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San José State University
Department of Economics |
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applet-magic.com Thayer Watkins Silicon Valley & Tornado Alley USA |
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from the Transactions Table for an Economy |
| Industry | Steel | Veh | Agric | Cons | Invest | Gov | Exp |
|---|---|---|---|---|---|---|---|
| Steel | 0 | 40 | 20 | 10 | 30 | 20 | 30 |
| Vehicles | 10 | 0 | 10 | 50 | 30 | 30 | 30 |
| Agric | 0 | 10 | 0 | 80 | 0 | 0 | 10 |
| Imports | 20 | 10 | 20 | ||||
| Wages/Sal | 70 | 40 | 20 | ||||
| Rents/Int | 0 | 10 | 10 | ||||
| Profits | 10 | 20 | 10 | ||||
| Deprec | 30 | 20 | 10 | ||||
| IBT | 10 | 10 | 0 |
A transaction table displays the information concerning an economy in such a way that it is simply to define the output and income of an economy and see their relationship. The sales of the firms in an industry appear in the table as a horizontal row. The firms in an industry may sell to firms in other industries or to other firms in the same industry or they may sell to final users such as consumers and government. An intermediate buyer is one that will use the goods or services to produce other goods or services within the economy within the accounting year. Firms which are buying raw materials and supplies for their operations are intermediate buyers. Consumers and governments are not going to use their purchases to produce other goods and services so they are not intermediate buyers and are called final buyers. Exports may to a buyer who will produces other goods but not within the economy so exports also counts as final sales. Investment purchases may be for later production but not within the accounting year so investment purchases are also counted as final sales.
Each entry in the table represents both a sale and a purchase. Horizontal rows for the industries are the sales, but the vertical columns are the payments made by the industry or by a final user. In the transactions table the Steel Industry's sales to the Vehicles Industry are the payments made by the Vehicles Industry to the Steel Industry. The other purchases and payments made by the Vehicles Industry are shown in the vertical column under the Vehicles Industry. For example, in addition to the purchases of an industry for raw materials and supplies from other industries it may make such purchases from outside of the economy as imports. Also in addition to the payments made to other industries for materials, the Vehicles Industry makes payments for labor (wages and salaries), for property use (rents and interest). The industry also needs to set aside funds to cover the depreciation of its equipment and structures. Depreciation is the cost of capital "used up" in the process of production. An industry also makes payments to governments for taxes on sales and on property. These tax payments are known as Indirect Business Taxes. They are called indirect taxes because even though they are paid to governments by business they ultimately come from consumers.
After all other payments have been by an industry the residual goes as profit to the owners of the firms in the industry. Profit constitutes the payment for capital invested in the industry. When profit is included as a payment then the total payments of an industry automatically exactly equal the total sales of that industry. This fact is the key to the relationship which exist in national income accounting.
The payments made to other industries are called intermediate payments and the other payments can be called final payments.
The general structure of the transactions table is:
| Industry | Final Users |
|---|---|
| Intermediate Sales and Payments | Final Sales |
| Final Payments |
In defining the output of an economy it is essential to avoid double
counting. If the total sales of all the industries were added the resulting
number would not be an appropriate measure of output because the intermediate
sales are counted twice and perhaps more. For example, the production of the
Steel Industry would be counted once as the sales of the Steel Industry and
again as part of the output of the Vehicles Industry because of the steel
that was sold to the Vehicles Industry and incorporated into vehicles. One
way to avoid double counting the intermediate sales is to add up only the
sales to the final users. For the above transactions table the breakdown
of sales is as follows:
| Industry | Intermediate Sales | Final Sales | Total Sales |
|---|---|---|---|
| Steel | 60 | 90 | 150 |
| Vehicles | 20 | 140 | 160 |
| Agriculture | 10 | 90 | 100 |
In addition to avoiding the double counting of intermediate sales, we need to avoid counting imports as part of the economy's output. Therefore after adding up final sales we must deduct imports. The GROSS DOMESTIC PRODUCT of an economy is defined as the sum of final sales of the economy less its imports. The sum of final sales from the above table is 90+140+90=320 and level of total imports is 50. Therefore the GROSS DOMESTIC PRODUCT of the economy is 320-50=270.
The total of final sales in the transactions table is just the sum of all the numbers in the upper right hand block of the table. Instead of adding across to get the final sales for each industry one can add vertically each column for the final users to get their purchases and then add across. In the transactions table the total purchases of consumers is 140. Likewise the total purchases of investors, governments and foreign buyers (exports) are 60, 50 and 70; respectively. Thus the total purchases by consumers, investors, governments and exports is 320. Subtracting total imports of 50 from this figures gives GROSS DOMESTIC PURCHASES of 270. This necessarily has to be the same as GROSS DOMESTIC PRODUCT.
When economists first tried to quantify the performance of economies they found it easier to get information on incomes than on production. Since production generates incomes and incomes come from participation in production there was clearly some relationship between income and production.
The first attempt at quantifying the performance of an economy was to measure the national income. National income is the sum total of:
In the current terminology National Income is now called DOMESTIC INCOME. For the above transactions table the wage and salaries, rents and interest, and profits are 130, 20 and 40; respectively. This means that DOMESTIC INCOME is 130+20+40=190. Clearly this is not the same as GROSS DOMESTIC PRODUCT which was 270. However, note that if Depreciation (60) and Indirect Business Taxes (20) are added to DOMESTIC INCOME (190) the result is 270. the same figure as GROSS DOMESTIC PRODUCT and GROSS DOMESTIC PURCHASES. This is not merely a coincidence. It is always true that DOMESTIC INCOME plus Depreciation plus Indirect Business Taxes will be equal to GROSS DOMESTIC PRODUCT. The quantity obtained by adding Depreciation and Indirect Business Taxes to DOMESTIC INCOME is called GROSS DOMESTIC INCOME.
The proof of this proposition is as follows. For each industry total sales is equal to total payments. Therefore the sum total of all sales is equal to the sum total of all payments. But the sum total of all sales is intermediate sales I plus final sales S. Likewise the sum total of all payments is the intermediate payments I plus final payments P. Therefore,
Since I, intermediate sales and intermediate payments, appears on both sides of the equation it can be canceled out to give:
Final payments P is the sum of the numbers in the lower left block of the transactions table. It is equal to the sum of imports, wages and salaries, rents and interest, profits, depreciation and indirect business taxes. The sum of all these components except Imports is called GROSS DOMESTIC INCOME. Thus if we deduct Imports M from both sides of the equation we get:
The left side of this equation is just GROSS DOMESTIC PRODUCT and the right side is GROSS DOMESTIC INCOME. Thus always:
GROSS DOMESTIC INCOME represents the total buying power generated in the
economy in the process of production. This buying power can be transferred
around the economy by taxation and lending, but the total buying power
has to be equal to the GROSS DOMESTIC INCOME. The AGGREGATE BUYING POWER
of the four sectors of the economy is:
The final sales for a single firm is not a good measure of its output. Total sales is a better measure of output for a single firm but even the total sales of a firm may not accurately reflect its contribution to the economy. For example, two calculator firms may have the same sales but one might merely assemble components purchased from other firms or as imports. The other firm firm might manufacture all of the components for its calculators. Clearly, the second firm is contributing more production to the economy. The concept of VALUE ADDED provides a better way of quantifying a firm's contribution to the production of an economy. VALUE ADDED is defined as the total sales of a firm less its purchases from other firms or imports. The same definition of VALUE ADDED can be applied for an industry.
In the transactions table, the total sales of the Vehicles industry is 160,
but it purchases 40 from Steel, 10 from Agriculture and 10 from Import. The
value added by the Vehicles industry is therefore 160 - (40+10+10)=100. The
value added by all the industries are:
| Industry | Total Sales | Purchases from Industries and Imports | Value Added |
|---|---|---|---|
| Steel | 150 | 30 | 120 |
| Vehicles | 160 | 60 | 100 |
| Agriculture | 100 | 50 | 50 |
The TOTAL VALUE ADDED by all industries is 120+100+50=270, which is the
same figure as GROSS DOMESTIC PRODUCT. Again this is not a coincidence.
The total sales of an industry is the same as its total payments, so when
we subtract out the intermediate payments and imports we are left with the
numbers which are below imports in the table. When we total these numbers
vertically we get a value which is the same as the value added for that
industry. When we add up the values added by each industry we get the
same figure as GROSS DOMESTIC INCOME. GROSS DOMESTIC INCOME can be obtained
by summing each horizontal row below imports in the table and then adding
vertically. Thus,
All five of the following quantities are equal:
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