National Income and Flow-of-Funds Analysis

By John P. Powelson | Go to book overview

Chapter 18
REAL INCOME AND PRODUCT

Our plan to use the accounting framework as a device for teaching economic concepts, theories, and processes was stressed in the preface. Until this chapter, we have confined our illustrations to accounting systems for which data are (usually) statistically reportable. But we are not required to do so. As a pedagogical technique, the accounting framework is useful beyond the limits of published accounts, in the teaching of concepts and ideas for which exact measures, or even reasonable estimates, are not necessarily possible.

In the present chapter we shall examine the concept of real income, as it is customarily used in economic literature, and we shall discover that the so-called real income of all residents of a country does not necessarily equal the real national income. Likewise, their saving in "real" terms does not necessarily equal real national saving. We shall show that as wages and prices change, some groups will gain and others will lose, but that the "gains" of some do not necessarily equal the "losses" of others. The same is true for capital gains, in which there is theoretically a winner but not necessarily a loser.

This shadowy area of paradox will be probed within a model system of "real accounts." Here we shall find that much that is spoken of as "real" is illusory, for it does not make sense that some shall gain (i.e., be granted a larger share of GNP than they earn as income) unless others lose. As we shall see in subsequent chapters, the monetary illusion is itself part of this paradox.

The accounting system developed in this chapter will provide a framework within which to discuss the theory of income distribution during inflation, and productivity changes, in the next two chapters.


CAPITAL GAINS, TERMS OF TRADE, AND INFLATION

Inflation not only alters the type of output (as among investment, government consumption, and exports), but it also affects the distribution of income. In the models of the two preceding chapters, payments to factors of production were not divided into type (e.g., wages, profit, etc.), and we assumed no business saving or transfer payments. By thus sim

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