NIPAs, output measures when a good or ser­
vice is produced, not when that good or service is sold.
For example, an automaker may produce a car in one
Total
$4
$7
$11
period and sell it in a later period. In the first period,
the production of the car is recorded in GDP as an ad­
dition to inventories, a component of investment. In
the later period, the sale of the car is recorded as a con­
When the miller purchases $1 worth of wheat from the
sumer expenditure and is offset by the withdrawal of farmer to produce flour and then sells the flour to the
the car from inventories.
baker for $3, the $3 the miller charges for the flour in­
cludes the $1 price of the wheat (an intermediate prod­
4. GDP includes the value of “final” goods and services uct) plus the $2 value added by his own resources (in
only.
this example, his labor). When the baker makes the
In the measurement of GDP, final products are flour into bread and sells the bread to a consumer for
those that are consumed and not used in a later stage $7, the $7 the baker charges includes the $3 value of
of production, those that are sold to foreign residents, the flour (an intermediate product) and the $4 value
those that are durable goods and structures used to added by his own resources. The value of the final
produce other goods and last more than a year, product—the bread—is the price paid by the con­
and those that may be inventoried for future consump­
sumer ($7); the bread is recognized as the final product
tion. When considering the production process for the because it is eaten by the consumer and not used in an­
entire economy, intermediate products—that is, goods other production process. If the total sales of the
and services that are used as inputs in the produc­
wheat, the flour, and the bread were all included, the
tion process (and will not contribute to future produc­
aggregate value ($1 + $3 + $7, or $11) would overstate
tion)—are excluded, so that the measure of output is the value of production by triple-counting the value of
an unduplicated total.
the wheat and double-counting the value of the flour.
For example, consider a simple economy with one
product, bread, which is produced in three stages:
5. GDP can be measured in three different ways.
1. Wheat is grown, harvested, and sold for $1 by a
The nature of economic activity reflected in the cir­
farmer (for simplification, it is assumed the
cular flow diagram suggests two ways to measure GDP.
wheat is produced using no intermediate
First, GDP can be measured as the sum of expendi­
products);
tures, or purchases, by final users. This is known as

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4
NIPA Primer
the expenditures approach (and is illustrated by the
? It can be derived as the value added, or total out­
formula familiar to students of economics:
put less intermediate products, across all indus­
GDP = Consumption + Investment + Government
tries—that is, the $1 of output by the farmer, plus
spending + eXports – iMports) and is used to identify
the $3 of output by the miller, plus the $7 of output
the final goods and services purchased by persons,
by the baker minus the $0 of intermediate inputs by
businesses, governments, and foreigners. Second, be­
the farmer, minus the $1 of intermediate inputs by
cause the market price of a final good or service will re­
the miller, minus the $3 of intermediate inputs by
flect all of the incomes earned and costs incurred in
the baker ($11 – $4 = $7).
production, GDP can also be measured as the sum of
these charges. This is known as the income approach
6. GDP captures output produced in the United
and is used to examine the purchasing power of house­
States.
holds and the financial status of business income.
GDP is a measure of the goods and services pro­
In addition, GDP can also be measured either as duced by labor and property located within the United
total sales less the value of intermediate inputs or as States (in the NIPAs, the United States comprises the
the sum of the “value added” at each stage of the pro­
50 states and the District of Columbia). Thus, GDP in­
duction process. The value-added approach to measur­
cludes the output of U.S. offices or establishments of
ing GDP is central to the U.S. industry accounts and is foreign companies located in the United States, and it
used to analyze the industrial composition of U.S. out­
excludes the output of foreign offices or establishments
puts.
of U.S. companies located outside the United States.
These three approaches can be illustrated using the This treatment aligns GDP with other key U.S. statis­
information from exhibit 1.
tics associated with the domestic economy, such as
population and employment.
7. GDP is a “gross” measure.
Intermediate
Income =
Sales =
GDP reflects production in a given time period, re­
product
value added
output
gardless of whether that production is used for imme­
diate consumption, for investment in new fixed assets
or inventories, or for replacing depreciated fixed assets.
Economic depreciation, or the consumption of fixed

Farmer, wheat
$0

$1

$1

capital (CFC), is a measure of the amount that would
need to be “set aside” to cover the aging, wear and tear,
accidental damage, and obsolescence of existing fixed
Miller, flour
$1
$2
$3
assets. Subtracting CFC from GDP leaves “net domes­
tic product,” which is a measure of current production
that excludes the investment that is necessary to re­
place fixed assets as they wear out. Thus, net domestic

Baker, bread
$3

$4

$7
pr oduct is a measure that indicates how much of the
Nation’s output is available for consumption or for
adding to the Nation’s wealth.
Total
$4
$7
$11
Income
In addition to GDP, which is measured using the final
expenditures approach, the NIPAs also present gross
Output (sum of final expenditures) = Total income earned from production
domestic income (GDI), which is GDP measured us­
Value added = Total output – Total intermediate products.
ing the income approach. As noted above, this ap­
proach measures output as the sum of the incomes
? As demonstrated in point 4 above, GDP can be accruing to the owners of the factors of production
derived as the sum of final expenditures for bread, (capital and labor) and to governments. In other
which is the $7 spent by consumers.
words, as the circular flow diagram suggests, income is
? It can be derived as the sum of the incomes earned
equal to product (GDI is equal to GDP).
in the production of bread—that is, as the sum of
The NIPAs also include other measures of income.
the $1 earned by the farmer for his labor, the $2 Two of these are gross national income (GNI) and per­
earned by the miller for his labor, and the $4 earned sonal income. GNI, the most comprehensive measure
by the baker for his labor.
of a nation’s income, is calculated as GDI plus income

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NIPA Primer
5
receipts from the rest of the world less income pay­
ment and businesses. Personal income is closely moni­
ments to the rest of the world. As such, it is a measure tored both as an indicator of economic activity and as
of income from production that accrues to U.S. resi­
a predictor of future spending.
dents, regardless of where that productive activity is
It is important to note that the income measures in the
located. Its companion production measure is gross NIPAs do not count gains or losses resulting from changes
national product (GNP). Personal income is the in­
in the prices of assets (that is, capital gains or losses) as
come received by persons from participation in pro­
income, because a gain for one represents a loss for an­
duction (including compensation and interest and other.
dividend income) and from transfers from govern­
An Imputation for the Services of Owner-Occupied Housing
Within GDP, personal consumption expenditures tenant rather than occupied by the homeowner (and
include the consumption of housing services by persons would decrease if a home were occupied by the home-
who own the housing that they occupy (referred to as owner rather than rented to a tenant).
“owner-occupants”) as well as by those who rent their
To prevent such a variance in GDP from occurring, the
housing. The imputation ensures that GDP will not NIPAs treat home ownership as if the owner-occupants
change if a house is rented by a landlord or lived in by its
rent their homes to themselves. The value of these hous­
owner.
ing services is based on the rents charged for similar ten-
When a landlord provides housing services to a tenant ant-occupied housing. Therefore, GDP is based on the
in exchange for payment—rent—the transaction appears
number and quality of housing units in service and will
on the product side of the accounts as personal con-
not change if a house switches from being rented by a
sumption expenditures for housing services and on the landlord to being lived in by its owner. On the income
income side as rental income of persons. If the NIPAs side of the accounts, the owner-occupant is treated simi­
were strictly constrained to items traded on the market, larly to a business. Expenses associated with owner-occu­
the measurement would end there. That is, the housing pied housing, such as depreciation, maintenance and
services provided to owner-occupants would be excluded
repairs, property taxes, and mortgage interest, are
from GDP because homeownership involves no market deducted from the value of the housing services, leaving a
exchange of housing services for rent. Under this treat-
profit-like remainder of income, “rental income of per­
ment, GDP would increase if a home were rented to a sons.”

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6
NIPA Sectors
F ROM the NIPAs, one can determine who demands the production of household services—that is the
the goods and services that are produced, or one housing services provided to homeowners, the goods
can examine who supplies the output being produced. and services provided by nonprofit institutions, and
Three major types of producers (or sectors) are recog­
the compensation paid to domestic workers. The sec­
nized:
tor consists of private household workers, owner-occu­
Businesses. This sector engages in the production pants, and nonprofit institutions servings households
and sale of goods and services for profit, or at least for (such as Goodwill Industries International).
a price that approximates the costs of production. The
General governments. This sector receives revenues
sector comprises all for-profit corporate and noncor­
from taxes and other sources and uses these revenues
porate private entities and certain other entities that to provide public goods and services, such as educa­
are treated as businesses in the NIPAs, including mu­
tion and defense, and transfer payments, such as social
tual financial institutions, private noninsured pension security or Medicaid benefits. The sector includes Fed­
funds, cooperatives, nonprofit organizations that pri­
eral, state, and local government agencies, except for
marily serve businesses, Federal Reserve banks, feder­
government enterprises.
ally sponsored credit agencies, and government
In addition, various measures are shown for subsets
enterprises. Government enterprises are government of these sectors (or subsectors). For example, sepa­
agencies—such as the U.S. Postal Service or state gov­
rate measures are available for farm businesses, non­
ernment-run utilities—that cover a substantial portion farm businesses, corporations, noncorporate
of their operating costs by selling goods and services to businesses, households, nonprofit institutions serving
the public.
households, Federal Government, and state and local
Households and institutions. This sector engages in governments.

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7
The T-account
A T-account offers another way to illustrate the expenditures and saving.” As with the circular flow,
flows of the economy. More detailed than the cir­
the T-account shows that income equals expenditures.
cular flow diagram, it is a two-sided table that matches
The structure of the T-account provides two analyt­
“sources” of funds on the right, or credit side, with ical benefits. First, because it is an identity, it enables
“uses” on the left, or debit side. The entries on each one to identify and estimate a “balancing item” be­
side sum to a total shown at the bottom; the totals on tween the two sides of the account: In the example, the
each side are equal. The example below presents a very difference between the individual’s total income on the
simple “income and outlay” account for an individual.
right side and the individual’s consumption and tax
The right side of the account shows an individual’s payments on the left side provides a measure of the in­
sources of income: Compensation (primarily wages dividual’s saving. Second, when constructed for more
and salaries) and the interest and dividends received than one economic sector, the T-accounts provide a
from the ownership of assets (such as bonds or stocks). “double-entry” system in which a source of income in
The sum of these sources is “total income.” The left an account for one sector also appears as a use of in­
side shows the individual’s uses of income: Con­
come in the account of another sector. This accounting
sumption (purchases of goods and services), tax pay­
framework tracks the flow of economic activity from
ments, and saving. The sum of these uses is “total one sector to another.
Income and Outlay Account for an Individual
Uses of Income
Sources of Income
Consumption
50
Compensation
70
Tax payments
20
Interest received
20
Saving
30
Dividends received
10
Total Expenditures and Saving
100
Total Income
100

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8
The Seven NIPA Summary Accounts
I N the NIPAs, the flows of production-related activi­ The entries on the right side of account 1 show the
ties and income between sectors of the economy are approach used by BEA for deriving GDP: It is mea­
summarized in the seven accounts presented below. sured using the expenditures approach—that is, as the
The parenthetical numbers following each entry in an sum of purchases by final users. Specifically, GDP is
account indicate the table and line item location of the the sum of:
“counter-entries,” or the flow from one sector of the
? Personal consumption expenditures consist of pur­
economy to another.
chases of goods and services by households and by
The first account, the Domestic Income and Prod­
nonprofit institutions serving households
uct Account, displays the expenditure and income ap­
(NPISHs). These goods and services include
proaches to measuring GDP. The right-hand side of
imputed expenditures on items such as the services
the account shows the expenditures on final output by
of housing by a homeowner (the equivalent of
consumers, private business, governments and for­
rent), financial and insurance services for which
eigners. The left-hand side of the account shows the in­
there is no explicit charge, and medical care pro­
comes that are generated in the production of that
vided to individuals and financed by government or
output.
by private insurance.
Account 2 presents the sources and uses of income
? Gross private domestic investment consists of pur­
for private enterprises (that is, corporate and noncor­
chases of fixed assets (equipment, software, and
porate businesses and households and institutions in
structures) by private businesses that contribute to
their role as producers). Account 3 presents personal
production and have a useful life of more than one
income and outlays (that is, the income and outlays of
year, of purchases of homes by households, and of
households and nonprofit institutions, except for the
private business investment in inventories. Inven­
outlays they make as producers). Account 4 presents
tory investment, which is shown as “change in pri­
government receipts and expenditures. Account 5, the
vate inventories,” includes the value of goods
Foreign Transactions Current Account, summarizes
produced during a period but not sold, less sales of
the current transactions relating to production, in­
goods from inventories that were produced in pre­
come, and outlays of the United States with the rest of
vious periods. It is measured as ending period less
the world. Accounts 6 and 7 are capital accounts; they
beginning period inventories valued at current
reflect the transactions that contribute to the accumu­
prices (and is equivalent to additions to, less with­
lation of fixed assets and inventories by showing the
drawals from, inventories), Intermediate inputs,
Nation’s saving and the use of that saving for invest­
which become an integral part of the final product
ment in fixed assets and inventories and for net lend­
and do not contribute to future production, are not
ing or borrowing. Specifically, account 6 is a
included in investment.
consolidated “saving-investment” account for the do­
? Exports consists of goods and services that are sold
mestic sectors of the United States, and account 7 sum­
or transferred by U.S. residents to residents of the
marizes the capital transactions of the United States
rest of the world.
with the rest of the world.
? Imports, which is deducted in the calculation of
GDP, consists of goods and services that are sold or
Account 1. Domestic Income and Product Account
transferred by the rest of the world to U.S. residents.
Account 1 is a production account for the United
The value of imports is already included in the
States: The right, or “product” side, of account 1 shows
other expenditure components of GDP, because
the total final output produced in the Nation orga­
market transactions do not distinguish the source of
nized by type of expenditure, and the left, or “income”
the goods and services. Therefore, imports must be
side, shows the incomes and other costs incurred in
deducted in order to derive a measure of total
production. The summary measure of production on
domestic output. Deducting total imports pur­
the right side—GDP—is defined as the market value
chased by all sectors from total exports, rather than
of final goods and services produced by labor and
deducting each sector’s imports from its total
property within the United States during a given pe­
expenditures, provides an analytically useful mea-
riod.
sure—net exports—that enables one to examine the

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Document Outline

• Measuring the Economy: A Primer on GDP and the National Income and Product Accounts
• Acknowledgments
• Preface
• Introduction: Measuring the Economy
• Conceptual Basis of the Accounts
  • An Imputation for the Services of Owner-Occupied Housing
• NIPA Sectors
• The T-account
• The Seven NIPA Summary Accounts
  • 1. Domestic Income and Product Account
  • 2. The Private Enterprise Income Account
  • 3. The Personal Income and Outlay Account
  • 4. The Government Receipts and Expenditures Account
  • 5. Foreign Transactions Current Account
  • 6. Domestic Capital Account
  • 7. Foreign Transactions Capital Account
• Derivation of the NIPA Measures
• References
• Appendix: Accessing the NIPA Estimates Interactively

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