Chapter 20 Introduction to macroeconomics and national income accounting

1
Chapter 20Introduction to macroeconomics and
national income accounting

• MIS 112
• Spring 2006

2
Anouncements

• Web page of MIS 112
• www.mis.boun.edu.tr/badur/MIS112
• Web page of Beggs book
• www.begg6.com

3
Macroeconomics is ...

• the study of the economy as a whole
• it deals with broad aggregates
• households
• firms
• government
• foreigners

4
Some key issues in macroeconomics

• Inflation
• the rate of change of the general price level
• inflation 100(P2 - P1)/ P1
• 100?P/P
• ?P P2 - P1
• P1 is the old price level
• P2 is the new price level

5
General price level

• General price level is the weighted average of
  individual goods and services prices in an
  economy
• P ?wiPi
• wi is the weight of each good and Pi its price
• ?wi 1
• Consumer price index CPI (TÜFE)
• Whole sale price index WPI (ÜFE)

6
ExampleInflation Rate calculation

• Annual inflation rate in CPI
• P2January 2006 123.57
• P1 Jsnuary 2005 114.4556
• annual inflation rate
• 100(123.57-114.4556)/114.45567.96
• Monthly inflation rate in CPI
• P2January 2006 123.57
• P1 December 2005 122.65
• monthly inflation rate in January 2006
• 100(123.57-122.65)/122.65 0.75

7
Some key issues in macroeconomics

• Unemployment
• a measure of the number of people looking for
  work, but who are without jobs
• Unemployment rate
• is the percentage of labour force that is
  unemployed
• 100(Lf - Lw)/Lf
• Lf is labour force, Lw is employed labour
• Labour force is number of people working or
  looking for work

8

• Labour force does not include
• retired people
• housewife
• any one who does not want to work voluntarily

9
More key issues in macroeconomics

• Output
• real gross national product (GNP) measures total
  income of an economy
• quantity of goods and services the economy as a
  whole can afford to produce
• it is closely related to the economy's total
  output

10
More key issues in macroeconomics

• Economic growth
• increases in real GNP, an indication of the
  expansion of the economys total output
• growth (GNP2 - GNP1)/GNP1
• ?GNP/GNP
• GNP2 is the new output level
• GNP1 is the old output level

11
More key issues in macroeconomics

• Macroeconomic policy
• a variety of policy measures used by the
  government to affect the overall performance of
  the economy
• taxes
• government spending
• money supply
• interest rates
• exchange rates

12
Inflation in UK, USA and Germany
13
Unemploymentin UK, USA and Germany
14
Economic growthin UK, USA and Germany
15
An Overview

• No government
• Closed to outside economies

16
An Overview

• Households
• Own factors of production which they supply to
  firms
• labour
• capital
• land

• Firms

17
An Overview

• Households
• Own factors of production which they supply to
  firms

• Firms
• use factors of production supplied by households
  to produce goods and services

18
An Overview

• Households
• Own factors of production which they supply to
  firms
• Receives incomes form firms in exchange for
  supplying factors of production
• wages for labour
• profit for capital
• rent for land

• Firms
• use factors of production supplied by households
  to produce goods and services

19
An Overview

• Households
• Own factors of production which they supply to
  firms
• Receives incomes form firms in exchange for
  supplying factors of production

• Firms
• use factors of production supplied by households
  to produce goods and services
• pay households for use of factors of production

20
An Overview

• Households
• Own factors of production which they supply to
  firms
• Receives incomes form firms in exchange for
  supplying factors of production
• Spend on goods and services produced by firms

• Firms
• use factors of production supplied by households
  to produce goods and services
• pay households for use of factors of production

21
An Overview

• Households
• Own factors of production which they supply to
  firms
• Receives incomes form firms in exchange for
  supplying factors of production
• Spend on goods and services produced by firms

• Firms
• use factors of production supplied by households
  to produce goods and services
• pay households for use of factors of production
• Sell goods and services to houshods

22
Goods Services
Firms
Households
23
Three ways of measuring amount of economic
activity

• The value of goods and services produced
• the level of factor earnings
• wage
• profit
• rent
• the value of spending on goods and services

24
Assumptions

• Factor income household spanding
• all income is spent
• The value of output spending
• all goods are sold
• value of output households income
• profits, wage or rent to households

25
National Income Accounting

• Gross domestic product (GDP)
• measures the output produced by factors of
  production located in the domestic economy
• GDP GNP
• when there is no foreign sector

26
Continued

• Value added
• is the increase in the value of goods as a result
  of the production process
• Final goods
• are goods purchased by the ultimate user,
• either consumer goods purchased by households ex
  cars,food
• or capital goods such as machinery purchased by
  firms ex copy machines

27
continued

• Intermediate goods
• are partly finished goods which form inputs to
  another firms production process and are used up
  in that process
• Examples
• steel
• petrolium
• tyre

28
A Simple Example

• 4 good economy
• steel, tyre, machinery, cars
• final goods
• cars, machinery (capital good)
• intermediate goods
• tyres, steel

29
Tyre 500
500
Steel 4000
car
3000
5000
households
Machine 1000
1000
2000
Car producers
30
A Simple Example
31
What is the value of output

• steel 4000
• tyres 500
• machine 2000
• cars 5000
• -------------------------
• total 11500

32
Wrong calculations

• double counting in the previous calculations
• total value of output is
• cars 5000
• machines 2000
• --------------------------
• total 7000
• count only final goods cars machine

33

• 7000 is spent by firms and households to the
  output
• only 7000 income is generated how
• steel total value 300010004000
• steel industry pays 4000 wages, profits
• value of tyre500 paid as wages or profit

34

• machine
• pays 1000 to purchase steel
• sells the machine at 2000
• 2000-1000 is paid as profits or wages
• cars
• pays 3000 for steel
• 500 for tyre
• sells 5000
• 5000 - (3000500)1500 as wage or profit

35

• value added of
• cars 1500
• steel 4000
• tyre 500
• machine 1000
• total 7000
• paid as wage or profit as factor income
• Y 7000 either by factor income or
• by value of output or by spending

36
Investment and Saving

• Investment
• is the purchase of new capital goods by firms
• Saving
• is that part of income which is not spent buying
  goods and services

37
Investment spending 2000
Spendings on Goods services 5000
Saving 2000
Goods Services
Firms
Households
Services of productive factors
Factor Incomes 7000
38

• A leakage
• from the circular flow is money no longer
  recycled from households to firms
• An injection
• is money that flows to firms without being cycled
  through households

39

• Y GDP
• C households spending on consumption
• S saving
• S ? Y - C or Y ? C S
• Y or GDP by expenditure
• Y ? C I or
• Y ? C I C S
• thus S ? I

40
The circular flow of income, expenditure and
output
41
The circular flow of income, expenditure and
output
I2000
C I
50002000
C
S2000
5000
7000
42
Intuition of IS

• The reason that I S is not investors uses the
  funds saved by households in this model with no
  financial sector the saving decisions and the
  investments decisions are totally independent
• This equality comes from accounting
• Knowing consumption and investments ex C 5000
  and I 2000

43

• In the previous simple economy
• consumption is C5000
• Investment by firms I 2000
• total income 7000 Y7000
• households spend only 5000 of their income of
  7000 so they must save 2000
• S Y-C 7000-50002000

44

• Total expenditures on goods and services is
  500020007000
• This is transferred as factor income
• But we know that consumption is 5000 so
  households must save 2000 of their factor income

45

• Similarly if we know consumption and saving as
  5000 and 2000
• Then factor income of households is 50002000
  7000
• But 5000 of which comes from consumption
  expenditure then to generate the remaining 2000
  of the factor income firms must be investing 2000
  in machinery

46
Stocks and Flows

• A stock
• Is a the quantity of an asset at a point in time
  such
• 100 machines on 31 December 2000
• A flow
• Is the stream of services or income provided by
  assets during a time period
• Income generated by that machine in the year 2000

47
Examples of Flows

• All types of income and their components are flow
• Consumption in a year
• Investment expenditures in 2005
• Sale in December 2005
• These are streams of money flowing or strem of
  factor services from one group to another

48
Examples of Stocks

• Wealth of a single person or the total wealth of
  all households in the economy
• Total amount of money deposited in banks at the
  end of 31 January 2005
• The capital stock in the economy the total
  number of machines used in production
• Inventories of Migros

49
The relation between stocks and flows

• Saving (a flow variable) is an increase in
  financial wealth (a stock variable) of households
  firms or government
• In macroeconomics saving is a withdrawel of some
  money from the circular flow
• Wealth31.12.2005 10000, Saving20062000
• Wealth31.12.2006 wealth31.12.2005savings2006
• wealth31.12.2006 2000 1000012000

50
Savings during 2000
51
Dissaving

• Any period when the households save some of their
  income their financial wealth is increasing
• But they can also dissave that is
• Use some portion of their wealth in addition to
  their income to spend on goods an services

52
Example of dissaving

• Say Y 7000 their factor income
• S -2000
• Y ? CS
• C Y-S
• C 7000 (-2000) 9000
• Then wealth of households decreased by 2000

53
The circular flow of income, with dissaving
I2000
Total expenditure 90002000tot
C I
dissaving S-2000
C
9000
4000
Factor income
7000
Firms saving
54
Another stock flow relation

• Investment which is an injection by firms is a
  flow variable
• Capital stock the amount of all machines and
  inventory is a stock
• Investment resusts in an increase in stock of
  capital

55

• K31.12.2000 I2000 K31.12.1999
• K capital stock
• I investment
• Example
• I2000 2000, K31.12.1999 8000
• K31.12.2000 2000800010000
• In an economy with no financial sector investors
  (firms) use their own financial wealth (simply
  money) to finance this investment

56

• We can assume that firms have a huge amount of
  financial wealth like households
• They use this money for their investment
  expenditures
• The capital stock including machinery and
  inventory of goods increase
• The investment expenditure turns into factor
  income in the form of wages profit or rent

57
Example of stock flow conversion

• on 31.02.1999
• WH31.12.1999 10000.WHfinancial wealth of
  households
• WF31.12.1999 8000.WFfinancial wealth of firms
• K31.12.1999 6000
• During the year 2000
• S2000,hence I2000,C5000

58

• on 31.12.2000
• WH31.12.2000 WH31.12.1999 S2000
• 10000 2000
  12000
• WF31.12.2000 WF31.12.1999 - I2000
• 8000 - 2000
  6000
• K31.12.2000 K31.12.1999 I2000
• 6000 2000 8000

59
On 31.12.1999
Firms Financial wealth
Households Financial wealth
10000
8000
6000
households
firms
Capital stock
60
During the year 2000
Firms Financial wealth
Households Financial wealth
10000
8000 -
5000
2000
2000
6000
households
firms
Capital stock
7000
61
On 31.12.2000
Firms Financial wealth
Households Financial wealth
12000
6000
8000
households
firms
Capital stock
62
What is value added

• Profit revenue - costs
• PQ - (wages raw material)
• rearranging terms
• revenue - raw mat cost
• profit wages
• value added distributed as factor income

63
Some assumptions

• The firms hire labour and has to pay the wages as
  factor income to employers.
• Profits are the income of shareholders the
  owners of the company. So they may decide not to
  distribute the profit as income
• In most of our analysis we assume that the firm
  distribute the profit as income

64

• If not profits are left in the cash hence
  increases the wealth of the business firms
• The undistributed profits are withdrawels from
  the firms so they are regarded as business
  savings

65
An example

• Consider the car industry in the previous example
• 10 cars are sold each at P 500
• for each car
• 300 steel and 50 tyre
• 4 workers are needed,
• wage for worker w25 per car

66
Example continued

• Total Profit 10500 - 10(30050425)
• revenue - cost
• 500
• value added profit wage
• 500 10425 1500
• if the shareholders want to distribute only 300
  of the profit as factor income
• 500-300200 is left in firm as business saving

67
Value added of the steel ind.

• Steel manufacturer sells 30001000 steel
• 100 workers/hour are needed again wage rate is 25
  per worker
• Profit revenue - costs
• 10003000 10025 1500
• Value added profit wage
• 1500 2500 4000

68
New circular flow with business saving
I2000
C I
50002000
C
S1800
5000
200
Business saving
Factor income68001000300 5500
wageprofit others

car
69

• Injections leakages
• 2000 200 1800
• investment bus saving housh. S.

70
Depreciation

• Capital depreciates over time
• becoming less productive and less valuable
• Gross investment
• the production of new capital goods and the
  improvement of existing capital goods
• Net investment
• gross investment minus the depreciation of the
  existing capital stock

71
In the previous example

• The capital stock as off 31.12.1999 is 6000
• Suppose 1000 worth of that machinery become
  useless during the year 2000
• Firms make an investment of 2000 during 2000
• Then gross investment 2000
• But net investment Gross I depreciation of
  capital during 2000

72

• Net I 2000 1000 1000
• Only 1000 worth of new capital (machinery) is
  added to the capital stock which is the net
  investment
• The remaining 1000 is used to replace the
  depreciated or useless machines

73
How do we show depreciation in the circular flow

• Profit revenue - costs
• In general cost include
• Raw material
• Wages paid to labor
• And cost of capital depreciation which is
  recorded as an expense in accounting
• Profit revenue (wageraw matdepreciation)
• But value added is profit wages
• Depreciation is a reduction in profits
• It is kept as money in the cash of firms.

74

• So we can consider it as an undistributed profit
• Then depreciation expenses increases the wealth
  of firms
• In summary it is considered as business saving

75

• The details of this procedure is not important
  for us
• Just consider the part of gross investment going
  to depreciation as a leakage from the circular
  flow
• This part is not distributed as factor income it
  is deduced from profits

76
Example

• C 5000 Ig 2000 (gross investment)
• D 1500 (depreciation)
• Then net investment In becomes
• In Ig D 2000 1500 500
• Total expenditure CIg500020007000
• Factor income CIn 50005005500

77

• Business saving Sb depreciation
• 1500
• Households saving
• Sh factor income consumption
• 5500 50000 500
• Sh D Ig or Sh Sb Ig
• leakages injections leakages
  injections
• 5001500 2000

78
New circular flow with depreciation
I2000
C I
50002000
C
S500
5000
1500
Business saving or depreciation
Factor income55005005000

79
Inventories

• What if households do not purchase all the output
• Inventories or stocks
• are goods currently held by a firm for future
  production or sale
• they can be both final goods or intermediate
  goods
• We treat stocks as working capital and hence as a
  kind of investments by firms

80
Example

• Households purchase 4000 worth of cars 8 cars
  at a price of 500 each
• then C 4000
• total expenditure on final good
• 4000 by households on 8 cars
• 2000 by car producer on machines
• 1000 by car producer on stocks of 2 cars

81

• Here investment has two components
• On machinery by 2000
• On stocks of cars by 1000 (inventory investment)
• Car producing firm producees these 2 cars
• But can not or do not sell
• Pay raw material costs steel tyre
• Pay wages for workers...

82
The circular flow of income, expenditure and
output
I2000 1000
C I
40003000
C
S3000
4000
7000
83
What is neglected in the previous example?

• As two cars are not sold, kept int the inventory
• Try to find the hidden assumption or (little
  mistake) in the previous circular flow.
  Considering the costs and prices of cars in our
  previous example
• otherwise some of the income figures will be
  slightly different

84
Government in the circular flow
85
Government

• Government
• collects direct taxes on factor income
• wages, profit, rent Td
• collects indirect taxes (sales taxes) on sales Te
• in Turkey KDV (katma deger vergisi)
• Spends on goods and services G
• wages of civil servants, military expenses,
  health, education, all equipment

86

• Transfer payments or benefits
• wages of retired, unemployment subsidies,
• subsidies to private firms and state owned firms
  (in Turkey KITs kamu iktisadi tessekkulleri and
  state banks kamu bankalari Ziraat Bankasi)
• transfer payments do not add to GDP neither to
  national income not to national output.
• Not added to G DP no corresponding value added
• taxes and transfers redistribute income from
  people being taxed towards people being
  subsidized

87
Government budget

• Government budget
• Td Te - G - B
• revenue expenses
• Government budget deficit
• G B -Td - Te
• expenses revenue
• Budget deficit - Gevernmet budget
• G, B are injections to
• Td, Te are wtihdrawals from the
• circular flow

88
Government in the circular flow
89
A sales or value added tax example

• The value added tax rate is 0.1
• before the tax
• C5000, I2000. G3000,
• GDP or YCIG 10000

90
Value added tax paid by car industry

• Indirect tax by car industry
• revenue sales value added T total
• 5000 0.15000
  5500
• costs
• steel 3000 300
  3300
• tyre 500 50
  550
• total cost 3500 350
  3850
• difference 1500 150 1650
• value added value added tax
  paid to gov.
• value addedd tax 0.11500150

91

• In general value added tax is proportional to the
  total value added or total value of output
• in this example Te 100000.11000
• This 1000 is collected by government as a kind of
  revenue

92
Market and Basic Prices

• Market price of cars is 5500
• Includes VAT paid by consumers
• basic price of cars is 5000
• 500 VAT is paid to governmet as VAT
• 150 50 300
• car industry tyre steel
• Eventually 5000 is factor income generated by car
  industry

93
GDP at market and basic pricces

• GDP at market prices
• measures domestic output inclusive of indirect
  taxes on goods and services.
• GDP at market prices C I G
• GDP at basic prices
• measures domestic output exclusive of indirect
  taxes on goods and services
• GDP at basic prices C I G - Te
• continuing with the previous ex.

94

• Here C,I, and G includes value added tax or basic
  preice
• Note that governmet take value added tax from her
  own expenditures as well

95

• continuing with the previous ex.
• GDP at market p.
• Y C I G
• 5500 2200 3300 11000 (10.1)10000
• GDP at basic p.
• 5500 2200 3300 (500200300)10000
• market value -
  indirect tax
• the expenditure and output measures of GDP net of
  indirect taxes is 10000
• the income measure of GDP is 10000

96

• Here C5500 (at market prices)
• 5000 of which is price of cars without VAT
• 500 VAT paid by consumer goods
• Basic price of Consumption good is 5000
• I includes VAT paid
• I2200 firms pay 200 VAT
• 2200 is the market price of investment goods
• 2000 is basic price of investment goods
• And G 3300 includes VAT
• Governmets get VAT from her expenditures as well

97
Total VAT15050100400700 in addition
governmet by private car tyre mach
steel pays a VAT of 300
sector
50 VAT
Tyre 500
400 VAT
150 VAT
550
Steel 4000
car
3300
5500
households
100 VAT
Machine 1000
1100
2200
Car producers
98
Government in previous example
2200
220055003300
I
10000
4500
C I G
C I G - Te
C
S
G
5500
3300
1000
Te
Households
Firms
Government
Y
Y
10000
99
Injection withdrawals in previous example

• S Te I G
• 4500 1000 2200 3300
• withdrawels injections

100
Disposable income

• Personal disposable income YD
• is household income after direct taxes and
  transfer payments.
• It shows how much households have available for
  spending and saving.
• YD ? Y B Td but YD S C
• As disposable income is either saved or consumed
• savings become S ? Y B - Td - C
• so eliminating YD
• S C ? Y B - Td or Y ? S C - B Td

101

• C S - B Td ? Y ? C I G - Te
• factor income expenditure
• since these expressions are identical
• S Te Td ? I G B
• total withdrawals total injections
• or
• S - I ? G B - Te - Td

102

• S - I ? G B - Te Td
• S- I
• total surplus of the private sector comes from
  the total budget deficit of the government
• The private sector has can run a surplus only if
  government has a deficit or vice versa

103
Adding the foreign sector

• To incorporate the foreign sector into the
  circular flow
• we must recognize that residents of a country
  will buy imports from abroad
• and that domestic firms will sell (export) goods
  and services abroad.

104

• Denoting total import by Z
• Z Zc Zi Zg
• Zc imports by households
• Zi imports by firms (machinery)
• Zg imports by government
• these components are not part of domestic output
  and
• do not give rise to domestic income
• Do not show up in the output measure of GDP but
  do show up in final expenditure

105

• Subtracting the individual components from C, I,
  and G and measure the expenditure on domestically
  produced output as
• GDP C- Zc I- Zi G - Zg X
• or, measure the total expenditures on C, I, G, X
  and subtract total imports from
• GDP C I G X - Z (market prices)
• C I G NX, NX X-Z net exports

106

• GDP C I G X Z at market prices
• C expenditure by domestic households
• Includes consumption of domesticly produced
  output imported consumer goods
• I investment expenditures by firms including
  imported machines
• G government expenditure on output including
  government imports
• X expenditure of foreigners on domesticly
  produced output
• Z sum of all imports (householdfirmsgovernment)
  
• Here C I G and X includes VAT
• Z does not include VAT

107

• GDP C I G NX-Te (basic prices)
• imports are leakages, exports are injections so
• CS-BTd ? Y ? CIG -TeX-Z
• factor income expenditure
• since these expressions are identical
• S Te Td Z ? I G B X
• total withdrawals total injections

108

• or
• S - I ? (G B - Te - Td) NX
• private budget
  net exports
• surplus deficit
• the private sector surplus (a leakage from
  circular flow) comes from the budget deficit of
  the government or from net exports

109
Adding export and imports
X
Zi
Zc
Zg
110
An Example

• 10 cars are produced and sold in Turkey (no
  inventory accumulation)
• Price of a car 500 (without VAT)
• 2 cars are purchased by Bogazici University
• 1 car is purchased by Sabanci Holding
• 5 cars are purchased by Turkish citizents leaving
  in Turkey
• 2 cars are purchhased by Rauf Denktas
• In addition
• Bogazici Univ. purchased 1 mercedes from Germany
• Sabanci Hoding purchased 1 mercedes from Germany
• Turkish citizents purchased 2 mercedeses form
  Ger.
• Also
• Sabanci invested on a machine produced in Turkey
  with a value of 2000
• VAT rate 0.1 or 10
• Price of a mercedes 750

111

• What is total consumption expenditures?
• Turkish citizens purchase 5 domestically produced
  cars plus
• 2 cars are imported from Germany
• C 5500 2750 4000 (basic prices)
• C 40000.14000 4400 at market prices
• Consumers pay 400 VAT 250 for domestic cars and
  150 for imported cars

112

• They spend 2500250 on domestic cars 250 goes to
  government as VAT
• They spend 1500150 on imported cars
• 1500 goes to Germany
• 150 goes to Turkish Government as VAT

113

• What is total investment expenditures
• Sabanci purchased
• 1 domestic car at a price of 500
• 1 imported car at a price of 750
• A machine at 2000
• Total investments of SH
• I 5007502000 3250 basic prices
• I 32501.1 at market prices 3250325 at
  market prices

114

• Sabanci H spends 500 on a domestic car and pays
  50 VAT for that
• 2000 on machine 200 VAT for that machine
• 750 on a mercedes 75 VAT on mercedes
• Total VAT 5020075 325

115

• What is government spending G?
• 2 domestic cars 5500
• 1 imported 1750
• G 1000750 1750 at basic prices
• G 17501.1 1750 175 at market prices
  including VAT

116

• What is imports Z
• Imports by consumers 2750 1500 at basic prices
• Imports by Sabanci Holding
• 750
• Imports by Bogazici a gov inst.
• 7501750
• Total Z 15007507503000 at basic prices
• Shall we compute the Z at market prices
• No..........................Why?

117

• What is exports
• Denktas purchased 2 cars produced in Turkey
• X 2500 at basic prices
• X 10001.1 1100 at market prices
• He pays 1000 to Turkish car producing firm 100
  VAT to Turkish Government

118

• What is Turkish GDP at basic prices
• Excluding VAT
• GDP Y C I G X Z
• 4000325017501000
• -1500 - 750 - 750
• 10000-30007000
• What is GDP at market prices?
• GDPmarket4400357519251100
• -1500-750- 750 8000
  

119

• What is total indirect tax
• Total value added tax collected by Turkish
  goverrnment
• Total consumption 4000
• 2500 domestic cars 1500 imported cars
• Government take 400 VAT form consumption
• Total investmnt exp by Sabanci Hol 3250
  including 2500 domstic goods750 imported goods
• Government takes 325 VAT

120

• Total gov expenditures of Bogazici University
  1750 1000 domestic 750 imported
• Government takes 175 VAT
• Total exports 1000
• Government takes 100 VAT
• Total VAT 4003251751001000

121

• GDP at basic prices
• (C I G X )at market prices
• -Z (at basic prices)
• - VAT(collected from total consumption
  investment gov expexports)
• VAT collected from imports are already counted in
  C,I,G and X
• GDPbasic GDPmarket VAT
• 8000 - 1000 7000

122
GDP and GNP

• Gross domestic product (GDP)
• measures the output produced by factors of
  production located in the domestic economy
• Gross national product (GNP)
• measures the total income earned by domestic
  citizens
• GNP GDP net income from abroad

123

• In the previous example profit of the car company
  was 500
• IF 25 of the car company were owned by
  foreigners
• 5000.25 of that profit goes to abroad
• it is part of GDP because it is earned by
  domestic factors lacated in the domestic country
• not part of GNP not income to domesic citizents

124

• Income earned by Turkish citizens in Germany is
  neither contributes to Turkish GNP not to GDP
• Portion of that income sent ot their families in
  Turkey is
• part of Turkish GNP
• income of Turkish citizens located in TR
• not part of Turkish GDP
• not earned by factors lacated in Turkey

125
Three measures of national output

• Expenditure
• the sum of expenditures in the economy
• Y C I G X - Z
• Income
• the sum of incomes paid for factor services
• wages, profits, etc.
• Output
• the sum of output (value added) produced in the
  economy

126
From GNP to National Income

• National Income or NI
• is the economys net national product. It is GNP
  minus depreciation at basic prices (net national
  product NNP)
• NNP GNP - D
• CIgGNXNIA-Te-D

127
National income accounting a summary
GNP (and GNI) at market prices
128
A final example

• C5000,I2000,G3000,X2500,Z1500
• these are at basic prices
• depreciation D1000
• indirect tax rateTe 0.1
• income to abroad500
• income from abroad750
• direct tax Td1750
• transfers B500

129
solution

• GDP at basic prices
• GDP C I G X-Z C I G NX
• 5000200030002500-1500 11000
• GDP at market prices
• 5500220033002750-150012250
• NNP net national product
• GNP - D (at basic prices)
• GDPNIA11000750-500-100010250
• GDPbasic NIA D
  

130

• Disposable income YD
• YD NNI-TdB10250-17505009000
• Households savings S
• S YD-C 9000- 5500 3500
• injection withdrawals
• G I NX NIA B S Td Te D
• 33002200 1250 250 500 3500 1750
  12501000
• 7500
  7500

131
circular flow of the example
X-Z
1250
2200
12250
3500
3300
11000
5500
1250
9000
1000
750
500
NNP10250
132
What GNP does and does not measure

• Some care is needed
• to distinguish between real and nominal
  measurements
• to take account of population changes
• to remember that GNP is not a comprehensive
  measure of everything that contributes to
  economic welfare

133
Nominal and real GNP

• Nominal GNP
• measures GNP at the prices prevailing when
  income was earned
• Real GNP or GNP at constant prices
• adjusts for inflation by measuring GNP in
  different years at the prices prevailing at some
  particular calendar date known as the base year

134
Nominal and real GNP
135
The GNP deflator

• GNP deflator
• is the ratio of nominal GNP to real GNP expressed
  as an index
• GNP deflator nominal GNP100
• real GNP
• in the previous example
• deflator 1440 100 167
• 860

136
Per capita real GNP

• Per capita real GNP
• is real GNP divided by the total population
• It is real GNP per head

137
GNP does not include

• Subtract nuisances such as
• noise pollution
• these are created during production but
  classified as beds
• goods and services which are not marketed are
  excluded
• household chores, do-it-yourself activities,
  unreported jobs
• Add leisure if people prefer it to more income

138
GNP should not include

• Household-household transactions
• if you buy a used car
• or buy a used computer
• or buy an old house
• these transactions does not generate income
• income is transferred from one household to the
  other
• but income distribution may change

139
Question

• The following aggregate quantities are expressed
  in basic prices consumption expenditures C3000,
  Investment I2000, government spending G1500,
  exports X1500.Z1000, Indirect tax rate is
  te0.1 In this particular year government has a
  balance budget. Transfer payments B250, income
  from abroad IA500 (B and IA are not taxed.)
  Compute the following quantities about national
  income accounting
• GDP at basic prices (1.5 pnt)
• GDP at market prices (1.5 pnt)
• Direct tax rate of factor income td (1.5 pnt)
• GNP at market prices (1.5 pnt)
• Disposable income YD (1.5 pnt)
• Savings S (1.5 pnt)

140

• GDPbasic3000200015001500-1000
• C I G X -
  Z
• 7000
• GDPmar3300220016501650-1000
• C I G X - Z
• 7800

141
Direct tax rate

• Balanced budget
• G B TdTe
• 1650250TdTe
• Note G includes VAT paid by gov.
• Te 300200150150800
• Td 1650250-8001100
• tdTd/factor_income 1100/700000.157

142
GNP at market

• GNPmarGDPmarNIA
• 7800 5008300
• Disposable income
• Ydfactor incomeNIA B - Td
• 7000 500250 -1100
• 6650
• Saving S Yd C S
• 6650 3300 S or S 3350

143
circular flow of the example
X-Z
1250
2200
7800
3350
3300
7000
3300
800
250-1100
6650
500
NNP7500
144
Question

• The following aggregate quantities are expressed
  in basic prices consumption expenditures C3000,
  Investment I2000, government spending G3000,
  exports X3000, imports Z1000. Indirect tax rate
  is te0.1 no indirect tax is taken from exports.
  At the end of last year, total value of capital
  stock was 8000. Depreciation rate is 20 20 of
  the capital stock is shown as depreciation. Total
  wage payments is W5000. All profit is
  distributed to shareholders but 20 of the
  shareholders are foreigners. Direct tax rate is
  td0.1. Transfer payments B250, income from
  abroad IA500 (B and IA are not taxed.) Compute
  the following quantities about national income
  accounting

145

• GDP at basic prices (1 pnt)
• GDP at market prices (1 pnt)
• GNP at market prices (1 pnt)
• Government budget deficit (1 pnt)
• Disposable income YD (1 pnt)
• Savings S (1 pnt)
• Change in wealth of households (1 pnt)
• Change in wealth of firms (1 pnt)

146

• GDPbasic3000200030003000-1000
• C I G X -
  Z
• 10000
• GDPmar3300220033003000-1000
• C I G X - Z
• 10800
• GNPmarGDPmarNIA
• 10800 500-IFSh
• IFSh income of foreign shareholders

147

• Depreciation
• D0.2Capital_stock
• Capital_stock old_CapitalInvestment
• 8000 200010000
• D0.2100002000

148

• Profits GDPbasic-depreciation-wages
• 10000 - 2000-50003000
• 20 of profit inocme of foreigners
• 0.23000600(income of fereigners)
• So
• GNPmarGDPmarNIA
• 10800 500-60010700

149

• Government budget
• TdTe - G - B
• TdTe - 3300-250
• Note G includes VAT paid by gov.
• Te 300200300800
• Td 0.1(GDPbasic-D) 0.1(10000-0.210000)
• 800
• Gov Bud 800800-3300-250-1450

150

• Disposable income Yd
• Yd GNPbasic- DBIA-Td-foreign
  shares_going_abroad_after_taxation
• Yd10000-2000250500-800-5407410
• Notice foreign shares after taxation
• Total profit 10000-wages-D3000
• 0.23000600 total profit of foreign.
• 6000.160 is taken as tax by Gov
• 600-60 540 going abroad not part of disposable
  income
• Saving S Yd-C7410-33004110

151

• Wealth change households
• Savings of households 4110
• Wealth change of firms
• -2200 investment including VAT
• 2000 value of new machines
• Depreciation 2000
• -200 tax paid as VAT-2000-2200

152
circular flow of the example
X-Z
2000
2200
10800
4110
3300
10000
3300
800
7410
-550
2000
500
540
153
Question

• Consider a three sector economy cars, steel,
  tire. During the year XXXX 10 cars are produced
  with a selling price of 500 each, 40 tires are
  produced with a price of 25 each. All tires are
  purchased by car industry. Each car needs 4
  tires. In addition each car needs 200 worth of
  steel and 100 TL of wages are paid per car. Both
  tire and steel industries each purchases one car
  to be used in their production processes. 2 cars
  are unsold and left in the inventory of the car
  producer. 2000 worth of steel and 40 tires are
  produced in the year XXXX. Steel and tire
  industries pay 1000 and 500 TL of total wages
  respectively

154

• calculate total consumption (2 pnt)
• total investment (2 pnt)
• total inventory investment (2 pnt)
• total value added of this economy in the year
  XXXX (2 pnt)

155
2cars 1000 investm
Tyre 1000
1000
Steel 2000
car
2000
3000
households
2 cars Inventory 2400
156

• C6 cars 65003000
• I capital inventory
• 2500 2400 1800
• I_inventory 2400 (unsold cars)
• For each car
• 200 steel
• 100 tyre
• 100 wages
• 400 is spent by car producer
• Not sold weiting to be sold

157

• Value added of the economy
• 2000 steel
• 1000 tyre
• 200810021800 cars
• 4800
• Or 6 cars for consumption
• 2 cars for capital investment
• 2 cars for inventory investment
• 300010008004800