Description
This is a presentation about different methods of measuring economic activity of a country.
National Income Accounting
"When a man spends his own money to buy something for himself, he is very careful about how much he spends and how he spends it. When a man spends his own money to buy something for someone else, he is still very careful about how much he spends, but somewhat less what he spends it on. When a man spends someone else's money to buy something for himself, he is very careful about what he buys, but doesn't care at all how much he spends. And when a man spends someone else's money on someone else, he doesn't care how much he spends or what he spends it on. And that's government for you." Economist and Nobel Laureate Milton Friedman
Concepts
• Basic measure is gross domestic product, or GDP. • GDP is the money value of all final goods and services produced in the country during an accounting year. • What is final good? Best way to visualize is value added. Ex: value added of a clinic, hair-dresser. • Value term b/c different units are not additive. • All goods and services have to be included whether marketed or not. Goods for own consumption, rental of the self occupied buildings. • Excluded: contribution of house-wives, smuggling, black marketing et cetera.
National Income Accounting
Methods of measuring economic activity of a country:
• Measuring the amount purchased (the ‘expenditure’ method) • Measuring the amount produced (the ‘output’ method) • Measuring the amount earned (the ‘income’ method)
NI A/C: The Expenditure Approach
Total spending on final goods and services produced within a nation during a specified period of time/a year. Y ? C+I+G+NX (identity) Consumption •Non-durables and durables except house •Expenditure on maid servant is included?? • Non-profit institutions’ exp is considered C. Investment •Fixed investment and Residential investment. •Inventory investment
continued…
Government • On defence, justice, health, education, salary etc. are included. Central.State. Local ?? • Government purchases of G/S are measured in terms of cost/spending. • What about government transfers? Net exports • Added to total spending bcz represent spending by foreigners. • Imports are deducted bcz C,I, and G purchases have included imported goods and services.
NI A/C: The Income Approach
GDP is calculated by adding the incomes received by all the factors of productions. • Compensation of employees: salaries, employee benefits, and employers’ contribution. • Proprietors’ income: in case of self-employed. • Rental income: rent, royalty paid to authors and artists. • Corporate profit: includes tax, dividends and retained earnings. • Interest income • Capital Consumption allowance (depreciation)
ii
Output Measures: 1. Theoretically: GDP = Price level* units of aggregate output =P*Q 2.GDP = value of final goods and services 3. GDP = Value added by all production units (businesses) in an economy
GNP=gross national product
• • • • Domestic vs National: GDP and GNP GNP = GDP + Net receipts from abroad Gross vs. Net: GDP and NDP NDP = GDP – Depreciation
Concepts
National Income = NNP-indirect taxes +subsidies Domestic Income = NDP – indirect taxes +subsidies National Income = domestic income + net income from abroad
• NGDP is the value of output in a given period measured in current Rs (current prices)
NGDP in 2007 is the sum of the value of all outputs measured N in 2007 Rs: NGDP 2007 = ?P 2007 * Qi2007 i
i= 1
Changes in NGDP could be purely due to changes in prices ? if GDP is to be used as a measure of output, need to control for prices
• RGDP is the value of output in constant Rs (prices)? scaled by a based year price, so that any change in GDP is due to change in production, not prices
If PB is the price in the base year for good i, RGDP in 2007 is:
R G D 2 00 7 = ? Pi B * Qi2 00 7 P
i =1
N
• GDP deflator = price index for all the domestically produced goods & services = NGDP/ RGDP of the same year. • Inflation, ?, is the rate of change of prices: where Pt is today’s price and Pt-1 is last period’s price Additionally, Pt = Pt ?1 + ( Pt ?1 * ?) , or today’s price equals last year’s price, adjusted for inflation If ? > 0, prices are increasing over time ? inflation If ? < 0, prices are decreasing over time ? deflation How do we measure prices? For the macroeconomy, need a measure of overall prices = price index There are several price indexes, but most common are CPI, PPI, WPI and the GDP deflator
Inflation and price indexes
Products 1993-94 2004-05 Nominal 2004-05 (base)Nominal GDP Real GDP GDP=real gdp 10 *150=1500 5 *150=1000
Rice (tons) 5 *100=500
Beer (btls) 50 *50=2500 GDP (Rs.) Rs 3000
75 *100=7500 Rs 9000
50 *100=5000 Rs 6000
• Since real GDP in 2004-5 is const Rs 6000 and for 93-94 it is Rs 3000, the quantity of G/S produced in 2004-5 doubled. • Since nominal GDP of 2004-5 is Rs 9000 whereas real is Rs6000, GDP deflator for 2004-5 is 9000/6000 =1.5. Compared to the base period 1993-94, overall price level has increased by 50% . • CPI measures the cost of buying a fixed basket of goods and services - domestic as well as foreign by representative consumers of a particular area/segment Measures the cost of living for average HH.
Year 2005 2006 2007
Nominal gdp (bill $) 1234 1467 1550
Real gdp (base deflator 2005) 1234 1350 1400 100 108.7 110.7
Year 2007 2008 2009
C (nominal) 800 1000 1100
cpi 150 170 180
C(real) 533 588 611
Check Understanding of Concepts
• Current Prices vs. Constant Prices • Changes in NGDP includes changes in production and changes in prices. • Elimination of price effect using base year: Real GDP, Real NI • While calculating series of values for inflation, or real values we always use series of price index based on the same year. • Market Prices vs. factor cost • Market value includes the indirect taxes (+) and subsidies (-)
Limitation
There are three major criticisms of the GDP measure: • Omits non-market goods and services – Ex. Work of stay-at-home mothers and fathers not included in GDP • No accounting for “bads” such as crime , pollution and environmental damages. – Ex. Crime is detrimental to society, but there is no subtraction from GDP to account for it
• No correction for quality improvements
– Ex. Technological improvements are beneficial to the economy, but nothing is added to GDP to account for them
Purchasing power parity Income
• GDP/capita is a measure of well-being of its average citizen in a country. Normally compared to US$ ($50000), India’s GDP/capita is US$1100 (in 2008) whereas • Since 1 US$ has different purchasing powers in different countries like US and India, purchasing power of the $ is used to compute GDP/capita rather than simple nominal exchange rate. • How? Compute PPP exchange rate between two currency by computing the cost of the same bundle in their respective currencies. This exchange rate is used to transform GDP in Rs into GDP in $ (called PPP rate) • PPP-GDP/Capita of India was $2900 (2008)
From GDP to Personal Saving
• GDP- Depreciation= NDP • NNP= NDP + Net receipts from abroad • NNP-Indirect Taxes + subsidies = National Income • National Income + transfers – retained profits = Personal Income • Personal Income – Direct Taxes = Personal disposable income • Personal disposable income – Consmption = personal saving
ii
Circular Flow Model
Injections, withdrawals and equilibrium Source: Pam Perlich (univ. of Utah)
The circular flow of income
Consumption of domestically produced goods and services (Cd)
The circular flow of income
Factor payments
Consumption of domestically produced goods and services (Cd)
The circular flow of income
Factor payments
Consumption of domestically produced goods and services (Cd)
BANKS, etc
Net saving (S)
The circular flow of income
Investment (I)
Factor payments
Consumption of domestically produced goods and services (Cd)
BANKS, etc
Net saving (S)
The circular flow of income
Investment (I)
Factor payments
Consumption of domestically produced goods and services (Cd)
BANKS, etc
GOV.
Net saving (S)
Net taxes (T)
The circular flow of income
Investment (I)
Factor payments
Consumption of domestically produced goods and services (Cd)
Government expenditure (G) BANKS, etc GOV.
Net saving (S)
Net taxes (T)
The circular flow of income
Investment (I)
Factor payments
Consumption of domestically produced goods and services (Cd)
Government expenditure (G) BANKS, etc GOV. ABROAD
Net saving (S)
Import Net expenditure (M) taxes (T)
The circular flow of income
Investment (I)
Export expenditure (X)
Factor payments
Consumption of domestically produced goods and services (Cd)
Government expenditure (G) BANKS, etc GOV. ABROAD
Net saving (S)
Import Net expenditure (M) taxes (T)
The circular flow of income
Investment (I)
Export expenditure (X)
Factor payments
Consumption of domestically produced goods and services (Cd)
Government expenditure (G) BANKS, etc GOV. ABROAD
Net saving (S)
Import Net expenditure (M) taxes (T)
WITHDRAWALS
The circular flow of income
INJECTIONS
Export expenditure (X)
Investment (I)
Factor payments
Consumption of domestically produced goods and services (Cd)
Government expenditure (G) BANKS, etc GOV. ABROAD
Net saving (S)
Import Net expenditure (M) taxes (T)
WITHDRAWALS
Economic Base Model Collapses All Spending into Regional and Non-Regional
INJECTION
Export expenditure (X)
Factor payments
Regional Purchases of regionally produced goods and services
OUTSIDE OF REGION
Import expenditure (M)
WITHDRAWAL
IMPORTANT ACCOUNTING IDENTITIES: • Y=C+I+G+NX • Decomposition by uses of Income: Y=C+S+T (income is consumed, saved and taxed) • C+S+T = C+I+G+NX • Or, (S-I) + (T-G) = NX private surplus + govt surplus = foreign surplus Implications: ? S>I//S<I means pvt. sector is net saver//net borrower ? T>G//T<G meansC+I+G+NX govt is saving//borrowing ? Negative trade-balance means somebody is spending more than their resource availability. ? If trade is balanced, govt budget deficit is financed by private surplus
Balance of Payments (Chp 12)
• is the record of all transactions between a country and the rest of the world for a period, usually a year. There are two accounts: current account and capital account. • Rule of record: any transaction involving outflows of money is recorded as deficit (-) item, and transactions leading to inflows are recorded as surplus (+) . • includes exports and imports of goods & services , transfers (services eg: freight, royalty payments, interest payments); purchases and sales of assets: stocks,bonds, bank deposits, land, houses etc. abroad. • Transfers are: remittances, gifts and grants
Balance of payments 1. Exports of goods
ii
2. Imports of goods 1 to 2: Trade balance 3. Exports and imports of services 4. Net royalties 5. Net investment income 3 to 5: Invisible Balance 6. Net foreign workers’ remittances 7. Net international aid 1 to 7: Current account balance 8. Inward direct investment 9. Outward direct investment 10. Inward portfolio investment
• GDP+net receipts from abroad = C+I+G+NX + net receipts from abroad=C+I+G+ Current Account (approx) • GNP=C+I+G+CA = Absorption (A) +CA • or, GNP = A +CA • or, GNP-A=CA or, approximately, Y-A=CA • Current account is the excess of income over spending (it signals whether a country is a net borrower or a net lender). When a country spends more than it earns it is a net borrower.
How does a country accumulate net wealth (net foreign assets) or net investment position in the ROW? • Accumulation of Current Account • A country is said to be net creditor or debtor depending on whether its net foreign asset position>0 or <0. • US’s net foreign asset position: • India’s net foreign asset position:
• Net Foreign asset position: difference between the assets a country has in the ROW and the ROW has in the country including foreign exchange reserve. • Country NFA position (local currency) (in bill $) approx
China India Japan UK USA 7569662000000 6467192000000 47338540000000 -24673000000 -611396900000 -611.4 1081.4 161.2 473.4
• As any exercise in accounting, all items in bop must add up to zero. • If domestic economy is buying more G/S from abroad than ROW is buying from domestic economy, then the extra foreign exchange required to satisfy CA deficit comes from Official Reserve: the monetary authority. Foreign exchange reserve of the domestic authority will decline. • CA surplus means increase in foreign exchange accumulation. • BoP Surplus = increase in official exchange reserves = CA surplus + net private capital inflow. • If CA in surplus – it should be matched by capital outflows (i.e. domestic country is lending) or the surplus absorbed by the monetary authority. CA deficit implies borrowing from abroad (an opposite change in the capital account).
• If monetary authority absorbs the difference by selling or receiving foreign exchange – the process is called foreign exchange market intervention. • A monetary authority ascertains fixed exchange rate system by absorbing surplus or deficit of foreign exchange.
Economic Performance Indicator of an economy:
Indicators GDP rate of growth GDP per capita compensation of employees per work hour Compensation of employees /gross value added Operating surplus/gross value added Gross capital formation/GDP Saving/GDP Saving/gross fixed capital formation Saving of HHs/disposable income of HHs interpretation Performance of the economy Well-being of an average person Labour cost Income share of employees in GDP Income share of capital in GDP Investment rate of GDP Saving rate of nation Domestic funding of investment Saving rate of households
ii
doc_999275048.ppt
This is a presentation about different methods of measuring economic activity of a country.
National Income Accounting
"When a man spends his own money to buy something for himself, he is very careful about how much he spends and how he spends it. When a man spends his own money to buy something for someone else, he is still very careful about how much he spends, but somewhat less what he spends it on. When a man spends someone else's money to buy something for himself, he is very careful about what he buys, but doesn't care at all how much he spends. And when a man spends someone else's money on someone else, he doesn't care how much he spends or what he spends it on. And that's government for you." Economist and Nobel Laureate Milton Friedman
Concepts
• Basic measure is gross domestic product, or GDP. • GDP is the money value of all final goods and services produced in the country during an accounting year. • What is final good? Best way to visualize is value added. Ex: value added of a clinic, hair-dresser. • Value term b/c different units are not additive. • All goods and services have to be included whether marketed or not. Goods for own consumption, rental of the self occupied buildings. • Excluded: contribution of house-wives, smuggling, black marketing et cetera.
National Income Accounting
Methods of measuring economic activity of a country:
• Measuring the amount purchased (the ‘expenditure’ method) • Measuring the amount produced (the ‘output’ method) • Measuring the amount earned (the ‘income’ method)
NI A/C: The Expenditure Approach
Total spending on final goods and services produced within a nation during a specified period of time/a year. Y ? C+I+G+NX (identity) Consumption •Non-durables and durables except house •Expenditure on maid servant is included?? • Non-profit institutions’ exp is considered C. Investment •Fixed investment and Residential investment. •Inventory investment
continued…
Government • On defence, justice, health, education, salary etc. are included. Central.State. Local ?? • Government purchases of G/S are measured in terms of cost/spending. • What about government transfers? Net exports • Added to total spending bcz represent spending by foreigners. • Imports are deducted bcz C,I, and G purchases have included imported goods and services.
NI A/C: The Income Approach
GDP is calculated by adding the incomes received by all the factors of productions. • Compensation of employees: salaries, employee benefits, and employers’ contribution. • Proprietors’ income: in case of self-employed. • Rental income: rent, royalty paid to authors and artists. • Corporate profit: includes tax, dividends and retained earnings. • Interest income • Capital Consumption allowance (depreciation)
ii
Output Measures: 1. Theoretically: GDP = Price level* units of aggregate output =P*Q 2.GDP = value of final goods and services 3. GDP = Value added by all production units (businesses) in an economy
GNP=gross national product
• • • • Domestic vs National: GDP and GNP GNP = GDP + Net receipts from abroad Gross vs. Net: GDP and NDP NDP = GDP – Depreciation
Concepts
National Income = NNP-indirect taxes +subsidies Domestic Income = NDP – indirect taxes +subsidies National Income = domestic income + net income from abroad
• NGDP is the value of output in a given period measured in current Rs (current prices)
NGDP in 2007 is the sum of the value of all outputs measured N in 2007 Rs: NGDP 2007 = ?P 2007 * Qi2007 i
i= 1
Changes in NGDP could be purely due to changes in prices ? if GDP is to be used as a measure of output, need to control for prices
• RGDP is the value of output in constant Rs (prices)? scaled by a based year price, so that any change in GDP is due to change in production, not prices
If PB is the price in the base year for good i, RGDP in 2007 is:
R G D 2 00 7 = ? Pi B * Qi2 00 7 P
i =1
N
• GDP deflator = price index for all the domestically produced goods & services = NGDP/ RGDP of the same year. • Inflation, ?, is the rate of change of prices: where Pt is today’s price and Pt-1 is last period’s price Additionally, Pt = Pt ?1 + ( Pt ?1 * ?) , or today’s price equals last year’s price, adjusted for inflation If ? > 0, prices are increasing over time ? inflation If ? < 0, prices are decreasing over time ? deflation How do we measure prices? For the macroeconomy, need a measure of overall prices = price index There are several price indexes, but most common are CPI, PPI, WPI and the GDP deflator
Inflation and price indexes
Products 1993-94 2004-05 Nominal 2004-05 (base)Nominal GDP Real GDP GDP=real gdp 10 *150=1500 5 *150=1000
Rice (tons) 5 *100=500
Beer (btls) 50 *50=2500 GDP (Rs.) Rs 3000
75 *100=7500 Rs 9000
50 *100=5000 Rs 6000
• Since real GDP in 2004-5 is const Rs 6000 and for 93-94 it is Rs 3000, the quantity of G/S produced in 2004-5 doubled. • Since nominal GDP of 2004-5 is Rs 9000 whereas real is Rs6000, GDP deflator for 2004-5 is 9000/6000 =1.5. Compared to the base period 1993-94, overall price level has increased by 50% . • CPI measures the cost of buying a fixed basket of goods and services - domestic as well as foreign by representative consumers of a particular area/segment Measures the cost of living for average HH.
Year 2005 2006 2007
Nominal gdp (bill $) 1234 1467 1550
Real gdp (base deflator 2005) 1234 1350 1400 100 108.7 110.7
Year 2007 2008 2009
C (nominal) 800 1000 1100
cpi 150 170 180
C(real) 533 588 611
Check Understanding of Concepts
• Current Prices vs. Constant Prices • Changes in NGDP includes changes in production and changes in prices. • Elimination of price effect using base year: Real GDP, Real NI • While calculating series of values for inflation, or real values we always use series of price index based on the same year. • Market Prices vs. factor cost • Market value includes the indirect taxes (+) and subsidies (-)
Limitation
There are three major criticisms of the GDP measure: • Omits non-market goods and services – Ex. Work of stay-at-home mothers and fathers not included in GDP • No accounting for “bads” such as crime , pollution and environmental damages. – Ex. Crime is detrimental to society, but there is no subtraction from GDP to account for it
• No correction for quality improvements
– Ex. Technological improvements are beneficial to the economy, but nothing is added to GDP to account for them
Purchasing power parity Income
• GDP/capita is a measure of well-being of its average citizen in a country. Normally compared to US$ ($50000), India’s GDP/capita is US$1100 (in 2008) whereas • Since 1 US$ has different purchasing powers in different countries like US and India, purchasing power of the $ is used to compute GDP/capita rather than simple nominal exchange rate. • How? Compute PPP exchange rate between two currency by computing the cost of the same bundle in their respective currencies. This exchange rate is used to transform GDP in Rs into GDP in $ (called PPP rate) • PPP-GDP/Capita of India was $2900 (2008)
From GDP to Personal Saving
• GDP- Depreciation= NDP • NNP= NDP + Net receipts from abroad • NNP-Indirect Taxes + subsidies = National Income • National Income + transfers – retained profits = Personal Income • Personal Income – Direct Taxes = Personal disposable income • Personal disposable income – Consmption = personal saving
ii
Circular Flow Model
Injections, withdrawals and equilibrium Source: Pam Perlich (univ. of Utah)
The circular flow of income
Consumption of domestically produced goods and services (Cd)
The circular flow of income
Factor payments
Consumption of domestically produced goods and services (Cd)
The circular flow of income
Factor payments
Consumption of domestically produced goods and services (Cd)
BANKS, etc
Net saving (S)
The circular flow of income
Investment (I)
Factor payments
Consumption of domestically produced goods and services (Cd)
BANKS, etc
Net saving (S)
The circular flow of income
Investment (I)
Factor payments
Consumption of domestically produced goods and services (Cd)
BANKS, etc
GOV.
Net saving (S)
Net taxes (T)
The circular flow of income
Investment (I)
Factor payments
Consumption of domestically produced goods and services (Cd)
Government expenditure (G) BANKS, etc GOV.
Net saving (S)
Net taxes (T)
The circular flow of income
Investment (I)
Factor payments
Consumption of domestically produced goods and services (Cd)
Government expenditure (G) BANKS, etc GOV. ABROAD
Net saving (S)
Import Net expenditure (M) taxes (T)
The circular flow of income
Investment (I)
Export expenditure (X)
Factor payments
Consumption of domestically produced goods and services (Cd)
Government expenditure (G) BANKS, etc GOV. ABROAD
Net saving (S)
Import Net expenditure (M) taxes (T)
The circular flow of income
Investment (I)
Export expenditure (X)
Factor payments
Consumption of domestically produced goods and services (Cd)
Government expenditure (G) BANKS, etc GOV. ABROAD
Net saving (S)
Import Net expenditure (M) taxes (T)
WITHDRAWALS
The circular flow of income
INJECTIONS
Export expenditure (X)
Investment (I)
Factor payments
Consumption of domestically produced goods and services (Cd)
Government expenditure (G) BANKS, etc GOV. ABROAD
Net saving (S)
Import Net expenditure (M) taxes (T)
WITHDRAWALS
Economic Base Model Collapses All Spending into Regional and Non-Regional
INJECTION
Export expenditure (X)
Factor payments
Regional Purchases of regionally produced goods and services
OUTSIDE OF REGION
Import expenditure (M)
WITHDRAWAL
IMPORTANT ACCOUNTING IDENTITIES: • Y=C+I+G+NX • Decomposition by uses of Income: Y=C+S+T (income is consumed, saved and taxed) • C+S+T = C+I+G+NX • Or, (S-I) + (T-G) = NX private surplus + govt surplus = foreign surplus Implications: ? S>I//S<I means pvt. sector is net saver//net borrower ? T>G//T<G meansC+I+G+NX govt is saving//borrowing ? Negative trade-balance means somebody is spending more than their resource availability. ? If trade is balanced, govt budget deficit is financed by private surplus
Balance of Payments (Chp 12)
• is the record of all transactions between a country and the rest of the world for a period, usually a year. There are two accounts: current account and capital account. • Rule of record: any transaction involving outflows of money is recorded as deficit (-) item, and transactions leading to inflows are recorded as surplus (+) . • includes exports and imports of goods & services , transfers (services eg: freight, royalty payments, interest payments); purchases and sales of assets: stocks,bonds, bank deposits, land, houses etc. abroad. • Transfers are: remittances, gifts and grants
Balance of payments 1. Exports of goods
ii
2. Imports of goods 1 to 2: Trade balance 3. Exports and imports of services 4. Net royalties 5. Net investment income 3 to 5: Invisible Balance 6. Net foreign workers’ remittances 7. Net international aid 1 to 7: Current account balance 8. Inward direct investment 9. Outward direct investment 10. Inward portfolio investment
• GDP+net receipts from abroad = C+I+G+NX + net receipts from abroad=C+I+G+ Current Account (approx) • GNP=C+I+G+CA = Absorption (A) +CA • or, GNP = A +CA • or, GNP-A=CA or, approximately, Y-A=CA • Current account is the excess of income over spending (it signals whether a country is a net borrower or a net lender). When a country spends more than it earns it is a net borrower.
How does a country accumulate net wealth (net foreign assets) or net investment position in the ROW? • Accumulation of Current Account • A country is said to be net creditor or debtor depending on whether its net foreign asset position>0 or <0. • US’s net foreign asset position: • India’s net foreign asset position:
• Net Foreign asset position: difference between the assets a country has in the ROW and the ROW has in the country including foreign exchange reserve. • Country NFA position (local currency) (in bill $) approx
China India Japan UK USA 7569662000000 6467192000000 47338540000000 -24673000000 -611396900000 -611.4 1081.4 161.2 473.4
• As any exercise in accounting, all items in bop must add up to zero. • If domestic economy is buying more G/S from abroad than ROW is buying from domestic economy, then the extra foreign exchange required to satisfy CA deficit comes from Official Reserve: the monetary authority. Foreign exchange reserve of the domestic authority will decline. • CA surplus means increase in foreign exchange accumulation. • BoP Surplus = increase in official exchange reserves = CA surplus + net private capital inflow. • If CA in surplus – it should be matched by capital outflows (i.e. domestic country is lending) or the surplus absorbed by the monetary authority. CA deficit implies borrowing from abroad (an opposite change in the capital account).
• If monetary authority absorbs the difference by selling or receiving foreign exchange – the process is called foreign exchange market intervention. • A monetary authority ascertains fixed exchange rate system by absorbing surplus or deficit of foreign exchange.
Economic Performance Indicator of an economy:
Indicators GDP rate of growth GDP per capita compensation of employees per work hour Compensation of employees /gross value added Operating surplus/gross value added Gross capital formation/GDP Saving/GDP Saving/gross fixed capital formation Saving of HHs/disposable income of HHs interpretation Performance of the economy Well-being of an average person Labour cost Income share of employees in GDP Income share of capital in GDP Investment rate of GDP Saving rate of nation Domestic funding of investment Saving rate of households
ii
doc_999275048.ppt