MacroeconomicsI_working_version (1)

Measuring Domestic Output, National Income 51
Proprietors’ income. To characterise properly the item “profits” in national accounting we
must distinguish between two accounts: proprietors’ income, which is the net income of
sole proprietorship and partnership, and corporate profits.
Corporate profits. The earnings of corporations are usually distributed further in three
channels.
• Firstly, a part of the profit is collected as corporate income tax, which flows to
government.
• The stockholders receive a part of (or all) remaining profit as dividends. The ultimate
receivers of such payments are the households, because they are the ultimate owners of
all corporations.
• A part of remaining profit may be invested currently or in the future. This part of
profits, increasing the real assets of the businesses, is called undistributed corporate
profits.
6.2.2.1. Three Adjustments to Balance the Accounts
Three adjustments must be done to balance both sides of the account. These adjustments
represent three items, which must be added.
Consumption of fixed capital (depreciation). Capital purchased in some particular year is
usually productively used for many years after. Depreciation is the annual charge, which
corresponds to the amount of capital equipment used up in each year’s production. This
part of capital must be counted to avoid some gross understatement of profit and, thus, of
total income. The total costs of such “long-lived” capital goods must be allocated over all
their lives.
From the macroeconomic prospect a large depreciation charge, called consumption of
fixed capital, should be made against the economy’s private and public stock of capital in
order to count accurately the profits and total income. Public capital involves government
buildings, motorways, port facilities, etc. Consumption of fixed capital represents the
amount of capital goods, which is consumed in producing current GDP. That part of GDP
is put aside to replace the capital goods used up in current production. The difference
between gross private investment, Ig, and net private investment, In, equals the part of that
depreciation charge relating to the private sector (without government).
Indirect business taxes. These taxes are added to prices of products because they are
considered to be a cost of production by firms selling these products. General sales taxes,
excise taxes, business property taxes, license fees, and custom duties are the typical
examples of such taxes.
Net foreign factor income. To get the accurate balance between national income (NI) and
gross domestic product (GDP) means to move from what is labelled under “national” to