Measuring National Income Accounting
Perhaps the most common way to measure national income accounting is to use gross domestic product (GDP). Gross domestic product looks at the goods and services produced during a particular time within a particular economy. So economists can calculate the GDP for the purposes of national income accounting. The equation often used to calculate GDP is:
GDP = C + I + G + (X - M)
But what do the letters in this equation stand for?
- C = Household spending, which is personal expenditures such as non-durable and durable goods
- I = Capital investment spending, which includes expenditures that add or replace capital stock, such as equipment, plants, and inventories
- G = Government spending on a local, state, and federal level. All purchases of goods and services are included.
- X = Exports of goods and services, which refers to domestic goods that are sold to foreign countries
- M = Imports of goods and services, which are the exact opposite of exports of goods and services. They are those goods that are produced by foreign countries and purchased domestically.
Uses of National Income Accounting
So why would an economist use national income accounting? Why is it important? Let's go through some of the benefits of national income accounting:
- It identifies the strengths and failures of the economy, providing a big picture of how the economy is doing.
- It helps economist understand where to make changes to the economy. Sometimes, the economy may not be doing well, and national income accounting can help pinpoint where the problems may be coming from.
- It provides a picture of income throughout the many areas of production. Since national income accounting takes into account goods and services, looking at production helps economists better understand how well an economy is producing.
- It allows us to make comparisons with other nations.
- It helps us understand individual sectors of the economy and their growth. Since the economy is so large and made of many different parts, national income accounting allows economists to break up the many parts and determine how well they are functioning and growing.
Lesson Summary
National income accounting is a measurement of the overall health of an economy. It helps economists better understand the economy's activities. In order to measure national income accounting, economists often use gross domestic product, applying the formula GDP = C + I + G + (X - M). Some uses of national income accounting include identifying strengths and weaknesses, comparing economies of different nations, and allowing economists to look at the many different sectors of the economy.
