# National Income Accounting

The statistics for Gross Domestic Product (GDP) are computed as part of the National Income and Product Accounts. This national accounting system, developed during the 1940s and 1950s, is the most ambitious collection of economic data by the United States government and is the source of much of the information we have about the economy. Like business accounting, national-income accounting uses a double-entry approach. Because each transaction has two sides, involving both a sale and a purchase, there are two ways to divide up GDP. One can look at the expenditures for output, or one can look at the incomes that the production of output generates.

Let us look at how this double-entry system works. Suppose you are a computer programmer who creates a game that you distribute over the Internet. You have no costs of packaging--you only input is your skill and time as a programmer. Lots of teenagers buy your game and you earn \$50,000 dollars for the year. You have produced something of value. How should we account for this production?

The double-entry system says that the expenditures made on the product, which is the source of funds to the producer, should equal the uses of funds by the producer, which are the incomes that flow from production. Because ordinary people bought this game, the expenditures made are by households. They are called consumption expenditures. We will increase them by \$50,000. You pay yourself, but is what you earn wages or profit? For an unincorporated business there is a special category for earnings called proprietors' income, and it will increase by \$50,000

 Expenditures Made on Output (Source of Funds) Incomes Generated in Production (Uses of Funds) Consumption \$50000 Proprietors' Income \$50000

Suppose instead that you incorporate yourself as a business and your product is educational software sold only to public schools. What will change? The expenditures are no longer consumption because they are not made by the household sector. There are three other sectors of the economy used in national income accounting: government, business, and the rest of the world. Public schools are an important part of the government, so now these sales will be classified as government expenditures. Since you are incorporated, you will have to file a tax form that separates wages from your profit. Suppose you tell the IRS that you paid yourself \$40,000 and that the profit of your business was \$10,000. On the Income side of the accounts, employee compensation goes up \$40,000 and corporate profits goes up \$10,000.

 Expenditures Made on Output (Source of Funds) Incomes Generated in Production (Uses of Funds) Government Spending \$50000 Employee Compensation \$40000 Corporate Profit \$10000

Finally, suppose you retire and receive \$15,000 per year from Social Security. What will we do in this case? The answer is, "Nothing," because nothing has been produced. This income is a transfer payment. It was taken from someone through taxes (euphemistically called a contribution in the case of Social Security, but there was nothing voluntary about it) and given to you. In an exchange, both parties must give to get. In a transfer, one party gives and the other gets--no service or product is returned to the giving party.

Now that we have seen the logic behind these accounts, let us see what they look like in a bit more detail.