Transcript Chapter 2

Chapter 2
National Income Accounting
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-1
Objectives
• Analyse the components of final demand in
the economy
• Define gross domestic product and examine
its relationship with other measures of output
• Identify the set of national income relationships
• Derive a model of the economy that explains
the relationships between the various sectors
• Consider the impact of price changes on output
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-2
Chapter Organisation
2.1
Production of Output and Payments
to Factors of Production
2.2
Outlays and Components of Demand
2.3
Some Important Identities
2.4
Measuring Gross Domestic Product
2.5
Inflation and Price Indices
2.6
Inflation and Interest Rates
2.7
Where to Find the Data
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-3
2.1 Production
• Gross domestic product (GDP) is the value:
– Of all final goods and services
– Produced in a country
– For a given period.
• Australian GDP for 2004 was $830 billion.
• Per capita GDP = $830b/20.1m pop.
= $41 300 p.a. in 2004.
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-4
Production
• The production function (f) relates:
– GDP (Y) to inputs called factors of production
– The major factors are labour (N) and capital (K)
– Y = f(N, K)
• Payments to factors comprise:
– The wage rate (w) for N and interest rate (i) for K
– These payments plus profits add to GDP
– Y = (w  N) + (i  K) + profit
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-5
Production
• Gross national income (GNI):
– GNI = GDP + payments from overseas to domestically
owned factors of production
– Overseas payments are about 3% of GNI.
• Net domestic product (NDP):
– NDP = GDP – depreciation
– Depreciation is about 15% of GDP.
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-6
Production
• Real versus nominal GDP
– Nominal GDP measures the value of all final goods
and services produced but it does not take account
of price changes.
– Real GDP measures the value of all final goods
and services produced but adjusts that value to
take account of price changes.
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-7
Chapter Organisation
2.1
Production of Output and Payments
to Factors of Production
2.2
Outlays and Components of Demand
2.3
Some Important Identities
2.4
Measuring Gross Domestic Product
2.5
Inflation and Price Indices
2.6
Inflation and Interest Rates
2.7
Where to Find the Data
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-8
2.2 Outlays and Components of Demand
• The expenditure measure of GDP called GDP(E)
comprises:
–
–
–
–
Household consumption spending (C)
Investment spending (I)
Government purchases (G)
Foreign demand (NX)
• The national income identity is
Y = C + I + G + NX
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
(2.3)
2-9
Components of Demand
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-10
Consumption
• From Table 2.1, Australia’s household
consumption was $490 billion in 2004.
• This comprises 61.4% of GDP.
• The consumption share of GDP has
increased over time.
• The rate is lower than for the US (70%) and
higher than for Japan (56%).
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-11
Investment
• Investment means additions to the physical
stock of capital.
• This includes new construction, machinery,
factories and additional inventories.
• Investment in human capital increases the
labour force knowledge and skill.
• Gross investment represents total investment
or the increase in capital stock.
• Net investment = Gross investment – Depreciation
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-12
Government Purchases
• Government spending represents purchases
of goods and services.
• Transfer payments are not purchases.
• Government expenditure comprises purchases
and transfers.
• Domestic final demand is the sum of public
and private consumption and investment.
• Gross national expenditure (GNE) is final
demand plus the increase in stocks ( change
in inventories).
• GNE = C + I + G
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-13
Net Exports
•
Net exports (NX):
– Are the difference between exports and imports
– Australian NX have been mostly negative.
•
Gross domestic product (GDP) takes into
account net exports.
•
GDP = C + I + G + NX
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-14
Chapter Organisation
2.1
Production of Output and Payments
to Factors of Production
2.2
Outlays and Components of Demand
2.3
Some Important Identities
2.4
Measuring Gross Domestic Product
2.5
Inflation and Price Indices
2.6
Inflation and Interest Rates
2.7
Where to Find the Data
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-15
2.3 Some Important Identities
• An analytical model can be used to represent the
set of national income relationships used in later
chapters.
• To simplify the analysis assumptions are made to
ensure that disposable income is equal to GDP.
• These assumptions are:
– Depreciation is disregarded so that GDP = NDP.
– Indirect taxes and business transfer payments are
disregarded.
– GDP is referred to interchangeably as income or output.
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-16
A Simple Economy
• A simple economy has two sectors.
• There is no government and foreign trade.
• Output produced equals output sold
• Y=C+I
(2.4)
• Also, income is consumed or saved.
• Y=S+C
(2.5)
• Therefore, I = S
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-17
Government and Foreign Trade
• The addition of the government and net exports
creates a four-sector economy where:
• Y = C + I + G + NX
(2.8)
• Disposable income (YD) includes transfers (TR)
and is net of taxes (TA).
• YD = Y + TR − TA
(2.9)
• Disposable income (YD) is consumed (C)
or saved (S)
• YD = C + S
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
(2.10)
2-18
Government and Foreign Trade
• Using Equations (2.9) and (2.10) to eliminate YD,
substituting for C in (2.8) and rearranging, gives:
S – I  (G + TR – TA) + NX
(2.12)
• (G + TR – TA) represents the government’s
budget deficit (BD).
• Identity (12.12) states that the excess of savings
over investment (S – I) is equal to the budget
deficit plus the external sector.
• S – I  BD + NX
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-19
Government and Foreign Trade
• S – I  BD + NX indicates important relationships
between S – I, BD and NX.
• If S = I, then the budget deficit must be equal to
the external deficit (twin deficits).
• If S = $1000m, I = $950m and the budget deficit
is $150m, then NX must be equal to ?
• NX = –$100m. This reflects Australia’s budget
and trade deficits in the early 1990s.
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-20
Chapter Organisation
2.1
Production of Output and Payments
to Factors of Production
2.2
Outlays and Components of Demand
2.3
Some Important Identities
2.4
Measuring Gross Domestic Product
2.5
Inflation and Price Indices
2.6
Inflation and Interest Rates
2.7
Where to Find the Data
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-21
2.4 Measuring Gross Domestic Product
• GDP is the value of final goods and services
produced.
• Including semi-processed goods will cause
double counting.
• GDP is therefore the sum of value added in
each production stage.
• GDP excludes the resale of existing commodities.
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-22
Measurement Problems
• Most household work and non-market activities
such as volunteerism are not included.
• Pollution and environment degradation effects
not included in GDP.
• Illegal activity and the underground economy
cannot be accounted for.
• Government services may not be priced by
the market.
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-23
Measurement Problems
• How to account correctly for improvements in
the quality of goods?
• National accounts data is collected and frequently
revised.
• Quarterly GDP growth figures can change by
1–2% at an annual rate.
• Other measures of living standards such as the
human development index (HDI) can be used to
supplement GDP measures.
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-24
Chapter Organisation
2.1
Production of Output and Payments
to Factors of Production
2.2
Outlays and Components of Demand
2.3
Some Important Identities
2.4
Measuring Gross Domestic Product
2.5
Inflation and Price Indices
2.6
Inflation and Interest Rates
2.7
Where to Find the Data
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-25
2.5 Inflation and Price Indices
• Real GDP measures changes in output in
the economy between different time periods
by valuing goods at constant prices.
• Real GDP is measured in the national income
accounts at the prices of 2002/03.
• In calculating real GDP physical output
is multiplied by the prices that prevailed
in 2002/03.
• This gives a measure of the value of current
output if it had been sold at 2002/03 prices.
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-26
Inflation
• Inflation is the rate of change in prices.
(2.13)
• Australia’s inflation rate has remained around
2–3% p.a. since the mid 1990s.
• Two measures of inflation are the consumer
price index (CPI) and the GDP deflator.
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-27
Price Indices
• The GDP deflator is the ratio of nominal GDP
to real GDP for a year.
• It is a broad-based price index.
• The consumer price index (CPI) measures:
– A typical urban consumer’s cost of purchases
– Based on a fixed basket of goods and services.
• The CPI is more narrow but includes import prices.
• Inflation () is the rate of change in prices.
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-28
Chapter Organisation
2.1
Production of Output and Payments
to Factors of Production
2.2
Outlays and Components of Demand
2.3
Some Important Identities
2.4
Measuring Gross Domestic Product
2.5
Inflation and Price Indices
2.6
Inflation and Interest Rates
2.7
Where to Find the Data
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-29
2.6 Inflation and Interest Rates
• Interest rates reported in the media are
nominal rates.
• Real interest rate = nominal interest rate –
(expected) inflation rate.
• A 10-year Treasury bond paying 5.23% p.a.
with 2.3% annual inflation rate has a real
return of ?
• Real return = 5.23% – 2.3% = 2.93%
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-30
Chapter Organisation
2.1
Production of Output and Payments
to Factors of Production
2.2
Outlays and Components of Demand
2.3
Some Important Identities
2.4
Measuring Gross Domestic Product
2.5
Inflation and Price Indices
2.6
Inflation and Interest Rates
2.7
Where to Find the Data
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-31
2.7 Where to Find the Data
• Data is available on the Internet
–
–
–
–
–
–
–
Australian Bureau of Statistics: www.abs.gov.au
Australian Treasury: www.treasury.gov.au
Reserve Bank of Australia: www.rba.gov.au
Resources for economists http://rfe.wustl.edu
US Bureau Economic Analysis: www.bea.doc.gov
World Bank: www.worldbank.org/data;
OECD: www.oecd.org/statistics; www.imf.org
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 2e by Dornbusch, Bodman, Crosby, Fischer, Startz
Slides prepared by Monica Keneley.
2-32