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Principles of National Accounting Presented by: Gurnain Kaur Pasricha Sept 8, 2006.

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Presentation on theme: "Principles of National Accounting Presented by: Gurnain Kaur Pasricha Sept 8, 2006."— Presentation transcript:

1 Principles of National Accounting Presented by: Gurnain Kaur Pasricha Sept 8, 2006

2 Overview National Income Accounting Relationships/Identities: National Income Accounting Relationships/Identities: 1. Three measures of GDP. 2. Domestic and National Product 3. Domestic/National Product and Disposable Income 4. Savings-Investment Gap and the Current Account 5. Current Account Balance and Net Lending/Borrowing 6. Measures of Government Deficit. Real vs. Nominal Measures Real vs. Nominal Measures

3 Gross Domestic Product GDP A commonly used measure of standard of living. (Other measures: GNI, GNDI all in real terms) A commonly used measure of standard of living. (Other measures: GNI, GNDI all in real terms) Market value of final goods and services produced in the territory of an economy, in a given time period. Market value of final goods and services produced in the territory of an economy, in a given time period.

4 Final goods and services : Those that are available for final uses in the given time period. Final goods and services : Those that are available for final uses in the given time period. Final uses: Consumption, capital formation and export Final uses: Consumption, capital formation and export Territory: includes territorial waters, embassies and missions abroad. Territory: includes territorial waters, embassies and missions abroad.

5 Circular Flow of Income Households Producers Factor Services Factor Payments ( I ) Payments for Goods & Services (E) Goods & Services (O) G&S

6 I. Expenditure Approach GDP = Final Consumption Expenditure of households (C h ) GDP = Final Consumption Expenditure of households (C h ) + Final Consumption Expenditure of General Government (C g ) + Final Consumption Expenditure of General Government (C g ) + Final Consumption Expenditure of NPISH (C n ) + Final Consumption Expenditure of NPISH (C n ) + Gross Capital Formation ( I ) + Gross Capital Formation ( I ) + Exports – Imports (NX = X - M) + Exports – Imports (NX = X - M)

7 I.I Final Consumption Expenditure of Households Includes consumption of all durable and non-durable goods except own construction or improvement of residential housing Includes consumption of all durable and non-durable goods except own construction or improvement of residential housing Services of owner occupied dwellings counted through imputed rent Services of owner occupied dwellings counted through imputed rent Estimated using retail trade and household surveys for non-census years. Estimated using retail trade and household surveys for non-census years.

8 I.II FCE of General Government General Government: General Government: Central governmentCentral government State governmentsState governments Local governmentsLocal governments Social security fundsSocial security funds Non-Profit Institutions serving the governmentNon-Profit Institutions serving the government Excluded: Government agencies that can charge market prices or prices that cover over 50 % of their costs.

9 I.II FCE of General Government Output of the General Government Output of the General Government = Current Expenditures on goods and services to produce government services + Compensation of employees + Consumption of Fixed capital + Own major construction + Own major repairs = Own-account capital formation

10 I.II FCE of General Government = Output less Sales to households and corporations less Sales to households and corporations less Own-account Capital Formation less Own-account Capital Formation plus Social Benefits in kind plus Social Benefits in kind ( g & s provided free) ( g & s provided free) Excluded: Interest payments, Social benefits in cash. Interest payments, Social benefits in cash.

11 I.III FCE of Non-Profit Institutions Serving Households Non-market output other than own account capital formation Non-market output other than own account capital formation = Production Costs – Incidental Sales Expenditure on market goods and services supplied without transformation and free of charge. Expenditure on market goods and services supplied without transformation and free of charge.

12 I.IV Gross Capital Formation = Gross Fixed Capital Formation Additions to produced capital goods and improvements to non-produced assets (e.g.. Land) + Change in Inventories + Acquisition less disposals of valuables + Acquisition less disposals of valuables

13 I.V Net Exports Exports and Imports are transactions involving an exchange of goods and services between residents and non- residents of an economy. Exports and Imports are transactions involving an exchange of goods and services between residents and non- residents of an economy. Exclude transactions in non-movable non- produced assets (e.g. Land), buildings and in financial assets. Exclude transactions in non-movable non- produced assets (e.g. Land), buildings and in financial assets.

14 Residents vs. Non-Residents A resident of an economy is an economic agent whose center of economic interest is in the economy in question. A resident of an economy is an economic agent whose center of economic interest is in the economy in question. Center of interest identified by Center of interest identified by length of stay – usually a year or more.length of stay – usually a year or more. Ownership of land or structuresOwnership of land or structures Treatment of : Treatment of : Students Students International organizations International organizations Military personnel and civil servants Military personnel and civil servants

15 I. Expenditure Approach GDP = Final Consumption Expenditure of households (C h ) GDP = Final Consumption Expenditure of households (C h ) + Final Consumption Expenditure of General Government (C g ) + Final Consumption Expenditure of General Government (C g ) + Final Consumption Expenditure of NPISH (C n ) + Final Consumption Expenditure of NPISH (C n ) + Gross Capital Formation (GCF) + Gross Capital Formation (GCF) + Exports – Imports (NX = X - M) + Exports – Imports (NX = X - M)

16 II. Output Approach GDP = Output GDP = Output less Intermediate less Intermediate Consumption Consumption plus Net Indirect Taxes plus Net Indirect Taxes Net Indirect Taxes Net Indirect Taxes = Taxes on goods and services less Subsidies less Subsidies = Gross Value Added

17 II.I Output Approach Output Includes: Output Includes: Services of Owner occupied housing Services of Owner occupied housing Services of paid domestic staff Services of paid domestic staff Agricultural production for sale or own consumption Agricultural production for sale or own consumption Illegal and hidden goods Illegal and hidden goods Own account development of software* Own account development of software* Natural growth of cultivated forests Natural growth of cultivated forests Output Excludes: Output Excludes: Waste and losses in production Transfer payments (eg. Birthday presents, social security payments) Goods and services produced in the household for own consumption

18 III. Income Approach GDP = Primary incomes generated in the domestic economy = Compensation of Employees = Compensation of Employees + Other taxes less subsidies on production + Other taxes less subsidies on production + Consumption of fixed capital + Consumption of fixed capital + Net Operating Surplus + Net Operating Surplus + Net Indirect Taxes + Net Indirect Taxes Gross Value Added

19 GDP by Income Approach = GVA + NIT = GVA + NIT = Output – Intermediate Consumption + NIT = Output – Intermediate Consumption + NIT = GDP by Output Approach = GDP by Output Approach

20 Total Supply = Output - Intermediate Consumption - Intermediate Consumption + NIT + Imports Total Uses = Final Consumption + Gross Capital Formation + Exports => GDP by Output Approach = GDP by Expenditure Approach

21 GDP to GNI GNI = Value of final goods and services produced by residents of the economy = GDP + Primary Income receivable by residents from abroad - Primary income payable to non- residents NFIA

22 Gross National Disposable Income (GNDI) = GNI + Current Transfers from ROW - Current Transfers to ROW Net Current Transfers

23 Data Source: WDI / GDF Central

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26 The Current Account CAB = Trade Balance (NX) + NFIA + Net Current Transfers from ROW

27 Current Account Balance, US Source: BEA

28 Saving-Investment Gap and the Current Account GNDI Gross Savings + Final Consumption + Final Consumption C + I + NX C + I + NX + NFIA + Net Current Transfers S + C I + CAB S I + CAB S CAB S - I CAB S - I

29 Capital Account Uses Gross Capital Formation Net acquisition of non- financial, non-produced assets from ROW Net Lending (+) or Net Borrowing (-) from ROW (NFA ) Resources Gross Saving Net Capital Transfers

30 Financial Account Change in Financial Assets Change in Financial Liabilities Net Lending (+) Or Net Borrowing (-) (NFA)

31 Government Finances Revenue Taxes Taxes Social Contributions Social Contributions Other Revenue Other Revenue (Includes Sales, Central Bank Profits) Grants Grants Expenditure & Net Lending Current: Wages and Salaries Goods and Services Consumption of Fixed Capital Subsidies Social Benefits Interest Payments Other Expense GrantsCapital Net Lending(+)/Borrowing(-) (Fiscal Balance)

32 Government Finances Fiscal Deficit = Total government outlays ( G + iD ) ( G + iD ) - Revenue (T) - Revenue (T) = Primary Deficit (G - T) + Interest Payments ( iD ) + Interest Payments ( iD ) = Net borrowing (D)

33 Government Finances For ratio of govt. debt to GDP to be constant, Primary Surplus = (i - g) D/GDP

34 Government Finances & Current Account CAB = S – I = S p + S g – I p – I g = S p – I p + S g – I g = S p – I p + Fiscal Balance If S p = I p, then CAB = Fiscal Balance

35 Real vs. Nominal Nominal GDP: Nominal GDP: Real GDP: Real GDP: GDP Deflator: GDP Deflator:

36 Comparison across countries Conversion using market exchange rates Conversion using market exchange rates PPP: An exchange rate between currencies that equalizes their purchasing power. PPP: An exchange rate between currencies that equalizes their purchasing power. Eg: A Liter of Pepsi costs $2 in US and 2.5 in Germany, then the PPP exchange rate for Pepsi is 1.25/$. Eg: A Liter of Pepsi costs $2 in US and 2.5 in Germany, then the PPP exchange rate for Pepsi is 1.25/$. PPP for product groups computed as geometric average of within-group price relatives PPP for product groups computed as geometric average of within-group price relatives Aggregated using expenditure weights for product groups in GDP. Aggregated using expenditure weights for product groups in GDP.

37 Rankings of Economic Size, 2004 CountryPPP RankUS$ Rank United States11 Japan32 Germany53 United Kingdom64 France75 China26 Italy87 Spain118 Canada139 India410 Korea, Rep.1411 Mexico12 Australia1613 Brazil914 Russian Federation1015 Netherlands1816 Switzerland3617 Belgium2818 Sweden3119 Turkey1720

38 Relative Living Standards, 2004 Rankings of per capita GDPs Country NamePPP RankUS$ Rank Luxembourg11 Norway42 Switzerland63 Denmark84 Ireland35 Iceland56 United States27 Sweden168 Japan189 United Kingdom13 France1714 Belgium1115 Germany1916 Canada1018 Italy2019 Turkey6458 Venezuela, RB8159 Russian Federation5361 Argentina4162 Belize7363 Uruguay5664 India106119

39 The wisest mind has something yet to learn. George Santayana (1863 - 1952)


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