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ECON 100 Tutorial: Week 14 office: LUMS C85.

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1 ECON 100 Tutorial: Week 14 office: LUMS C85

2 Question 1(a) The data in the table below are for the UK in All numbers are in £million. Source: UK National Accounts, The Blue Book, 2012 Using the expenditure side of the accounts, calculate the following: i)Gross Domestic Product at market prices ii)Gross National Income at market prices iii)Gross Value Added at basic prices iv)Net National Income Household and NPISH expenditure 974,252 Compensation of employees 814,515 Central Government consumption expenditure 210,065 Gross Fixed Capital Formation 215,467 Local Government consumption expenditure 128,934 Basic price adjustment 175,526 Fixed Capital Consumption 170,986 Mixed income 85,602 Net income from abroad 15,174 Acquisitions less disposals of valuables 1,645 Exports of goods and services 492,646 Total operating surplus, gross 422,514 Taxes on production and imports 205,562 Imports of goods and service 516,609 Subsidies 11,433 Changes in Inventories 8,646

3 Uses of National Income Accounts Inform macroeconomic policy GDP measures domestic efficiency; GNI measures standard of living of population Estimate economic growth –rate of change in real GDP Compare with other countries' economic performance Measure productivity (output per worker)

4 Question 1(a)(i) Using the expenditure side of the accounts, calculate the following: Gross Domestic Product at market prices Household and NPISH expenditure 974,252 Compensation of employees 814,515 Central Government consumption expenditure 210,065 Gross Fixed Capital Formation 215,467 Local Government consumption expenditure 128,934 Basic price adjustment 175,526 Fixed Capital Consumption 170,986 Mixed income 85,602 Net income from abroad 15,174 Acquisitions less disposals of valuables 1,645 Exports of goods and services 492,646 Total operating surplus, gross 422,514 Taxes on production and imports 205,562 Imports of goods and service 516,609 Subsidies 11,433 Changes in Inventories 8,646 GDP = C + I + G + NX (from the book, pgs ) GDP = Consumption + Investments + Gov’t purchases + Net Exchange In this example: GDP = Household Exp. + Gross Fixed Capital Formation + Acquisitions + Changes in Inventories+ Central & Local Gov’t expenditure + Exports – Imports GDP = 974, , , , , , ,646 – 516,609 GDP = 1,515,406 Note that the figure in the Blue Book for GDP at market prices in the 2012 edition is This takes account of the statistical discrepancy, which is not given here. See Slide 20 from Lecture 1&2 for definition of Investment

5 UK GDP 2012: Expenditure Approach £ million Households and NPISH Expenditure Government Expenditure Gross Capital Formation Exports Less Imports Statistical discrepancy between expenditure components and GDP GDP at market prices Source: UK National Accounts, 2013

6 UK GDP 2012: Output Approach £million Gross Value Added Value added taxes on products Other taxes on products Less Subsidies GDP at market prices Source: UK National Accounts, 2013 Nominal or “money” GDP

7 Question 1(a)(ii) Using the expenditure side of the accounts, calculate the following: Gross National Income at market prices Household and NPISH expenditure 974,252 Compensation of employees 814,515 Central Government consumption expenditure 210,065 Gross Fixed Capital Formation 215,467 Local Government consumption expenditure 128,934 Basic price adjustment 175,526 Fixed Capital Consumption 170,986 Mixed income 85,602 Net income from abroad 15,174 Acquisitions less disposals of valuables 1,645 Exports of goods and services 492,646 Total operating surplus, gross 422,514 Taxes on production and imports 205,562 Imports of goods and service 516,609 Subsidies 11,433 Changes in Inventories 8,646 The Gross national income (GNI) is the total domestic and foreign output claimed by residents of a country. This is made up of of gross domestic product (GDP) plus incomes earned by nationals abroad, minus income earned in the domestic economy by foreign nationals. The GNI is similar to the gross national product (GNP), except that in measuring the GNP one does not deduct the indirect business taxes. The World Bank now use GNI rather than GNP. GNI = GDP + Net Income from abroad we just calculated that GDP = 1,515,406 GNI = 1,515, ,174 GNI = 1,530,580

8 Question 1(a)(iii) Using the expenditure side of the accounts, calculate the following: Gross Value Added at basic prices GVA measures the contribution to the economy of each individual producer, industry or sector in a country. Is a productivity metric that measures the difference between output and intermediate consumption. Gross value added provides a dollar value for the amount of goods and services that have been produced, less the cost of all inputs and raw materials that are directly attributable to that production. It is used to calculate the GDP: GVA + taxes on products - subsidies on products = GDP Household and NPISH expenditure 974,252 Compensation of employees 814,515 Central Government consumption expenditure 210,065 Gross Fixed Capital Formation 215,467 Local Government consumption expenditure 128,934 Basic price adjustment 175,526 Fixed Capital Consumption 170,986 Mixed income 85,602 Net income from abroad 15,174 Acquisitions less disposals of valuables 1,645 Exports of goods and services 492,646 Total operating surplus, gross 422,514 Taxes on production and imports 205,562 Imports of goods and service 516,609 Subsidies 11,433 Changes in Inventories 8,646 Gross Value Added = GDP – Basic Price Adjustment Gross Value Added = 1,515,406 – 175,526 Gross Value Added = 1,339,880

9 Question 1(a)(iv) Using the expenditure side of the accounts, calculate the following: Net National Income (also known as Net National Product) GNI doesn’t take into account depreciation, so NNI (or NNP) is basically GNI – Depreciation. Household and NPISH expenditure 974,252 Compensation of employees 814,515 Central Government consumption expenditure 210,065 Gross Fixed Capital Formation 215,467 Local Government consumption expenditure 128,934 Basic price adjustment 175,526 Fixed Capital Consumption 170,986 Mixed income 85,602 Net income from abroad 15,174 Acquisitions less disposals of valuables 1,645 Exports of goods and services 492,646 Total operating surplus, gross 422,514 Taxes on production and imports 205,562 Imports of goods and service 516,609 Subsidies 11,433 Changes in Inventories 8,646 Net National Income = GNI – Depreciation Net National Income = GNI – Fixed Capital Consumption Net National Income = 1,530,580 – 170,986 Net National Income = 1,359,894

10 Question 1(b) Using the income side of the accounts, calculate the Gross Domestic Product at market prices. Household and NPISH expenditure 974,252 Compensation of employees 814,515 Central Government consumption expenditure 210,065 Gross Fixed Capital Formation 215,467 Local Government consumption expenditure 128,934 Basic price adjustment 175,526 Fixed Capital Consumption 170,986 Mixed income 85,602 Net income from abroad 15,174 Acquisitions less disposals of valuables 1,645 Exports of goods and services 492,646 Total operating surplus, gross 422,514 Taxes on production and imports 205,562 Imports of goods and service 516,609 Subsidies 11,433 Changes in Inventories 8,646 In this example: GDP = Compensation of Employees + Mixed Income + Total Operating Surplus, gross + Taxes on Prod. & Imports – Subsidies GDP = 814, , , ,562 – 1,4331 GDP = 1,516,760 Note: Again, the statistical discrepancy is not included in the table.

11 UK GDP 2012: Income Approach £ million Total Operating Surplus, gross Mixed Income Compensation of Employees Taxes on Production and Imports Less Subsidies Statistical discrepancy between income components and GDP GDP at market prices Source: UK National Accounts, 2013

12 Question 1(c) Explain why answers in (a)(i) and (b) are not identical. a)i) GDP at market prices using expenditure method = 1,515,406 b) GDP at market prices using income accounts = 1,516,760 Problems with collecting the data and use of sampling to collect some data mean that while the two figures should in theory be the same in practice they differ. The ONS therefore allow for this by adjusting the figures to the output measure which in 2012 had a value of £1,516,153. The statistical discrepancies for the expenditure and income measures were +£1106 and –£607 respectively.

13 Question 1(d) The values for 2011 shown above are taken from the 2012 Blue Book. But they are not the same as those for 2011 reported in the 2013 Blue Book. Why is this? Over time, new data comes in to National Statistics and they update their figures to take account of this effect. The process can go on over many years. Errors in how data were collected and data entry errors can also emerge. Monthly and quarterly economic data are compiled using statistics from businesses replying to surveys and statisticians use unaudited management accounts rather than audited financial accounts when making their first estimates of GDP data. Also, income tax returns give very good estimates of income figures. But the statisticians may have to wait for up to three years for these to become available. These problems all contribute to inaccuracies with the initial results. But while the initial data is less accurate it does mean GDP figures are available more quickly to policymakers so they can make any necessary decisions.

14 Question 2(i) For each of the three countries below, calculate the growth rate of real output.

15 How to calculate Growth Rates Nominal Growth Rate vs. Real Growth Rate Nominal Growth Rate = % change in nominal output (GDP) over time. Nominal is just counting some money. Real is adjusting the value of that money based on how much it can buy relative to the value of money in some base year, (i.e. 2000). Real Growth Rate = Nominal Growth Rate – Inflation

16 Nominal GDP (in billion US$) Nominal Output Index Nominal Growth Rate Inflation Rate Real Growth Rate Real GDP (in billion US$, 2000) Let’s look at what those numbers mean, using Germany as an example: The Nominal Output Index comes from using 2000 as the base year. We divide each year’s Nominal GDP by the base year’s GDP to get the Nominal Output Index for that year. The Nominal Growth Rate is the % change in the Nominal Output (from previous slide). The Inflation Rate is given to us. It is calculated from the change in the value of money. The Real GDP is calculated by multiplying the Real Growth rate with the base year’s Nominal GDP..

17 2(i) Calculate the growth rate of real output. Let’s look at Germany and find the annual growth rate for Nominal Growth = % change in Output Nominal Growth (as a decimal) = (‘02 Output – ‘01 Output) ÷ ’01 Output Nominal Growth (as a %) = ((‘02 Output – ‘01 Output) ÷ ’01 Output)*100 Real Growth = Nominal Growth Rate – Inflation (current year) = (((‘02 Output – ‘01 Output) ÷ ’01 Output)*100) – ’02 inflation = (((103.9 – 102.5) ÷ 102.5) * 100 – 1.42 = 0.0

18 Question 2(i) For each of the three countries below, calculate the growth rate of real output. Practice calculating the growth rates! Nominal Growth = % change in nominal output (GDP) over time. Nominal Growth (as a %) = ((Output 2 – Output 1 ) ÷ Output 1 )*100 Real Growth Rate = Nominal Growth Rate – Inflation Rate

19 Question 2(i) solutions Practice calculating the growth rates! You should be comfortable with: Working with percentages Calculating Real vs. Nominal Using the appropriate formulas from memory

20 Question 2(ii) Plot the rate of growth of real output on a graph for each country.

21 Question 2(iii) What might explain the differences in the countries’ experience?

22 Question 2(iii) What might explain the differences in the countries’ experience? Slower growth in the early part of the decade appears to be linked to stronger recovery from the great recession. Think about income elasticity of demand for the good that these countries produce. Spain produces tourism and Germany produces manufacturing goods. What can the income elasticities of these products tell us about how the countries producing them would react to a shock?

23 Question 3 In many developing countries, economic activity is mainly concentrated in small-scale subsistence agriculture. How would you expect this to affect comparisons of living standards based on GNP measurements? Not all activity will be measured, as many payments will be made in kind or carried out by individuals themselves. As these will not appear in market transactions they will not be recorded in the national income accounts. These problems occur in developed countries as well, but are much more prevalent in developing countries. Hence measures of GNI in developing countries tend to underestimate economic activity and therefore the standard of living of the population. (see Mankiw pgs. 498 – 502)

24 Question 3 (ctd.) In many developing countries, economic activity is mainly concentrated in small-scale subsistence agriculture. What other problems might you encounter in making international comparisons of living standards? Other problems with GNI measures: activities done as a mutual favour – sometimes to evade tax - are not included ; voluntary work is not included; recycling of goods is often not included; location-specific considerations (eg need for heating, air-conditioning) are not allowed for; the impact of pollution and other environmental problems are often not considered; illegal activities, such as drugs markets, are ignored. Many of these problems occur in both developed and developing countries. Note also difficulties in deciding the exchange rate used to compare countries. Changes in these rates can alter international comparisons. The UN’s Human Development Index is an attempt to include some of the other factors that might affect living standards such as health standards and levels of education. (see Mankiw pgs. 498 – 502)

25 Check Moodle for a worksheet next week and make an attempt at the problems before class.


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