1. Econ 215: Economy of Ghana National Income Accounting Lecture 2

2. National Income Accounting A Few Comments on the Computation of the GDP  It is important to note that several assumptions and approximations go into the computation of the GDP.  In the case of real GDP, many more ambitious adjustments are required to create so-called real GDP, which is actually far from real.  Nevertheless, it is a construction designed to strip away the effects of inflation from a measure based on prices that are actually paid.

3. National Income Accounting A Few Comments on the Computation of the GDP  Thus, it is worth noting that GDP is always an approximation and real GDP is a still-rougher estimate.  However, what’s worth noting is that these measures are used to indicate the direction and pace of a nation’s economic travel.

4. National Income Accounting A Few Comments on the Computation of the GDP  The measure of GDP is important because most of the economy moves together.  Jobs are created as demand increases and vice versa. An increase in GDP from 1 percent to 2 percent generally goes along with faster increases in employment, electricity use, retail sales, the demand for real estate, to list a few.

5. National Income Accounting A Few Comments on the Computation of the GDP  Thus, in the face of what we have noted earlier, it is worthy to stress that any claims of precision regarding the measure of GDP are totally spurious.  Nevertheless, what matters in respect of GDP figures is the trend, not the precise number.

6. NATIONAL INCOME ACCOUNTING

7. National Income Accounting A Few Comments on the Computation of the GDP  And, especially in the case of developing countries, it is not only changes in GDP which correspond with other signs of economic momentum.  GDP itself is a good proxy for economic development. Average GDP per person rises along with the level of sanitation, education, healthcare and economic opportunities for poor people.

8. NATIONAL INCOME ACCOUNTING Some Useful Identities: The NIA are just a series of identities. However, these identities shed light on important economic realities.  Y ≡ C + I + G + X This indicates that the national output is consumed (C), invested (I), purchased by the government (G) or exported (X).

9. NATIONAL INCOME ACCOUNTING Some Useful Identities: Alternatively, we could express the NIA as  Y ≡ C + S + T + M Here we observe that the national output can be used by households to finance consumption (C), save (S), pay taxes (T), or pay for imports (M).

10. NATIONAL INCOME ACCOUNTING Some Useful Identities: These identities reveal important implications in terms of how the national income might be used. Moreover, by combining these uses of the national income, we can reveal interesting economic implications.

11. NATIONAL INCOME ACCOUNTING Some Useful Identities:  Y ≡ C + I + G + X -------------- (1)  Y ≡ C + S + T + M -------------- (2) Taking (1) from (2) we arrive at this important and interesting outcome:  Y ≡ (S-I) + (T-G) – (X-M) ------- (3)

12. NATIONAL INCOME ACCOUNTING Some Useful Identities:  Y ≡ (S-I) + (T-G) – (X-M) ---- (3)  If we assume for a moment we are dealing with a closed economy, then all output is either consumed or saved/invested.  Where we have an open economy, then the identity above sheds some interesting light on the interactions between the economy and the rest of the world.(more on this in external sector)

13. NATIONAL INCOME ACCOUNTING What Is Its Relevance?  Economists use estimates of real GDP for two main purposes: 1) to compare the standard of living over time and, 2) to compare the standard of living across countries.   Real GDP per person tells us the value of goods and services that the average person can enjoy.

14. NATIONAL INCOME ACCOUNTING What Is Its Relevance?  Leading indicator for policy making – formulation and subsequent evaluation of policy  Indicator of expanding opportunities within an economy  Policy facilitating growth => reduction in both unemployment and poverty

15. NATIONAL INCOME ACCOUNTING What Shortcomings Can Be Identified?  We have seen that Real GDP measures the value of goods and services that are bought in markets.  Nevertheless, not all factors that affect living standards are captured in the computation of the real GDP. Some of the factors that influence the standard of living but are not part of GDP include:

16. NATIONAL INCOME ACCOUNTING What Shortcomings Can Be Identified?  Errors in measurement  Household production  Underground economic activity  Health and life expectancy  Leisure time  Environmental quality  Political freedom and social justice  Equity

17. NATIONAL INCOME ACCOUNTING What Shortcomings Can Be Identified?  Additionally, WELFARE is not captured in the computation of the GDP.  Yale economists William Nordhaus and James Tobin introduced their Measure of Economic Welfare (MEW)* as an alternative to crude GDP.

18. NATIONAL INCOME ACCOUNTING What Shortcomings Can Be Identified?  The Measure of Economic Welfare (MEW) is given as:  MEW = [Value of GDP] + [Value of Leisure Time] + [Value of Unpaid Work] – [Value of Environmental Damage]  MEW can be seen as the forerunner of later attempts to create a sophisticated index of sustainable development.

19. NATIONAL INCOME ACCOUNTING Any Questions or Comments