national income accounting antu panini murshid with revisions/additions by patricia hermes
TRANSCRIPT
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
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Principles of Macroeconomics 3
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)
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Principles of Macroeconomics 4
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)
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Principles of Macroeconomics 5
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)
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Principles of Macroeconomics 6
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
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Principles of Macroeconomics 7
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
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Principles of Macroeconomics 8
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
9
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
10
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
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Principles of Macroeconomics 11
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.
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Principles of Macroeconomics 15
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
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Principles of Macroeconomics 16
Expenditure Approach: Components of GDP
GDP = C + I + G + Xn
consumption
Investment
Governmentpurchases
Net exports
Adds up all spending on current production
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Principles of Macroeconomics 17
US GDP in 2001
Consumption=6,987 Investment=1,586
Government Purchases=1,858 Net Exports=-348.9 GDP=10,082.2
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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
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Principles of Macroeconomics 19
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
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Principles of Macroeconomics 20
Agriculture 9.2%Industry 26.9%Services 63.9%
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
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Principles of Macroeconomics 21
Agriculture 10.1%Industry 46.8%Services 43.1%
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Principles of Macroeconomics 22
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
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Principles of Macroeconomics 23
Investment
Expenditures by firms on new capital equipment
“Gross private domestic investment”
+ changes in inventories + residential investment (new home construction)
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Principles of Macroeconomics 24
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
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Principles of Macroeconomics 25
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
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Principles of Macroeconomics 26
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
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Principles of Macroeconomics 27
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
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Principles of Macroeconomics 28
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
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Principles of Macroeconomics 29
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
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Final Sales and GDP
GDP = Final Sales +Change in inventories
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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
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Principles of Macroeconomics 32
Government Spending
Government spending includes all spending by the
federal, state and local government on new
goods and services + transfer payments
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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
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Government Purchases
Government Spending – transfer payments =
Government Purchases
Government Purchases is what is included in GDP
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Principles of Macroeconomics 35
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
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Principles of Macroeconomics 36
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
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Principles of Macroeconomics 37
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=$600
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Principles of Macroeconomics 38
Real GDP
Real GDP is GDP measured in constant dollars A Base Year for prices is selected : ie
1990 GDP in 1995 is calculated using prices
from 1990 therefore….Real GDP is GDP adjusted for inflation
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Measuring Changes in Output Real GDP can be used
to compare output from year-to-year in a given country
%(real GDP) is the measure of Economic Growth
Year Real GDP (1990 dollars)
1990
100*1+100*2=300
1995
100*1+100*2=300
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Problems With Real GDP
New goods emerge The prices of these goods should remain at current dollars, but
they will be adjusted down
Relative prices change Computers were relatively more expensive in 1990, is it
appropriate to use 1990 prices to value computers produced in 1995?
Change in quality of goods Prices may increase due to product improvements, not just
inflation
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Comparing GDP between Countries GDP Per Capita Total GDP/population
Exchange rate conversions
Converts GDP figures to a common currency
Purchasing Power Parity conversions Further adjust GDP per capita figures to reflect the domestic
value of GDP dollars based on the cost of living within the country
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Purchasing Power Parity
The differences between PPP and real exchange rates can be significant:
Nominal GDP GDP PPP
China 6,989 11,290 Japan 5,855 4,981 GDP per/c GDP per/c PPP China : 4,981 US$ 8,400 US$Japan : 46,102 US$ 34,300 US$.
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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…
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Principles of Macroeconomics 44
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”
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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
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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.)
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GDP Poland 2004 GDP:
purchasing power parity - $463 billion (2004 est.)
GDP - real growth rate: 5.6% (2004 est.)
GDP - per capita: purchasing power parity - $12,000 (2004 est.)
GDP - composition by sector: agriculture: 2.9% industry: 31.3% services: 65.9% (2004 est.)
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GDP: China 2004 GDP:
purchasing power parity - $7.262 trillion (2004 est.)
GDP - real growth rate: 9.1% (official data) (2004 est.)
GDP - per capita: purchasing power parity - $5,600 (2004 est.)
GDP - composition by sector: agriculture: 13.8% industry and construction: 52.9% services: 33.3% (2004 est.)
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GDP: Tanzania 2004 GDP:
purchasing power parity - $23.71 billion (2004 est.)
GDP - real growth rate: 5.8% (2004 est.)
GDP - per capita: purchasing power parity - $700 (2004 est.)
GDP - composition by sector: agriculture: 43.2% industry: 17.2% services: 39.6% (2004 est.)