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Chapter 4
Australias national and
international accounts
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Learning objectives
Describe the major components of Australias
national accounts and the measurement and
construction of gross domestic product (GDP)
Demonstrate an understanding of the relationship
between the income, expenditure and production
measures of GDP
Discuss the differences between nominal GDP
(money GDP) and real GDP
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Learning objectives (cont.)
Explain how GDP figures can be adjustedto account for changes in the price level
Explain the limitations of GDP as a measure
of social welfare
Analyse and interpret the nature and structureof the balance of payments (BOP) accounts
Examine the consequences of the structure of
the BOP accounts for achieving external balance
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Gross domestic product
GDP is the total market value of all final goodsand services produced in the economy during
a specific period
Measured in money terms and not in physical units
Usually measured over a year
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What is included in GDP?
Only final goods and services
These are goods and services that are being
purchased for final use and are not to be subject to
further processing, manufacturing or resale
Intermediate goods are excluded to avoiddouble counting
To avoid double counting calculate only the
value added by each firm
The market value of a firms output less the value
of intermediate component is value added
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What is not included in GDP?
GDP excludes non-productive transactions
Transactions where no production of goods
or services occurs
Two major types of non-productive transactions
Purely financial transactions Sales of secondhand goods
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What is not included in GDP? (cont.)
Financial transactions are excluded
Public transfer payments
Private transfer payments
Buying and selling of shares and securities
Sales of secondhand goods are excluded These do not reflect current production
Involve double counting
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Two approaches to measuring
GDP Expenditure approach
Measures GDP as the sum of all the expenditures
involved in taking that total output off the market
Income approach
Sum of the incomes derived from the production
of the GDP
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Expenditure approach
GDP is derived as a sum of:
Consumption expenditures by households (C)
Gross private investment expenditures by
business (I)
Government purchases of goods and services (G)
Net export expenditures (NX)
GDP = C+ I+ G + NX
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Personal consumption
expenditure (C
)Also called household final consumption expenditure,
includes expenditure on:
Durable consumer goods
Cars, refrigerators, videos etc.
Non-durable consumer goods
Milk, bread, shirts etc.
Services
Doctors, mechanics cleaners etc.
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Gross private investment (I)
Defined as:
Final purchases of machinery, equipment
and tools
All building and construction
Changes in stocks (or inventories)
Does not include financial investment or transfer
of paper assets e.g. buying of shares
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Gross and net investment
Net private investment:
Added investment of non-government enterprises
that has occurred in the current year
Net private investment + Depreciation = Gross
Private investment Net private investment determines whether
the economy is expanding, static or declining
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Government purchases of goods (G)
Includes all government spending (federal,
state and local) on:
Final government consumption expenditure
Final government gross fixed capital expenditure
Increases in stocks of government authorities
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Net exports (NX)
Net exports is the difference between the valueof exports (X) and imports (M), orNX
The amount by which foreign spending on
Australian goods and services exceeds Australian
spending on foreign goods and services
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Income approach
GDP is calculated as the sum of wages, salariesand supplements, gross operating surpluses,
gross mixed income and indirect taxes, less
subsidies
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Compensation of employees
Largest component
Payments to suppliers of labour, including:
Wages
Salaries
Superannuation
Direct pensions
Compensation payments
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Gross operating surplus (GOS)
Basically rents, interest and profits
Accounts for the fact that rents, interest
and profits are difficult to distinguish
Excess of gross output value over sum of:
Intermediate consumption
Wages
Salaries
Supplements
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Net operating surplus
GOS less depreciation
Depreciation:
The annual charge that estimates the amount
of capital equipment used up in each years
production Also called capital consumption allowance
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Taxes less subsidies
Indirect taxes are treated as costs of productionby businesses and added to the prices of goods
and services
Indirect business taxes to the government are not
earned income Subsidies are payments to business to encourage
production of a particular commodity, or negative
indirect taxes
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Money GDP vs real GDP
Money GDP is GDP measured in current prices(nominal GDP)
Real GDP is money GDP adjusted for inflation
by an implicit price deflator, also called constant
price GDP
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Inflating and deflating
Two indices of price adjustment are:
Consumer Price Index
Measures the price level of a market basket of
goods and services for a typical family
Implicit price deflator Measures the average level of price changes ofC, I,
G and net exports
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Real and nominal GDP
RealGDP =Money GDP
Price index
(as a decimal)
The formula used for deflating
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GDP and social welfare
Problems in using GDP as an index
of social welfare
Non-market transactions:
Leisure Quality improvements
Composition and distribution of output
Per capita output
GDP and the environment
The underground economy
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International balance of payments
Reflected in international balance of paymentsaccount
Records all transactions between the entities
in Australia and those in foreign nations
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Balance of payment accounts
Two basic subcategories of accounts:
Current account reflecting current transactions
Capital and financial accounts
Capital account transactions of a non-current
and non-financial nature Financial account exchange of financial assets
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Current account
Goods and services Merchandise trade
Balance on merchandise trade
Net services
Balance on goods and services Income
Net income
Unrequited transfers
Net unrequited transfers Balance on current account
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Capital and financial
transactionsCapital account
Comprises capital transfers and entries from
the acquisition (less disposal) of non-produced,
non-financial assets
Financial account
The value of Australias transactions in domestic
and foreign financial assets and liabilities
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Capital and financial
transactions (cont.)Direct versus portfolio investment
Direct investment occurs when investment
is made by non-residents in an Australian
company, or when Australians make investmentin foreign company controlled by Australian
interests
Portfolio investment occurs when non-residents
buy shares/bonds from Australian companies,
or Australians buy shares in foreign companies
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Capital and financial
transactions (cont.) Financial derivatives, other investment and
reserve assets
Financial derivatives represent secondary financial
securities, or contracts that are linked to a primaryfinancial instrument, indicator or commodity
Previously included under portfolio investment
category
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External balance
A level of the current account consistent withthe maintenance of existing (or growing) levels
of consumption, employment and national output
over the long term
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Appendix to Chapter 4
Other national accountingconcepts
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Other national accounting
concepts National turnover
National turnover = GDP + Imports
Gross national expenditure (GNE)
Sum ofC+ I+ G
National income (NI)
GDP less depreciation and net income paid abroad
Gross national income equals GDP less net income
paid overseas
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Other national accounting
concepts (cont.) Domestic factor income (DFI)
GDP at factor cost less depreciation
Household income (HI)
Total income received by persons normally resident
in Australia
Household disposable income (DI)
Household income minus taxes and charges
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