In this chapter you will:

• Learn about input–output accounting and national income accounting, and how they are related;

• See how production uses natural resources indirectly as well as directly;

• Explore the extent to which Gross Domestic Product differences truly reflect differences in economic performance;

• Be introduced to proposals for modifying national income accounting to reflect environmental costs.

In this chapter we will first look at a system of economic accounting – input–output accounting – that records the ways in which industries trade with one another, as well as produce for consumption and investment. Then we will consider national income accounting, in which, inter-industry trade is netted out. National income accounting is where numbers for GDP, Gross Domestic Product, and related concepts such as GNP, Gross National Product, come from. As we shall see, while many commentators treat GDP as the principal indicator of an economy's performance, it is, at best, rather a crude indicator.

INPUT-OUTPUT ACCOUNTING

Input–output accounts describe the structure of an economy in terms of the inputs to its various industry sectors and the disposition of the outputs from those sectors. They are the most comprehensive economic accounts at the level of the whole economy. They are particularly useful in looking at the economy's extractions from and insertions into the natural environment. In order to keep things simple, we will explain the essentials of input–output accounting for an economy that does not trade with any other economy, and in which there is no government economic activity.