Economics●●●●●Difficulty 2 of 5

How do you add up everything a country makes, and why did a war make it urgent?

Serious attempts to count a country's total output only began in the late 1920s and 1930s, and it took a world war to make the number indispensable.

▶ Start the story

You add up everything a country makes by counting it in a way that cannot fool itself. Statisticians build national accounts: a set of books, much like a company's, but for a whole nation. The books use , which makes the totals on both sides equal even though they measure different things, such as production and the income that production creates. The best-known total is gross domestic product, GDP.

There are three roads to the same number. You can add up what every business produced, you can add up everyone's incomes, or you can add up everything that was bought. In theory they should agree, because every product is bought by somebody and every sale becomes someone's income. The spending road splits into four parts: consumption, investment, government spending and (exports minus imports).

One rule keeps the count honest: only count. If a carmaker buys parts, assembles a car and sells it, only the finished car is added, not the parts too. Otherwise the same steel would be counted again and again.

Around 1930 these books were only just being invented. The Great Depression made accurate measures of the whole economy urgent, and an economist named Simon Kuznets did national income work in the early 1930s so thorough that it set the standard in the field. Then came the war. Kuznets spent 1942 to 1944 at the , using national income accounting to ask how much more weaponry the country could make and which materials would run short first. That wartime role helped GDP win its place as the number a nation checks itself against.

From a depression to a world standard
  1. 1931

    Kuznets takes charge of US national income accounts

  2. 1934

    First US national income assessment for 1929 to 1932

  3. 1942-44

    Kuznets at the

  4. 1944

    : GDP becomes the main tool

  5. 1947

    First formal US national accounts

Quiz me

0/3

  1. 1.Why does counting only final goods stop GDP from being inflated?
  2. 2.Why can the spending approach and the income approach give the same GDP in theory?
  3. 3.How did the Second World War help GDP become the main way to measure economies?

Recap

A country's output can be counted by production, by income or by spending, and only final goods are added.

💡 A trick to remember it · Count the cake three ways, baked, earned or eaten, but never count the flour as well as the cake.

Surprising fact · Kuznets used national income accounting at the War Production Board to work out how much a country could expand military production.

Sources (3)

No source, no claim. Every fact in this lesson (16 claims) cites at least one of these.

  1. [1]National accounts · Wikipedia
  2. [2]Gross domestic product · Wikipedia
  3. [3]Simon Kuznets · Wikipedia
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