Methods of Accounting for GDP
I. Accounting for GDP by the Expenditure Method
The expenditure method of accounting for GDP is to calculate the market value of final products produced during the year by summing up the expenditures on final products purchased during the year from the use of the products. This method is also known as the final product method and the product flow method.
If Q1, Q2?......Qn are used to represent the production of various final products, and P1, P2......Pn represent the price of various final products, the formula for accounting for GDP using the expenditure method is:
Q1P1+ Q2P2+......QnPn=GDP
In real life, the final use of products and services, mainly residential consumption, business investment, government purchases and exports. Therefore, to account for GDP by the expenditure method is to account for the sum of the expenditures of a country or region in a certain period of time in terms of residents' consumption, business investment, government purchases and exports.
Consumption (denoted by the letter C) includes expenditures on consumer durables such as refrigerators, color TVs, washing machines, and automobiles, non-durable consumer goods such as clothing and food, and expenditures on labor such as health care, travel, and haircuts. Expenditures on building homes are not considered consumption.
Business investment (denoted by the letter I) is expenditure on adding or renewing capital assets, including plant, machinery and equipment, dwellings and inventories. Investment includes two main categories: investment in fixed assets and investment in inventories. Investment in fixed assets refers to investment in new plant, purchase of new equipment, and construction of new dwellings. Why is residential construction considered investment and not consumption? Because dwellings, like other fixed assets, are used for a long time and slowly consumed. Inventory investment is the increase (or decrease) in the value of inventory held by a business. If the nation's business inventories begin the year at $200 billion and end the year at $220 billion, then inventory investment is $20 billion. Inventory investment may be positive or negative because the value of inventory at the end of the year may be greater or less than inventory at the beginning of the year. Business inventory is considered an investment because it generates income.
Investment included in GDP is gross investment, which is the sum of replacement investment and net investment, which is also known as depreciation.
The division between investment and consumption is not absolute; the exact classification depends on what is specified in the actual statistics.
Government purchases (denoted by the letter G) are expenditures by all levels of government for the purchase of goods and services, which include government purchases of arms, services of the army and the police, office supplies and office facilities for government offices, the organization of public **** works such as roads, and the opening of schools. Salaries paid by the government to government employees are also government purchases. Government purchases are substantial expenditures that exhibit a two-way movement of goods, services and money, which directly creates social demand and becomes a component of the gross domestic product (GDP). Government purchases are only a part of government spending, and other parts of government spending such as government transfers and interest on the public debt are not included in GDP.Government transfers are expenditures made by the government not in return for goods and services produced in the current year, including government expenditures on social welfare, social insurance, unemployment relief, poverty assistance, old age security, health care, and subsidies to agriculture. Government transfer payment is the government through its functions to transfer and redistribute income among different members of society, transferring the income of one part of the population to another part of the population, in essence, a kind of wealth redistribution. When there are government transfer payments occur, that is, when the government pays these expenditures, it does not receive any goods and services accordingly; government transfer payments are a kind of monetary expenditures, and the total income of the whole society does not change. Therefore, government transfers are not included in GDP.
Net exports (denoted by the letters X-M, with X denoting exports and M denoting imports) are the difference between imports and exports. Imports should be subtracted from the country's gross purchases because it indicates a flow of income to foreign countries and, at the same time, is not an expenditure on the purchase of domestic products; exports should be added to the country's gross purchases because they indicate an inflow of income from foreign countries and are expenditures on the purchase of domestic products, and, therefore, net exports should be counted as part of gross expenditures. Net exports may be positive or negative.
To add up the above four items is the formula for calculating GDP by the expenditure method:
GDP = C + I + G + (X-M)
II. Accounting for GDP by the Income Method
The income method of accounting for GDP is to calculate GDP from the income point of view by adding up all kinds of incomes received by the factors of production in the course of production, i.e., by adding up all kinds of incomes received by labor, wages, landowners, etc., i.e., by adding up all kinds of incomes received by labor. GDP is calculated by adding the wages received by labor, the rent received by landowners, the interest received by capital, and the profits received by entrepreneurs.This method is also called the factor payment method and the factor cost method.
In a simple economy without government, the value added by firms, the gross domestic product they create, would be equal to factor income plus depreciation, but when the government intervenes, it often levies indirect taxes, at which point GDP should also include indirect taxes and corporate transfers. Indirect taxes are taxes levied on the sale of products, and they include excise taxes and turnover taxes. Such taxes are nominally levied on businesses, but they can be built into the cost of production and ultimately passed on to consumers, so they should also be considered as costs. Similarly, there are corporate transfers (i.e., corporate social charitable contributions to non-profit organizations and consumer bad debt), it is not a factor of production to create income, but to be transferred to the consumer through the price of the product, so it should also be regarded as a cost.
Capital depreciation should also be included in GDP because it is not factor income but is included in total investment.
Also, the income of unincorporated business owners should be included in GDP. Income of non-corporate entrepreneurs is the income of doctors, lawyers, small shopkeepers, farmers, etc. They use their own funds, self-employment, their wages, interest, rent is difficult to be divided into their own business as the company's accounts should be wages, interest on their own funds, rent of their own house, etc., and their wages, interest, profits, rent is often mixed together as non-company entrepreneurs income.
In this way, the formula calculated by the income method is:
GDP = Wages + Interest + Profit + Rent + Indirect Taxes and Corporate Transfers + Depreciation
In theory, GDP calculated by the income method is quantitatively equal to GDP calculated by the expenditure method.
Third, accounting for GDP by the production method
Accounting for GDP by the production method means calculating the gross domestic product by the output value of each sector that provides material goods and services. The production method is also called the sectoral method. This method of calculation reflects the source of GDP.
When calculating using this method, each production sector deducts the output value of intermediate goods used and only the value added is calculated. Sectors such as commerce and services are also calculated using the value added method. Sectors such as health, education, administration, and household services, which cannot calculate their value added, calculate the value of their services on the basis of wage income.
Accounting for GDP by the production method, it can be divided into the following sectors: agriculture, forestry, and fishing; mining; construction; manufacturing; transportation; postal, telecommunications, and utilities; electricity, gas, and water; wholesale and retail commerce; finance, insurance, and real estate; services; and government services and government enterprises. Summing the GDP produced by the above sectors and adding it to the net foreign factor income, and taking into account the statistical error term, you get the GDP calculated using the production method.
Theoretically, GDP calculated by the expenditure method, the income method and the production method are quantitatively equal, but there is often an error in the actual accounting, and thus a statistical error term has to be added to make adjustments to achieve consistency. In actual statistics, the expenditure method of the System of National Economic Accounts (SNA) is generally used as the basic method, i.e., the GDP calculated by the expenditure method is used as the standard.
Four, two kinds of national income accounting system
The above introduced is the western national income accounting system (referred to as SNA). This system is based on the western economic theory, that the creation of material products and the provision of services to the labor activities are value-creating production activities, the gross domestic product (GDP) as the core indicator of accounting for national economic activities. The Western national income accounting system is a method of accounting for the national economy adopted by most countries at present, and is a more reasonable and scientific accounting system. First of all, in today's world economy, where the trend of globalization, integration, marketization and informatization is strengthening, the information, knowledge, technology and labour sectors are becoming increasingly important in economic life, and the value created by the tertiary sector is taking up a larger and larger proportion of modern economic life, while the status of material production in the overall economic life has relatively declined. Therefore, it is necessary that non-material production labor should be counted in the national income accounting system and the market value of all paid labor should be included in GDP. Secondly, double counting can be avoided when accounting for national income according to the SNA, and the distinction between nominal and real GDP, etc. is also reasonable. Of course, this system of using GDP to measure the level of total output of the national economy, the degree of economic development, and the standard of living, etc. is also flawed. For example, non-market-traded activities (e.g., household activities, subsistence production) are not reflected, it does not account for the enjoyment and security of people's leisure, it does not reflect the level of environmental pollution in a country, there is inevitably some double counting in it, and so on. Before the end of the Cold War in the 1990s, there was another system of national economic accounting, the system of balance sheets of material products (or MPS for short) for countries with centrally planned economies, which was used in the former USSR, Eastern Europe, and China. The system was based on Marx's theory of reproduction and used gross social product and national income as the basic indicators reflecting the total results of national economic activity. This accounting system, compatible with the highly centralized planning and management system, once played an important role, but with the reform and development of the global market economy system, its shortcomings have become increasingly prominent. For example, it fails to reflect the development of non-material production sectors, such as information and labor services, and is not conducive to reflecting the comprehensive national strength and rational adjustment of the industrial structure; it fails to systematically reflect the movement of social funds, and is not conducive to the country's macro-management and regulation; and it fails to reflect the overall picture of the national economic cycle and the convergence of the various segments of the cycle, and is not conducive to the country's mastery of the overall balance of the entire economic operation. Therefore, countries with economies in transition, such as Eastern Europe and Russia, as well as China, have gradually adopted the Western national economic accounting system. Since 1985, China has formally adopted the GDP indicator as the main indicator for assessing the development of the national economy and formulating the strategic objectives of economic development. At present, China has calculated and published GDP figures, but has not yet calculated and published figures for such indicators as net domestic production, national income, personal income and personal disposable income.