Question

The following are the items of the income statement of the economy for the year 1976 (in billions of dollars): $$\begin{array}{|l|l|} \hline \text { Rents } & \$ 24 \\ \hline \text { Personal consumption expenditures (C) } & 1,080 \\ \hline \text { Corporate income taxes } & 65 \\ \hline \text { Undistributed corporate profits } & 18 \\ \hline \text { Net exports (Ex - Im) } & 7 \\ \hline \text { Dividends } & 35 \\ \hline \text { Capital consumption allowance } & 180 \\ \hline \text { Interest } & 82 \\ \hline \text { Indirect business taxes } & 163 \\ \hline \text { Gross private domestic investment (I) } & 240 \\ \hline \text { Compensation of employees } & 1,028 \\ \hline \text { Government purchases of goods and services (G) } & 365 \\ \hline \text { Proprietors' income } & 97 \\ \hline \end{array}$$ Determine the Gross National Product using: a) expenditures approach b) income approach

Short answer

Using both the expenditures and income approaches, the Gross National Product for the given data is $1,692 billion.

Step-by-step solution

a) Expenditures approach

Using the given information, we can directly calculate the GNP using the expenditures approach formula: $$ GNP = C + I + G + (Ex - Im) $$ Plugging in the values: $$ GNP = 1,080 + 240 + 365 + 7 $$ Now, calculate the sum: $$ GNP = 1,692 $$ So, GNP using the expenditures approach is $1,692 billion.

b) Income approach

For the income approach, we will first calculate the total Corporate Profits (TC) by adding Corporate income taxes, Undistributed corporate profits, and Dividends: $$ TC = 65 + 18 + 35 $$ Now calculate the sum: $$ TC = 118 $$ Now use the income approach formula to find GNP: $$ GNP = W + R + i + PR + CC + IBT + TC $$ Plugging in the values: $$ GNP = 1,028 + 24 + 82 + 97 + 180 + 163 + 118 $$ Now, calculate the sum: $$ GNP = 1,692 $$ So, GNP using the income approach is also $1,692 billion.

Key concepts

Income Statement Analysis

When it comes to understanding a nation's economic performance, income statement analysis plays a crucial role. In essence, an income statement showcases a country's economic transactions over a period, summarizing its income sources and expenditures.

The items listed on the statement, such as rents, corporate income taxes, dividends, etc., indicate various streams of income and expenses that contribute to the nation's Gross National Product (GNP). Analyzing these figures helps in assessing the economic health and also informs the calculation of the GNP through the income approach.

For example, in the provided exercise, we add together components like compensation of employees, corporate profits, and indirect business taxes to formulate the GNP. This thorough examination offers insights beyond basic numbers and can influence economic policy and business strategy.

Expenditures Approach

The expenditures approach is a method of calculating a nation's GNP by adding up all the money spent on final goods and services within an economy. This includes personal consumption expenditures, gross private domestic investment, government purchases of goods and services, and net exports (the difference between exports and imports).

For instance, we can see from the exercise that when applying the expenditures approach, we sum the specified categories to arrive at the GNP. Here’s how they contribute:

• Personal consumption expenditures (C) reflect what consumers are spending.
• Gross private domestic investment (I) tells us about the spending on capital goods that can help generate future income.
• Government purchases (G) indicate the level of government spending on public services and infrastructure.
• Net exports (Ex - Im) give an idea about the country's trade balance.

Understanding this composition can provide an in-depth look at how various sectors drive economic growth and help pinpoint areas for potential improvement.

Income Approach

Another angle to gauge a country’s economic output is through the income approach. This method tallies up all the incomes earned by individuals and businesses in the economy, including wages, rents, interest, and profits.

In the exercise, the income approach involves summing the earnings of different players within the economy. Each category has its significance:

• Wages represent the payment to employees.
• Rents show income from property leasing.
• Interest indicates the money made from lending.
• Corporate profits (dividends, taxes, and retained earnings) reflect the profitability of businesses.
• Capital consumption allowance accounts for depreciation.
• Indirect business taxes include sales taxes and excise taxes.

This method focuses less on spending and more on the income generated within the economy, which, when tallied up, equates to the GNP as well. It offers a perspective focusing on the distribution side of the economic equation, as opposed to the consumption side highlighted by the expenditures approach.