National Income Accounting Antu Panini Murshid with revisions/additions by Patricia Hermes.

National Income Accounting Antu Panini Murshid

with revisions/additions by Patricia Hermes

04/19/23Antu Panini Murshid--

Principles of Macroeconomics 2

Why Measure a Nation’s Output

National income statistics help to design government policies

Make international comparisons of well being

Track changes in a country's level of welfare



Gross Domestic Product

Gross domestic product (GDP) is the market value of all final goods and services domestically-produced over a given period of time (usually one year)



Gross National Product

Gross national product (GNP) is the market value of all final goods and services produced by domestically-owned factors of production over a given period of time (usually one year)



Is Market Value a Good Measure? Positives:

Market prices reflect how much people are willing to pay for (and therefore how much they value) goods and services

Negatives: Externalities are not reflected in market price Subsidies and taxes distort market prices Some goods do not have a market value

(non-market transactions)



Final Goods and Intermediate Goods Final goods and services are goods and

services used for final consumption Intermediate goods are those goods

which are produced by one firm and used in the production process by another firm Intermediate goods are used up in the

production process E.g. a tire produced by Goodyear for GM



Why Count Only Final Goods and Services? The value of intermediate goods are

imbedded in the market price of final goods, therefore if we include the value of intermediate goods in our GDP figures we would be….

Double counting including the same good or service more than once in

your valuation of output



Only New Output Is Counted

Both GDP/GNP are flow variables GDP/GNP measure the value of

output over a given period of time usually one year

US GDP for 2001 = final goods produced

in 2001

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Domestically Produced

GDP counts output produced within the geographical boundaries of a country regardless of who produces it Ulker in Istanbul Coca cola plant in Hadimkoy Shell Gas station in Bursa BMW Factory in Bahcesehir

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Domestically Owned

GNP counts output produced by domestically owned factors of production regardless of geographic location

Included in TURKISH GNP Ulker production located in Poland, Germany

and the Czech Republic

Excluded from TURKISH GNP BMW, Shell and Coca cola production located

in Turkey



Measuring GDP Expenditure approach

Add up all expenditures on final goods and services

Income approach Add up all incomes received by factors of

production Output approach

Add up all production values of final output from firms

Every payment (expenditure) by a buyer is at the same time a receipt (income) for the seller

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Circular Flow

Factors of productionsupplied

Market for Factors of

Production

Land, labor, capital

Goods MarketsExpenditure: goods and services bought

Income: factorsof production bought

Goods & services supplied

Food, clothing, etc.

Payments for products

Households Firms

Wages, rents, profits, etc.



Income Approach to GDP

GDP = Rent+ Wages + Interest+ Profit

Land Income

Labor Income

Capital Income

Entrepreneurial

Income

Adds up all income accrued to the owners of the factors of production in the given period



Expenditure Approach: Components of GDP

GDP = C + I + G + Xn

consumption

Investment

Governmentpurchases

Net exports

Adds up all spending on current production



US GDP in 2001

Consumption=6,987 Investment=1,586

Government Purchases=1,858 Net Exports=-348.9 GDP=10,082.2



US GDP in 2001

Consumption 69%

Investment16%

Government18%

Net exports-3%

US GDP 2011

Consumption=10,200 67.7%

Investment=1,870 12.4%Government = 3,604

23.9% Net Exports= -599 -4.0%

GDP=15,060



Agriculture 1.2%Industry 22.7%Services 76.7%

Turkey GDP 2011

Consumption= 685 66.8%Investment = 224 21.8

Government = 189 18.4%

Net Exports= -72 -7%

GDP=1,026




China GDP 2011

Consumption = 3,139 27.8% Investment = 6,120 54.2%

Government = 1,729 15.3% Net Exports= 281

2.7%

GDP=11,290






Consumption Expenditures by households on

goods and services Not included in consumption expenditures

Second-hand sales Used commodities Purely financial transactions Financial Assets such as stocks, bonds

Non-market transactions volunteer work, housework, DIY



Investment

Expenditures by firms on new capital equipment

“Gross private domestic investment”

+ changes in inventories + residential investment (new home construction)



Investment terms Capital Formation

Additions to the stock of capital over a period of time

Investment is a flow variable

Capital stock A nation’s capital stock is the value of

all capital goods in the country (at a point in time)

Capital is a stock variable



Investment in New Capital Why aren’t investments in new

machinery and equipment considered expenditures on intermediate goods? Intermediate goods are used up in the

production process Newly produced machinery and equipment

are considered final goods and firms that buy them are considered final consumers of these goods



Residential “Investment”

Most new homes are purchased by households, however they are not considered as part of consumption since homes are considered as part of the nations capital stock and therefore new home construction is considered to be investment



Changes in Inventories

Inventories are goods that have been produced but have not been sold If inventories were not counted as

part of GDP, we would underestimate the value of total production in a given year



An Example……

Suppose total automobile production in a given year amounts to $100 billion….

Total sales, Consumption (expenditures

by households on cars) = $80 billion

Unsold Cars held by firms, Investment (change in inventories)= $20 billion



Another Example……

Suppose total automobile production in a given year amounts to $100 billion….

Total sales, Consumption (expenditures by

households on cars) = $110 billion

Cars released from stock, Investment (change in inventories)= -$10 billion



Final Sales and GDP

GDP = Final Sales +Change in inventories



Changes Inventories: Why Investment?

Does it make sense to count changes in inventories as part of investment?

You can think about inventories as providing services in the future

In the retail industry inventories constitute an important part of total capital stock



Government Spending

Government spending includes all spending by the

federal, state and local government on new

goods and services + transfer payments



Transfer Payments

Transfer payments are payments for which no goods and services are received in return…therefore they do not represent new production Examples include social security

payments, welfare payments, unemployment benefits



Government Purchases

Government Spending – transfer payments =

Government Purchases

Government Purchases is what is included in GDP



Net Exports

C+I+G needs to be adjusted to properly account for output sold abroad and output produced abroad but sold in the USNet exports = Value of exports –

Value of imports



Nominal GDP

Nominal GDP is measured in current dollars

GDP is measured at market prices However market prices change due to

inflation Changes in nominal GDP are

therefore consistent with changes in price or changes in output… or both



Measuring Changes in Output Consider

an economy that produced 100 crates of apples and 100 crates of oranges in 1990

Year Nominal GDP

1990 100*$1+100*$2=$300

1995 100*$2+100*$4=$600



Real GDP

Real GDP is GDP measured in constant dollars A Base Year for prices is selected : ie

1990 GDP in 1995 is calculated using prices

from 1990 therefore….Real GDP is GDP adjusted for inflation



Measuring Changes in Output Real GDP can be used

to compare output from year-to-year in a given country

%(real GDP) is the measure of Economic Growth

Year Real GDP (1990 dollars)

1990

100*1+100*2=300

1995

100*1+100*2=300



Problems With Real GDP

New goods emerge The prices of these goods should remain at current dollars, but

they will be adjusted down

Relative prices change Computers were relatively more expensive in 1990, is it

appropriate to use 1990 prices to value computers produced in 1995?

Change in quality of goods Prices may increase due to product improvements, not just

inflation



Comparing GDP between Countries GDP Per Capita Total GDP/population

Exchange rate conversions

Converts GDP figures to a common currency

Purchasing Power Parity conversions Further adjust GDP per capita figures to reflect the domestic

value of GDP dollars based on the cost of living within the country



Purchasing Power Parity

The differences between PPP and real exchange rates can be significant:

Nominal GDP GDP PPP

China 6,989 11,290 Japan 5,855 4,981 GDP per/c GDP per/c PPP China : 4,981 US$ 8,400 US$Japan : 46,102 US$ 34,300 US$.



GDP As a Measure of Economic Well-Being

Real GDP per capita is perhaps the best single measure of economic well being Higher real GDP per capita can indicate a higher a standard of living

However GDP is not a perfect measure…



GDP As a Measure of Economic Well-Being Excluded output

Underground/informal economy Home production “non-market transactions” Volunteer work

Overlooked ‘quality of life’ factors Composition and distribution of output Life expectancy, literacy, etc.

Value of a clean environment Value of leisure “psychic income”



Some other issues….

Military spending Environmental clean-up following

“disaster” Colder climates have higher GDP

due to heating production, etc.These all add to GDP, but make

comparisons between countries more problematic



US GDP 2004 GDP:

purchasing power parity - $11.75 trillion (2004 est.)

GDP - real growth rate: 4.4% (2004 est.)

GDP - per capita: purchasing power parity - $40,100 (2004 est.)

GDP - composition by sector: agriculture: 0.9% industry: 19.7% services: 79.4% (2004 est.)



GDP Poland 2004 GDP:

purchasing power parity - $463 billion (2004 est.)






GDP: China 2004 GDP:

purchasing power parity - $7.262 trillion (2004 est.)

GDP - real growth rate: 9.1% (official data) (2004 est.)


GDP - composition by sector: agriculture: 13.8% industry and construction: 52.9% services: 33.3% (2004 est.)



GDP: Tanzania 2004 GDP:

purchasing power parity - $23.71 billion (2004 est.)


GDP - per capita: purchasing power parity - $700 (2004 est.)


National Income Accounting Antu Panini Murshid with revisions/additions by Patricia Hermes.

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Transcript of National Income Accounting Antu Panini Murshid with revisions/additions by Patricia Hermes.