Transcript Chapter 16 - McGraw Hill Higher Education

Chapter 16
National income, expenditure and
product
E
$
Y
P
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
16-1
Gross Domestic Product
• Gross Domestic Product (GDP) = the market value
of all final goods and services produced in the
economy in a given period (e.g. 1 year)
• No double counting. The market value of a final
good includes the value added at each stage of
production
• GDP is a measure of productive activity; it
excludes:
–
–
–
Second-hand goods
Shares and bonds trading
Transfer payments (e.g. social security payments )
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
16-2
Nominal and Real GDP
•
Nominal (money) GDP = GDP at current prices
–
•
Australia’s GDP in 1997: $529.2 billion
Real GDP = GDP at constant prices (adjusted for inflation)
–
Annual % change in real GDP = economic growth
nominal GDP
Real GDP 
 100
GDP deflator
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
16-3
Australia’s Nominal and Real GDP
Growth, 1991 to 2003, % p.a.
9.0
8.0
7.0
6.0
4.0
Real GDP
3.0
Nominal GDP
2.0
1.0
2002
2000
1998
1996
–2.0
1994
–1.0
1992
0.0
1990
% p.a.
5.0
Source: Adapted from
OECD, Economic
Outlook, July 2004.
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
16-4
Measures of GDP
• Three different methods of measuring GDP
–
–
–
GDP(I) = income approach
GDP(E) = expenditure approach
GDP(P) = production approach
• Statistical identity: Y = E = P
• GDP(A) = average of the three measures
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
16-5
Value Added
• Market value of the final product, $2, equals the
sum of the values added at each stage of the
production process
• Value added is the value of a firm’s production less
the cost of any intermediate goods or services used
in production
(1)
Production
stage
Firm 1, Tree farm
Firm 2, Logging co.
Firm 3, Pulp mill
Firm 4, Paper
manufacturer
Firm 5, Retail store
(2)
Product
Trees
Logs
Pulpwood
Writing pad
(3)
Sale price
of product
0.25
0.60
1.00
1.50
(4)
Value
added
0.25
0.35
0.40
0.50
Retail service
2.00
0.50
Sum of Value Added = Final Sales Price
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
16-6
GDP Calculation
• GDP excludes non-productive transactions:
–
Non-market items such as the activities of charities and
homemakers are excluded
• GDP also excludes:
–
–
–
–
Purely financial transactions
Buying and selling shares
Second-hand sales
Public transfer payments (social security payments)
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
16-7
Two Sides to GDP: Expenditure and
Income
• The amount spent on
• Income derived from
this year’s output e.g.
the production of this
year’s output e.g.
–
–
–
–
Consumption
expenditure by
households, plus
Government purchases
of goods and services,
plus
Investment expenditure
by businesses, plus
Net export expenditures
–
–
–
–
–
Wages plus
Rents
plus
Interest plus
Profits plus
Non-income charges or
allocations
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
16-8
GDP May Be Expressed As
• Output: GDP(O)
• Expenditure: GDP(E)
• Income: GDP(I)
• Average of these three: GDP(A)
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
16-9
Aggregate Demand/GDP(E)
• GDP(E) = aggregate demand (AD) = total
expenditures on final goods and services = C + I +
G + (X – M)
• Main components:
–
–
–
–
Private final consumption (C) = expenditure on
consumer goods and services
Private investment (I) = spending on capital goods
Government spending (G) = spending on final goods and
services by government
Net exports (X – M) = expenditure by foreigners on our
output as well as by our own citizens on foreign items
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
16-10
Personal Consumption Expenditures
(C)
• Expenditures by households on
–
–
–
Durable consumer goods (e.g. cars, refrigerators, videos)
Non-durable consumer goods (bread, milk, beer)
Services (banking, legal, car repairs)
• ‘C’ includes expenditure on imported as well as
Australian-produced goods and services (about
60% of total aggregate demand)
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16-11
Determinants of Personal
Consumption (C)
• Disposable income
• Consumer wealth (e.g. stocks, bonds, real estate)
• Consumer expectations/economic circumstances
• Credit conditions (interest rates, money supply)
• Taxes (e.g. income tax, indirect taxes)
• Marketing
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16-12
Private Investment (I)
• Most volatile component (12–19%). Includes
–
–
–
All final purchases of machinery, equipment and tools by
business enterprises
All building and construction
Changes in stocks (or inventories)
• Main influences
–
–
–
–
Rates of taxation and government incentives
Cost and availability of credit
Business confidence/profit expectations
Degree of excess capacity
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
16-13
Government Spending (G)
• Represents about 20–25 % of GDP(E)
• It excludes all government transfer payments
(unemployment benefits etc.)
• G1 = Current expenditure by the government
sector required for the day-to-day operation of
government (e.g. wages and salaries of
government employees, materials and power)
• G2 = Expenditure on capital goods and services
by the government sector (e.g. schools, hospitals,
transport and telecommunications)
(cont.)
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
16-14
Government Spending (G) (cont.)
• Main influences
–
–
–
The state of the economy
Ability to provide funds (e.g. from taxes or borrowings)
Political and economic considerations
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
16-15
Net exports (X – M)
• Spending by foreigners on Australian goods and
services, and
• A portion of the totals of C, I and G is for goods and
services that have been imported—that is,
produced overseas
• The total value of imports (M) must be estimated
and subtracted from C + I + G + X to avoid an
overstatement of total production in Australia
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
16-16
Influences on Net Exports
• The world economy (GDP growth in major
economies). Exports are to increase in line with
GDP growth (and imports) in major partner
countries
• Cost competitiveness
–
–
Labour productivity and capital efficiency
Exchange rates (e.g. a strong Australian dollar will
encourage M and discourage X)
• Government’s external policies
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
16-17
Australia’s GDP(E), 2001–02, A$
Billion and % of Total
Component
A$ billion
% of Total GDP
Private
Consumption (C)
419.3
60.2
Private
Investment (I)
130.6
18.8
G1 + G 2
151.7
21.8
Exports (X)
150.6
21.6
– Imports (M)
–156.2
–22.4
TOTAL GDP
696.0
100.0
Source: Adapted from ABS, Year Book Australia, 2004, p. 771.
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
16-18
International GDP Comparisons
($US Billion)
• World Bank Atlas method = conversion of GDP in
national currency to US$ using the 3-year average
annual exchange rate
• Example
–
–
–
Australia’s GDP: A$401.4 billion
Average annual exchange rate: A$1 = US$0.7031
GDP = A$401.4 x 0.7031 = US$282.2 billion
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
16-19
The World’s Largest Economies (GDP
in 2003 US$ Billion), World Atlas
Method
1.United States
10 881 9.Canada
834
2.Japan
4326 10. Mexico
626
3.Germany
2401 11.Korea Rep.
605
4. United Kingdom
1795 12.India
599
5. France
1748 13. AUSTRALIA
518
6. Italy
1466 14. Netherlands
512
7. China
1410 15. Brazil
492
8. Spain
836
WORLD GDP:
36 356
Source: Adapted from World Bank, World Development Indicators, 2004, http://www.worldbank.org.
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
16-20
Structure of Aggregate Demand in
Asia Pacific, 2001, % (World Bank)
Economy/
region
Household Government
Gross
consumption consumption
capital
expenditure expenditure formation
%
%
%
Net
exports
%
East Asia
(LDC)
52
12
31
5
Singapore
42
12
24
22
Hong Kong
59
10
26
5
Japan
56
18
25
0
Australia
60
19
23
0
Source: Adapted from the World Bank, World Development Indicators, 2003, Table 4.9.
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
16-21
Related National Income Concepts
• Gross National Expenditure (GNE) = C + I + G
–
Total domestic demand on goods and services. No
exports
• National Income (NI) = income received by a
country’s residents = GDP – (net income paid
overseas + depreciation allowances)
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
16-22
The Business Cycle
% change
Real GDP
Peak
Expansion
Contraction
Time
Trough
Trough
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
16-23
Consumption and Saving
• In terms of absolute size, C is the main component
•
•
•
•
of total spending (AD) with about 62% in 1996–97
Personal saving = that part of disposable income
(DI) that is not consumed
Average propensity to consume (APC) = the
fraction or percentage of total disposable income
that is consumed
Average propensity to save (APS) = the fraction or
proportion of total DI that is saved
APC + APS = 1
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
16-24
The Multiplier
•
The multiplier = the ratio of the income shift brought about by
a change in (investment) spending (See text Figures 16.4 and
16.5, p. 296)
change in C
Marginal propensity to consume (MPC) 
change in Y
•
Example
–
An income increase of $100 results in an $80 increase in
consumption
–
MPC = 80/100= 0.8
(cont.)
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
16-25
The Multiplier (cont.)
change in S
Marginal propensity to save (MPS) 
change in Y
• Therefore, MPS = 20/100 = 0.2
1
1
1
The multiplier (M) 


5
1  MPC MPS 0.2
• The multiplier (M) is the no. of times by which
changes in GDP exceed the initial change in
aggregate spending, brought about by changes in
income
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
16-26