National income accounting refers to a series of statistical measures of aggregate national INCOME or output. These statistical measures are estimated and published by the Department of Commerce on a monthly basis and are used by economists, business analysts, and government officials to forecast future changes in the economy. These predictions are then used in making policy decisions regarding ECONOMIC GROWTH and stimulation, and to make projections for the DEMAND for companies’ and industry output. National income accounting was developed in the 1920s by the NATIONAL BUREAU OF ECONOMIC RESEARCH. When Franklin Roosevelt became president, he directed the bureau to devise estimates of the country’s national income. Without a measure of national income and output, it was impossible to evaluate the impact of the New Deal programs Roosevelt initiated to stimulate the economy out of the GREAT DEPRESSION. Simon Kuznets, a Russian-born American economist, led the development of national income accounting and in 1971 was awarded the Nobel Prize in economics for his work. In the CIRCULAR FLOW MODEL of an economic system, income flows from businesses and government to households in exchange for the use of resources. Households then use their income to make purchases (CONSUMPTION), save, and pay taxes, leading to government spending. Logically the level of economic activity in an economy could be measured by the amount of income generated or the amount of spending. In national income accounting, the level of output is estimated by the sum of expenditures for that output. The aggregate expenditures (AE) approach to national income accounting is expressed by the equation

AE = consumption (C) + Investment (I) + Government (G) + exports – imports (X-M)

In the United States, consumption spending is the largest portion of aggregate expenditures, accounting for two-thirds of all spending in the economy. Often economic news will include comments about the importance of consumers to the future of the economy. After the September 11, 2001, terrorist attacks, most economists feared consumers would significantly reduce their spending. A significant decrease in the most important source of spending would lower national income. President George W. Bush even went so far as to suggest to Americans that what they could do for the country was to continue to spend. Consumption spending is primarily determined by income. As household income rises, spending rises. Consumption spending is also influenced by changes in WEALTH, expectations, INTEREST RATES, and DEMOGRAPHICS. During the 1990s, economists and the FEDERAL RESERVE SYSTEM debated the “wealth effect,” the degree to which current spending was influenced by increases in wealth from rising STOCK MARKET prices. When the DOT-COMS “bubble” burst in spring 2000, many consumers’ wealth declined, contributing to the RECESSION that followed. Expectations about the future affect consumption spending in the present. Economists and business forecasters closely watch the two major indexes of American consumer expectations, the University of Michigan’s Consumer Sentiment Index and the CONFERENCE BOARD’s Consumer Confidence Index. After September 11, understandably Americans’ confidence fell, but by December it had begun to rise again. Each spring, positive expectations are often also evident in college student parking lots as many college seniors, expecting to graduate and anticipating higher incomes, purchase cars. Interest rates also influence consumer spending, particularly for durable goods such as homes and automobiles. MONETARY POLICY can be used to stimulate aggregate expenditures through lower interest rates. For example, many Americans barely notice the price of a car, asking only what the monthly payments will be. After September 11, auto sales grew in response to zero-percent interestrate financing. Lastly, consumption spending is influenced by demographics. For example, most young people and lowerincome people (of any age) spend a greater portion of their disposable income than do older more affluent citizens. Tax cuts that increase the disposable income of younger, lower-income consumers will result in more consumption spending than tax breaks for upper-income groups. Economic INVESTMENT is the second component of aggregate expenditures in an economy. In the U.S. economy, investment spending represents approximately 17 percent of total spending annually but is the most volatile component of aggregate expenditures. The decision whether or not to invest in new productive ASSETS is primarily influenced by expected PROFITs. Managers make their best projections of future sales of output from the new investments and compare expected sales with estimated costs. In addition to being influenced by expected profits, economic investment decisions are also affected by changes in technology, capacity utilization, and the cost of borrowing. Often managers will replace existing equipment, even though the existing equipment is fully operational. If new technology can result in a better-quality product, managers are forced to purchase the new equipment in order to remain competitive. Capacity utilization is the percentage of existing productive capacity that is currently being used. The Department of Commerce maintains an index of overall capacity-utilization rate for U.S. manufacturers. Generally, 85-percent capacity utilization is considered close to full capacity. If, when operating at full capacity, managers think demand for their products will continue to grow, they will decide to invest in new productive capacity. New investment is also influenced by the cost of borrowing (interest rates). As interest rates decline, the cost of new productive assets decreases, stimulating additional investment spending. Government spending is the third component of aggregate expenditures. Unlike estimating consumption spending and business investment, which are done through SURVEYS and trend analyses, government spending is the record of expenditures for goods and SERVICES by various levels of government and is determined by the budgetary negotiation process. At the national level, every January the executive branch of the federal government promulgates a proposed budget. If the opposition party controls Congress, they will declare the president’s budget proposal DOA (dead on arrival). The two branches of government will then debate the level and composition of government spending and reach a compromise, usually by June for the beginning of the FISCAL YEAR or October 1. Some government programs act as AUTOMATIC STABILIZERS in overall aggregate spending. UNEMPLOYMENT benefits soften reductions in income and spending among households when people lose their jobs. Progressive tax rates (rates that increase as income increases) reduce consumers’ ability to spend as their income increases, slowing the growth of aggregate spending. Government redistribution of income (transfer payments) is not part of government spending. It simply transfers purchasing power from one group of consumers to another. Finally, exports are added and IMPORTS are subtracted to estimate national income. Since national income accounting measure the value of output in an economy, exports are part of the country’s output; imports are not, since they were produced somewhere else. Exports are influenced by the level of income in other countries, the relative rate of INFLATION, EXCHANGE RATES, and government policies. Imports are determined primarily by domestic income but also influenced by exchange rates and government policies. GROSS DOMESTIC PRODUCT (GDP), the MARKET VALUE of final goods and services produced in an economy in a year, is the primary measure estimated using national income accounting. In addition to GDP, national income accounts provide estimates of
• gross national product (GNP): GDP plus factor-income receipts from foreigners and minus factor-income payment to foreigners
• net national product (NNP): GNP minus DEPRECIATION (capital consumption allowances)
• national income: NNP minus indirect BUSINESS TAXES
• personal income: national income plus transfer payments and government interest payments, minus corcorporate taxes, SOCIAL SECURITY contributions, and undistributed corporate profits
• personal disposable income: personal income minus personal taxes
See also EXPORTING.