Question

There are basically two approaches to GNP: the expenditure approach and the income approach. The following is a list of national income figures for a given year. Arrange them in the form of a consolidated income statement with revenues and allocations ( expenses ') for the whole of the economy. The figures are in billions of dollars. \(\begin{array}{lr}\text { Personal consumption expenditures (C) } & 660 \\\ \text { Transfer payments } & 127 \\ \text { Rents } & 40 \\ \text { Capital consumption allowance (depreciation) (D) } & 95 \\ \text { Social security taxes } & 46 \\ \text { Interest } & 20 \\ \text { Proprietor's income } & 68 \\ \text { Net exports } & 2 \\ \text { Dividends } & 6 \\ \text { Compensation of employees } & 642 \\ \text { Indirect business taxes } & 101 \\\ \text { Undistributed corporate profits } & 40 \\ \text { Personal taxes } & 116 \\ \text { Corporate income taxes } & 35 \\ \text { Corporate profits } & 81 \\ \text { Government purchases of goods and services } & 233 \\\ \text { Net private domestic investment }\left(I_{\text {net }}\right) & 57 \\ \text { Personal saving } & 60 \\ \text { Calculate, in addition, Personal Income (PI) and Disposable } \\ \text { Personal Income (DPI). } & \end{array}\)

Short answer

In summary, the consolidated income statement for the whole economy is as follows: Total Revenues (GDP_EA): 952 billion dollars Total Expenses: 1296 billion dollars Personal Income (PI): 903 billion dollars Disposable Personal Income (DPI): 787 billion dollars

Step-by-step solution

Calculate GDP using the expenditure approach (GDP_EA)

GDP can be calculated using the expenditure approach with the following formula: \(GDP_EA = C + I_{net} + G + NX\). Using the given data: \( \begin{aligned} GDP_EA &= C + I_{\text {net}} + G + NX \\ &= 660 + 57 + 233 + 2 \\ &= 952 \end{aligned} \) GDP using the expenditure approach is 952 billion dollars.

Calculate Personal Income (PI) and Disposable Personal Income (DPI)

Personal Income (PI) can be calculated using the following formula: \(PI = \text{Compensation of employees} + \text{Proprietor's income} + \text{Rents} + \text{Interest} + \text{Dividends} + \text{Transfer payments}\). Using the given data: \( \begin{aligned} PI &= 642 + 68 + 40 + 20 + 6 + 127 \\ &= 903 \end{aligned} \) Personal Income is 903 billion dollars. Disposable Personal Income (DPI) can be calculated using the following formula: \(DPI = PI - \text{Personal taxes}\). Using the computed PI and the given data: \( \begin{aligned} DPI &= 903 - 116 \\ &= 787 \end{aligned} \) Disposable Personal Income is 787 billion dollars.

Create the consolidated income statement

Here's the consolidated income statement with revenues and allocations (expenses) for the whole economy. Revenues: - Personal consumption expenditures (C) = 660 - Net private domestic investment (I_net) = 57 - Government purchases of goods and services (G) = 233 - Net exports (NX) = 2 Total Revenues: 952 (GDP using expenditure approach) Expenses: - Compensation of employees = 642 - Proprietor's income = 68 - Rents = 40 - Interest = 20 - Dividends = 6 - Transfer payments = 127 - Social security taxes = 46 - Indirect business taxes = 101 - Personal taxes = 116 - Corporate income taxes = 35 - Capital consumption allowance (depreciation) (D) = 95 Total Expenses: 1296 In addition, we calculated Personal Income (PI) to be 903 billion dollars and Disposable Personal Income (DPI) to be 787 billion dollars.

Key concepts

Expenditure Approach

The expenditure approach is a method used to calculate the Gross Domestic Product (GDP) by adding up all the expenditures made in an economy during a specific period. This approach helps us understand how much money people are spending on goods and services produced within a country.
To find the GDP using this approach, we sum up the following components:

• Personal consumption expenditures (C): This represents all the spending done by households on goods and services. In our example, this is 660 billion dollars.
• Net private domestic investment (\(I_{net} \)): This includes business investments in equipment and infrastructure, minus depreciation. Here, it is 57 billion dollars.
• Government purchases of goods and services (G): The total government expenditure on goods and services, which amounts to 233 billion dollars.
• Net exports (NX): This is the value of a country's exports minus its imports, totaling 2 billion dollars in our case.

By adding these, we get a total GDP of 952 billion dollars for our scenario. The expenditure approach highlights where money is being spent and is useful for identifying economic activity.

Income Approach

The income approach is another way to calculate GDP, focusing on the income earned by factors of production in an economy. Unlike the expenditure approach, which focuses on spending, the income approach looks at the money people or businesses earn.
The GDP calculated with the income approach typically includes:

• Compensation of employees: Salaries and wages received by workers.
• Proprietor's income: Earnings of unincorporated businesses.
• Rents: Income received by property owners.
• Interest: Earnings from lending funds.
• Corporate profits: Earnings of corporations after paying out dividends.

Plus, adjustments like indirect business taxes and capital consumption allowances (depreciation) are included to align the income approach with total output.
By focusing on income generation, this approach offers insights into how income is distributed across different factors of production in the economy and can highlight wealth disparities or the sectors driving growth.

Personal Income (PI)

Personal Income (PI) represents the total income received by individuals and households in an economy. It includes earnings from various sources and gives a helpful overview of the economic well-being of residents.
To calculate PI, we sum:

• Compensation of employees: Amounting to 642 billion dollars in our scenario.
• Proprietor's income: Earnings totaling 68 billion dollars.
• Rents: Bringing in 40 billion dollars.
• Interest: Generating 20 billion dollars.
• Dividends: Contributing 6 billion dollars.
• Transfer payments: Government-assistance payments, such as social security, adding up to 127 billion dollars.

In our example, with these components added up, the Personal Income comes to 903 billion dollars. This value represents all income before personal taxes and highlights overall earning capacity.

Disposable Personal Income (DPI)

Disposable Personal Income (DPI) is the amount of money a household or individual has available to spend or save after personal taxes have been deducted from their total income. It's a more practical measure of the actual income people can use.
To find DPI, we calculate:

• Start with Personal Income (PI): Which is 903 billion dollars as per our calculations.
• Subtract Personal Taxes: In this scenario, personal taxes sum to 116 billion dollars.

Subtracting the taxes from PI, we find DPI to be 787 billion dollars. DPI essentially tells us what remains for households to allocate towards consumption, savings, or investments, providing a clear sense of economic health at the consumer level.