Written by Dean Baker
Published: 25 August 2011
“National income accounting is really basic stuff. It is taught in every intro economics class. It would be a really great thing if only the people who wrote about and implemented economic policy understand it.
Today Beat the Press features a quick lesson in national income accounting for folks who clearly do not know it: the Washington Post editorial board and its columnist Robert Samuelson.
Starting at the beginning, we know that we can add up GDP on the output side by summing its components, consumption, investment, government, and net exports. This must be equal to the incomes generated in production. This gives us a basic identity that:
1) C+I+G+(X-M) = Y
where Y stands for income. This identity must always hold, it is true by definition.
We can then divide Y into disposable income, which is total income, minus taxes. This gives us:
2) Y = YD + T
We can then divide disposable income into savings and consumption, since by definition any income that is not consumed is saved. This gives us:
3) YD = C+S
since we now know that Y = C+S+T, we can rewrite equation 1 as,
4) C+I+G+ (X-M) = C+S+T
we then eliminate consumption from both sides and we get:
5) I+G+(X-M) = S+T, rearranging terms gives:
6) (X-M) = (S-I)+(T-G)
This one actually has a clear meaning. X-M is exports minus imports, or the trade surplus, S-I is private saving minus private investment, and T-G is taxes minus government spending, or the budget surplus. This identity means that the trade surplus is equal to the sum of the surplus of private savings over investment and the government budget surplus. Remember, this is an accounting identity, it must be true.”