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National Income Accounting


National income accounting deals with the aggregate measure of the outcome of economic activities. The most common measure of the aggregate production in an economy is Gross Domestic Product (GDP). It is the market value of all final goods and services produced in an economy within a given period of time (typically a year), whether or not those goods are sold to the final consumer. It does not matter who owns the resources as long as it is contained within the geographical border of a country. What is happening to the GDP of a country over time is an important indicator of how well the economy is performing.

Calculating GDP involves adding together trillions of different goods and services produced by the economy. Computation of GDP focuses on transactions involving final output of goods and services produced in the current year.

Transactions involving intermediate goods are not included since their values are reflected in the values of the final goods in whose production the intermediate goods were employed. For example, if there is a firm that sells tires to a car manufacturer, GDP does not include the values of the tires and the full cars separately for this will unnecessarily count the tires twice. We either include the net value added by each firm or just add the value of only the final goods.  To illustrate this concept further, consider the tires and the cars that were sold.  The tires cost $100 each to manufacture thus totaling $400 for a car.  The manufacturer sold the tires to Dodge who used them to make a car.  A dealership then sold the car for $10,000.  Would the GDP equal $10,400 thus including the tires and the car?  No, it would not, because the tires are an intermediate good used to produce the car.  In this case, the value added of the tire manufacturer is $400.  The value added of the dealership in selling the car is $10,000 - $400 which is $9,600.  The total value added would then be $400 + $9,600 which is $10,000.  Basically, the the total of the value added must equal the total of the final goods and services.

