11' Macroeconomics and national income accounts

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11. Macroeconomics and national income accounts

• GDP and its measurement
• Output approach, income approach and expenditure
  approach
• The components of GDP
• From GDP to GNP to National Income
• How good an indicator of a countrys living
  standards is GDP?

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National income accounting

• National income accounting is about measuring
  economic activity
• One of the most comprehensive measures of a
  countrys economic activity is the value of total
  production of its goods and services, called
  national product
• The rate of economic growth is an important
  indicator of a countrys economic performance
  (although a high growth rate does not necessarily
  lead to less poverty)

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Gross Domestic Product

• Gross Domestic Product (GDP) is the most widely
  reported measure to indicate a countrys economic
  performance
• GDP is the market value of all final goods and
  services produced in a nation during a specific
  period of time, usually a quarter or a year
• GDP excludes production abroad by British (i.e.
  domestic!) companies but includes the production
  undertaken in Britain by foreign companies (i.e.
  the value of activity within the country)

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Gross National Product

• Gross National Product (GNP) is the market value
  of all goods and services produced by nationals
  (e.g. UK citizens) wherever they are located.
• GDP/GNP are expressed in monetary terms, thus
  rely on the markets to establish the relative
  values of goods and services
• E.g. In the UK in 2003 the value of GNP at
  market prices was 1,121.2 billions
• Net factor income from abroad was 21.8 bn.
• gt GDP at market prices was 1,099.4 bn.

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supply
Product Markets (Spending on goods Services)
Actual goods services
demand
expenditure
The circular flow of income
Households
Firms
Factor payments
demand
Factor Markets (Services of productive factors)
supply
Factors of production
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Points to remember when measuring GDP...

• Secondhand transactions are not included (since
  merely exchanges of previously produced goods)
• (b) Private or public transfer payments are not
  counted (e.g. unemployment insurance benefits
  not made in exchange of a service gt no new
  production)
• Only final goods, intermediate goods not included
  (e.g. bread yes, flour no)
• gt If any of these items were included in the
  calculations, the measurement of economic
  activity would be subject to double-counting

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Three different ways of measuring GDP

• Output approach, income approach, expenditure
  approach
• GDP may be measured as the total output of final
  goods and services. This uses the concept of
  value added
• Value added difference between the value of a
  good as it leaves a stage of production and the
  costs of that good as it entered that stage
• Summing the value-added of the different stages
  of production gives the total value of economic
  activity

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Measuring value added
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• GDP may be measured as the total income earned by
  the factors of production (i.e. land, labour and
  capital) derived from producing the output gt sum
  of factor incomes
• GDP may be measured by using the expenditure on
  total output. It is measured initially at market
  prices, including indirect taxes such as VAT but
  excluding subsidies. This approach provides a
  very useful identity Y C I G X M
• (see why in a couple of slides!)

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• The income and expenditure measures are expressed
  in monetary terms at the market prices that
  prevail (i.e. at current prices or in nominal
  terms)
• Nominal GDP (p x q) can grow because of three
  reasons
• Output (q) rises and prices remain unchanged
• Prices (p) rise and output remains unchanged
• Both output and prices rise
• In order to control for price changes GDP can be
  calculated using a base set of prices. The real
  measures can then be obtained by deflating GDP by
  a relevant price index

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• The Expenditure approach is important for
  highlighting linkages between macroeconomic
  indicators .

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Component parts of expenditure based GDP

• UK GDP (Y), 2003 estimated (billion) 1,099.4
• Consumption expenditure (C) 951.4
• (on durables, non-durables, services)
• Investment (I) 175.8
• (stock-building, capital formation, housing)
• Government expenditure (G) 231.7
• (roads, health, education, but not transfer
  payments)
• Exports of goods and services (X) 276.0
• Imports of goods and services (M) 308.4
• (C, I,G have import component, thus M need to be
  subtracted from economic activity)

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National Accounts Identity

• (1) Y C I G X - M

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Gross domestic product or grossly deceptive
product?

• Non-market transactions
• The care economy (underestimation of
  housewives/husbands work)
• Subsistence agriculture
• Distribution, nature and quality of goods
  produced
• Leisure time
• The hidden economy
• Illegal activities
• Informal sector
• Economic bads
• No distinction between green and polluting
  industries

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• This list of omissions suggests that GDP figures
  are a dubious guide to the quality of life in
  different countries
• Nevertheless GDP per capita is used a broad
  indicator of living standards
• Examples of alternative measures
• HDI (weighted average of life expectancy,
  education and income)
• GDI (HDI gender inequalities)

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Other national accounts

• GDP Net Factor Income (NFI) GNP
• Net National Product (NNP) GNP - Depreciation
• (depreciation estimate of the capital worn out
  by producing GDP)
• National Income total income earned by the
  owners of resources, including wages, rents,
  interest and profits
• NI NNP - indirect taxes taxes on goods sold,
  e.g. VAT
• Personal Income total income received by
  households that is available for consumption,
  saving and the payment of personal taxes
• Personal disposable Income (PDI) Personal Income
  minus personal income taxes plus transfer
  payments received by individuals
• PDI PI income taxes transfers