National Income Accounting Antu Panini Murshid with revisions/additions by Patricia Hermes

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics2 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

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics3 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)

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics4 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)

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics5 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)

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics6 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

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics7 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

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics8 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

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics11 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

12 Circular Flow Factors of production supplied Market for Factors of Production Land, labor, capital Goods Markets Expenditure: goods and services bought Income: factors of production bought Goods & services supplied Food, clothing, etc. Payments for products Households Firms Wages, rents, profits, etc.

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10/11/2015 Antu Panini Murshid--Principles of Macroeconomics15 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

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics16 Expenditure Approach: Components of GDP GDP = C + I + G + Xn consumption Investment Government purchases Net exports Adds up all spending on current production

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics17 US GDP in 2001 Consumption=6,987 Investment=1,586 Government Purchases=1,858 Net Exports= GDP=10,082.2

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics18 US GDP in 2001 Consumption 69% Investment 16% Government 18% Net exports -3%

US GDP 2011 Consumption=10, % Investment=1, % Government = 3, % Net Exports= % GDP=15,060 10/11/2015 Antu Panini Murshid--Principles of Macroeconomics19 Agriculture 1.2% Industry 22.7% Services 76.7%

Turkey GDP 2011 Consumption= % Investment = Government = % Net Exports= % GDP=1,026 10/11/2015 Antu Panini Murshid--Principles of Macroeconomics20 Agriculture 9.2% Industry 26.9% Services 63.9%

China GDP 2011 Consumption= 3, % Investment= 6, % Government =1, % Net Exports= % GDP=11,290 10/11/2015 Antu Panini Murshid--Principles of Macroeconomics21 Agriculture 10.1% Industry 46.8% Services 43.1%

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics22 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

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics23 Investment Expenditures by firms on new capital equipment “Gross private domestic investment” + changes in inventories + residential investment (new home construction)

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics24 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

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics25 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

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics26 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

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics27 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

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics28 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

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics29 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

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics30 Final Sales and GDP GDP = Final Sales +Change in inventories

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics31 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

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics32 Government Spending Government spending includes all spending by the federal, state and local government on new goods and services + transfer payments

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics33 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

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics34 Government Purchases Government Spending – transfer payments = Government Purchases Government Purchases is what is included in GDP

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics35 Net Exports C+I+G needs to be adjusted to properly account for output sold abroad and output produced abroad but sold in the US Net exports = Value of exports – Value of imports

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics36 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

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics37 Measuring Changes in Output Consider an economy that produced 100 crates of apples and 100 crates of oranges in 1990 YearNominal GDP *$1+100*$2=$ *$2+100*$4=$600

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics38 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

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics39 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 YearReal GDP (1990 dollars) *1+100*2= *1+100*2=300

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics40 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

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics41 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

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics42 Purchasing Power Parity The differences between PPP and real exchange rates can be significant: Nominal GDP GDP PPP ChinaChina 6,989 11,290 JapanJapan 5,855 4,981 GDP per/c GDP per/c PPP ChinaChina : 4,981 US$ 8,400 US$ JapanJapan : 46,102 US$ 34,300 US$.

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics43 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…

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics44 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”

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics45 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

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics46 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.)

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics47 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.)

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics48 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.)

10/11/2015 Antu Panini Murshid--Principles of Macroeconomics49 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.)