National Income and Product Account (NIPA)

choi

Chester Yung, 中国的鬼城将变得更加恐怖. 中国实时报, May 16, 2014.
cn.wsj.com/gb/20140516/rec110617.asp


Chester Yung, China’s Ghost Cities to Get Spookier. May 16, 2014.
blogs.wsj.com/chinarealtime/2014/05/16/chinas-ghost-cities-are-about-to-get-spookier/

two consecutive paragraphs:

CLSA analyst Nicole Wong “argues that these excess empty units reflect too much spending on property; China last year spent 12% of its gross-domestic product on new home sales—the highest level ever—which she called unsustainable.

“While mature markets like the US show periodic upticks in their ratio of new home sales to GDP, they still remain well below 10%, she said. Amid the post-war building boom of the 1950s, the U.S. ratio was just 5.9%, while it peaked again in 2005 at 3.1% amid the loose credit environment before the financial crisis. Even for Hong Kong , a city with limited land resources where property is considered a way to store wealth, the ratio peaked at 8%-9% between 1997 and 1998, just before the bubble burst, she added.

My comment:
(a) “ratio of new home sales to GDP”?
(b) I want to this as an object lesson in economics, to tell you about National Income and Product Account (NIPA). (c) will tell you what it is, and (d) will tell you what it is for.

(c) A Guide to NIPA's, in National Income and Product Accounts of the United States, 1929-97. 2 volumes. Bureau of Economic Analysis, US Department of Commerce (1999).
www.ciser.cornell.edu/NYCRDC/hel ... ipaguide-200209.pdf
(i) Though the content is federal government’s (having been released into public domain and thus without copyright protection), this is a link from the website at Cornell Institute for Social and Economic Research (CISER), of
John Maron Abowd, Edmund Ezra Day Professor (2011- ), Department of Economics, and Professor of Information Science (2000- ), Cornell University (PhD in Economics, University of Chicago (1977); AB in Economics, University of Notre Dame (1973); born French)

His last name is French and he is fluent in that language. But he was probably born in US. He is not a celebrity for sure. I just wish to introduce him to you.
(ii) At page M-6 is
“Table A.--Summary of National Income and Product Accounts, 1997 [billion of dollars]; Account 1 National Income and Product Account)” (brackets original)

For simplicity, I will identify this table as NIPA table.
(A) There are three ways to calculate GDP. See Gross domestic product
en.wikipedia.org/wiki/Gross_domestic_product
(section 2 Determining GDP)

Please, in addition, read sections 1 History and 3 GDP vs GNI.
* The income approach is itemized on the LEFT side of the NIPA table.
* The expenditure approach is itemized on the RIGHT side of the NIPA table.

Section 2.3.1 Components of GDP by expenditure presents a formula:

“GDP (Y) is the sum of consumption (C), investment (I), government spending (G) and net exports (X – M).
Y = C + I + G + (X − M)”

Fixed investment
en.wikipedia.org/wiki/Fixed_investment
(section 1 Why fixed)
can come from private and government sources. The former includes non-residential (ie, business) and residential, as itemized in the right side of the NIPA table.
* investment
en.wikipedia.org/wiki/Investment

Quote:

“In economics, investment is the accumulation of newly produced physical entities, such as factories, machinery, houses, and goods inventories.”  (Heed the word “newly”)

“Non-residential fixed investment (such as new factories) and residential investment (new houses) combine with inventory investment to make up I.
* THEREFORE, the ratio of residential (fixed) investment to GDP is that (ratio) of “new home sales to GDP” (mentioned in (a)). Economists do not know value of an item until it is sold in the market.
* Regarding “newly.” Bureau of Economic Analysis (BEA) does not count resales of non-residential (ie commercial or business) or residential properties (buildings, factory equipment, etc) as contributing to GDP. You can not double count them, once when it is produced and then sold as a second-hand.
* If you understand so far, you need not read

Kimberly Amadeo, What Are the Components of GDP?  About.com, undated
useconomy.about.com/od/grossdomesticproduct/f/GDP_Components.htm
(use "business investment" rather than the official "non-residential;" Just like in commercial real estate, the BEA doesn't count housing resales as contributing to GDP)

choi

(continued)

(d)
(i) J Steven Landefeld, GDP: One of the Great Inventions of the 20th Century; From the January 2000 SURVEY OF CURRENT BUSINESS. BEA, undated.
www.bea.gov/scb/account_articles/general/0100od/maintext.htm

Quote:

“In response to this need in the 1930's, the Department of Commerce commissioned Nobel laureate Simon Kuznets of the National Bureau of Economic Research to develop a set of national economic accounts [and GDP was born].

“Early in 1942 * * * Wartime planning needs also helped to stimulate the development of input-output accounts. Nobel laureate Wassily Leontief developed the US input-output accounts that subsequently became an integral part of the NIPA's.

(A)  Simon Kuznets
en.wikipedia.org/wiki/Simon_Kuznets
(1901-1985; born of a Jewish merchant family in now Belarus; an 1971 Nobel laureate)
(B) Simon Kuznets - Biographical. Nobel Prize, 1971
www.nobelprize.org/nobel_prizes/ ... 71/kuznets-bio.html
(“came to the United States in 1922 to join my father who left Russia for the United States before World War I. My university studies began in Russia, and were completed at Columbia University (BSc in 1923, MA in 1924, PhD in 1926)”)
(C) Wassily Leontief
en.wikipedia.org/wiki/Wassily_Leontief
(1906-1999; born in Munich to Russian Orthodox father and Jewish mother of Odessa; In 1931, he went to the United States and was employed by the National Bureau of Economic Research [in New York City]; a 1973 Nobel laureate)

The Nobel website has a footnote: “Recent information sets his year of birth to 1905, in Munich,” where he also stated he received the PhD degree from University of Berlin, before working at University of Kiel (in Germany) from 1927 to 1930.

(ii) Measuring the Economy; A primer on GDP and the National Income and Product Accounts. BEA, September 2007.
www.bea.gov/national/pdf/nipa_primer.pdf

(A) two consecutive paragraphs in page 1:

“But to fully understand an economy’s performance, one must ask not only “What is GDP?” (or “What is the value of the economy’s output?”), but other questions such as: ‘How much of the increase in GDP is the result of inflation and how much is an increase in real output?’  ‘Who is producing the output of the economy?’ ‘What output are they producing?’ ‘What income is generated as a result of that production?’ and ‘How is that income used (to consume more output, to invest, or to save for future consumption or investment)?’

“Thus, while GDP is the featured measure of the economy’s output, it is only one summary measure. The answers to the follow-up questions are found by looking at other measures found in the NIPAs; these include per­sonal income, corporate profits, and government spending. Because the economy is so complex, the NIPAs simplify the information by organizing it in a way that illustrates the processes taking place.

(B) sectional heading at page 4: “GDP is a ‘gross’ measure.”

* There is no need to read the rest of the primer.