national income accounting 2

Principles of Macroeconomics Amnah Abbas

Amnah Abbas Lecturer-Economics

National Income AccountingTools \ mechanism to measure the performance of an economy.y 3 Measures of Production:

i)GNP ii) GDP iii) NDP


3 Measures of Income: i) National Income ii) Personal Income iii) Disposable Income


GROSS DOMESTIC PRODUCT(GDP)The total market value of all final goods and services produced within the political boundaries of an economy during a given period of time, usually one year.This is the official measure of the aggregate output produced by the economy


What is meant by:y Total Market Value

GDP seeks to measure ALL production, the production of ALL goods and services in the economy.


y Tabulating GDP in terms of market value has three

important benefits: First, it provides an indication of satisfaction 2. Second, information is readily available 3. Third, it establishes a common denominator1.


What is meant by:y Final Goods and Services

Intermediate Goods: A standard car contains a number of intermediate goods-steel from one firm, tires from another, lug nuts from a third--which are combined to make the finished car. As a profit-seeking business, the car company includes the cost of these intermediate goods in the price of the final product.Amnah Abbas Lecturer-Economics

y Final Goods:

The calculation of GDP is based only on the market value of, the price buyers are willing to pay for, the final product.y A final good can be thought of as one that has reached its final user. y Business investment in capital goods also falls into the final goods category. y Government and foreign sectors also purchase final goods.Amnah Abbas Lecturer-Economics

y Given year

stock and flow


GROSS NATIONAL PRODUCT (GNP)y The total market value of all final goods and services

produced by the citizens of an economy during a given period of time, usually one year.


Difference between GDP and GNPy GNP measures the value of output produced using

resources owned by the citizens of a country, regardless where the production occurs.y GDP, in contrast, measures all of the output produced

within the political boarders of a country, regardless of the citizenship of the resources doing the producing.


Examples:y Included in Both: Automobile production usingthe labor of a Pakistani citizen who is employed by an Pakistani-owned factory in Pakistan is included in both Pak GNP and Pak GDP.y Production takes place within the political boundaries

of the Pakistan and is performed using resources owned by Pakistani citizens.


y Only in GDP: Cement production using the labor of an Chinese citizen who is employed by a Chineseowned factory in the Pakistan is included in Pak GDP, but not Pak GNP.y Production takes place within the political boundaries

of the Pakistan, but it is not performed using resources owned by Pakistani citizens. y This production, however, is included in China s GNP (but not China s GDP).Amnah Abbas Lecturer-Economics

y Only in GNP: Hockey-stick production using the labor of a Pakistani citizen who is employed by a Pakistani-owned factory in China is included in Pak GNP, but not Pak GDP. y Production is performed using resources owned by Pak citizens, but does not take place within the political boundaries of Pakistany This production, however, is included in China s GDP

(but not China s GNP).Amnah Abbas Lecturer-Economics

GNP = GDP + Net Foreign Factor Payment

NET FOREIGN FACTOR INCOME: The difference between factor payments received from the foreign sector by domestic citizens and factor payments made to foreign citizens for domestic production.


Net Domestic Product (NDP):The total market value of all final goods and services produced within the political boundaries of an economy during a given period of time, usually a year, after adjusting for the depreciation of capital.


DEPRECIATION: A permanent decrease in value or price/value.y While all sorts of stuff can depreciate in value, some of

the more common ones are capital, real estate, corporate stock, and money.y The depreciation of capital results from the rigors of

production and affects our economy's ability to produce stuff.Amnah Abbas Lecturer-Economics

NDP at Market Price:

NDPMP= GDP-depreciation


FACTOR COST


NDP at Factor Cost:NDPFC= NDPMP Net Indirect taxes


NNP at Market Pricesy Add Net Foreign Factor Income to the two NDPs.

NNPMP= NDPMP + Net Foreign Factor Income


NNP at factor costNNPFC= NNPMP Net Indirect taxes


NET INDIRECT TAXES

NET Indirect taxes = Indirect taxes business subsidies


Indirect Business Taxes y Indirect business taxes is the official term used in the National Income and Product Accounts for sales taxes. y These are termed INDIRECT taxes because the business sector has the DIRECT responsibility of paying these taxes to the government sector, but the business sector really acts as the "collection agency" for the government, collecting the taxes from the household sector. The taxes are paid INDIRECTLY by the household sector.Amnah Abbas Lecturer-Economics

Business Subsidiesy Business Transfer Payments y Business transfer payments are subsidies, or gifts,

made from the business sector to the household sector. While a portion of business transfer payments are, in fact, outright gifts to the household sector (such as student scholarships), a substantial portion results when unpaid debts are "written off." In effect, when the business sector "writes off" an unpaid debt, the are giving the household sector "free" goods.


Government subsidiesy are transfer payments from the government sector to the business sector. y As transfer payments, government subsidies are NOT payments for current production. y In essence they are government gifts to the business sector. y They are then added to the pool of revenue that the business sector uses for factor payments (and thus national income). y Because the business sector does NOT receive this revenue as the result of producing goods, it is part of national income but not part of gross domestic product.Amnah Abbas Lecturer-Economics

National Incomey The sum of all income of the people of a country is

called national income


Measuring National Income 1st Method

National Income = NNPFC


Measuring National Income nd Method 2National income is that earned by the 4 factors of production: 1) Labor 2) Capital 3) Land 4) Entrepreneurship The official entries in the National Income and Product Accounts for these factor payments (and their common terms) are:I. II. III. IV.

compensation of employees (wages), net interest (interest), rental income of persons (rent), corporate profits (profit) v) Proprietors Income Amnah Abbas Lecturer-Economics

NI = Wages + Net Interest + Rent + Corporate Profits + Proprietors' Income


Compensation of Employees:y The official measure of wages earned by the household

sector for supplying labor services.

y Compensation of employees is far and away the largest

of the five factor payments, typically running about 55 percent of gross domestic product.

y It includes standard wages and salaries paid directly to

employees, as well as fringe benefits paid on behalf of employees to third parties.Amnah Abbas Lecturer-Economics

Net Interest:y The official measure of interest earned by the household sector for supplying capital services. y Net interest is usually less than 8 percent of gross domestic product, typically in the 5 to 7 percent range. y It is considered payment for the productive services of capital.

Net interest = Interest Earned Interest Paid


Rental Income of Persons:y The official measure of rent earned by the household

sector for supplying land and related services.y Rental income of persons is typically the smallest of

the five factor payment categories, usually less than 4 percent of gross domestic product.y It includes payments for the use of land, natural

resources, and capital goods attached to the land.Amnah Abbas Lecturer-Economics

Corporate Profits:y The total accounting profits received by corporations,

which is the official measure of profit earned by the household sector for supplying entrepreneurship services through corporations.y Corporate profits the second largest factor payment

category, usually coming it around 15 to 20 percent of gross domestic product.


Proprietors' Income:y The excess of revenue over explicit production cost of

owner-operated businesses.y Proprietors' income is usually less than 8 percent of

gross domestic product, typically falling in the 6 to 9 percent range.


Personal Income PI:The total income received by the members of the domestic household sector, which may or may not be earned from productive activities during a given period of time, usually one year.


Measuring PI: Adjusting National Incomey An alternative method of deriving personal income is by adjustments to national income. y National income is income earned and personal income is income received. y Deriving personal income from national income is accomplished by A) deducting income earned but not received (IEBNR) B) then adding income received but not earned (IRBNE).Amnah Abbas Lecturer-Economics

PI = NI - Income Earned But Not Received + Income Received But Not Earned


Income Earned But Not Received:The 3 primary types of income earned but not received by the factors of production are: Social Security taxes are "contributions" to the Social Security system made by labor. These are wages earned, but not received. Corporate profits taxes are taxes on the profits earned by corporate shareholders. These profits are paid to the government and are thus not available for dividend payment. Undistributed corporate profits are a portion of the profits earned by corporate shareholders that could be paid out as dividends, but are retained to finance capital investment.


Income Received But Not EarnedThe 3 types of income received but not earned are: 1. Social Security payments, 2. unemployment compensation payments, 3. and welfare payments. These are also the three key transfer payments from the government sector to the household sector.


y Social Security payments are the payments from the

Social Security system to elderly and disabled members of the household sector. y Unemployment compensation payments are transfer payments from the government sector to unemployed members of the household sector.y And welfare payments are transfer payments from the

government sector to poor members of the household sector.Amnah Abbas Lecturer-Economics

Statistical Discrepancyy The last official difference between gross domestic

product and national income is the statistical discrepancy


Measuring PI: ALTERNATIVE METHODy PI = Wages Received + Interest Received + Rent

Received + Dividends + Proprietors' Income + Transfer Payments


DISPOSABLE INCOMEThe total income that can be used by the household sector for either consumption expenditures or saving during a given period of time, usually one year. Also term as Personal Disposable Income (PDI)


Disposable income provides useful information about the amount of income received by the household sector that is actually available for spending. The key is that a portion of personal income is gobbled up by income taxes. While the household sector officially receives personal income, the government sector is primed and ready to extract a portion of this personal income in income taxes.


DI = PI PT


Personal savingsy Disposable income

Consumption expenditure


How to measure GDP? Output Approach

-Value added Income Approach Expenditure Approach


Output Approachy value added

The difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage.


OUTPUT METHODValue added method In calculating GDP, we can sum up the value added at each stage of production or we can take the value of final sales. We do not use the value of total sales in an economy to measure how much output has been produced.TABLE 21.1 Value Added in the Production of a Gallon of Gasoline (Hypothetical Numbers) Stage Of Production (1) (2) (3) (4) Oil drilling Refining Shipping Retail sale Value Of Sales $3.00 3.30 3.60 4.00 Value Added $3.00 0.30 0.30 0.40 $4.0050 of 35

Total value added

Exclusion of Used Goods and Paper Transactions GDP is concerned only with new, or current, production. Old output is not counted in current GDP because it was already counted when it was produced. GDP does not count transactions in which money or goods changes hands but in which no new goods and services are produced.

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What is NOT included in GDP?y Intermediate goods (goods that are produced by one y y y y y

firm for use in further processing by another firm) Used goods Paper transactions, e.g. trading stocks, transferring ownership of something Output produced abroad by domestically owned companies Non-market activities (black market) Goods produced illegally and unreported cash incomeAmnah Abbas Lecturer-Economics

EXPENDITURE APPROACHexpenditure approach A method of computing GDP that measures the total amount spent on all final goods and services during a given period.

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Calculating GDPThe Expenditure Approach There are four main categories of expenditure: Personal consumption expenditures (C): household spending on consumer goods Gross private domestic investment (I): spending by firms and households on new capital, that is, plant, equipment, inventory, and new residential structures Government consumption and gross investment (G) Net exports (X - M): net spending by the rest of the world, or exports (X) minus imports (M)

GDP = C + I + G + (X - M)54 of 35

Calculating GDPThe Expenditure ApproachTABLE 21.2 Components of U.S. GDP, 2007: The Expenditure Approach Billions Of Dollars Personal consumption expenditures (C) Durable goods Nondurable goods Services Gross private domestic investment (l) Nonresidential Residential Change in business inventories Government consumption and gross investment (G) Federal State and local Net exports (EX IM) Exports (EX) Imports (IM) ti r t GrNote: Numbers may not add exactly because of rounding. Source: U.S. Department of Commerce, Bureau of Economic Analysis.

Percentage of GDP 70.3 7.8 0.5 42.1 15.4 10.7 4.6 0.0 19.4

9,734. 1,078. ,833. 5,822.8 2,125.4 1,481.8 640.7 2.9 2,689.8 976.0 1,713.8708.0

7.1 12.4 5.1

1,643.0 2,351.0 13,841.3 100.0

11.9 17.0

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Calculating GDPThe Expenditure Approach Personal Consumption Expenditures (C) personal consumption expenditures (C) Expenditures by consumers on goods and services. durable goods Goods that last a relatively long time, such as cars and household appliances. nondurable goods Goods that are used up fairly quickly, such as food and clothing. services The things we buy that do not involve the production of physical things, such as legal and medical services and education.

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Calculating GDPThe Expenditure Approach Gross Private Domestic Investment (I)Change in Business Inventories

change in business inventories The amount by which firms inventories change during a period. Inventories are the goods that firms produce now but intend to sell later. GDP = Final sales + Change in business inventories

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Calculating GDPThe Expenditure Approach Gross Private Domestic Investment (I)Gross Investment versus Net Investment

depreciation The amount by which an asset s value falls in a given period. gross investment The total value of all newly produced capital goods (plant, equipment, housing, and inventory) produced in a given period. net investment Gross investment minus depreciation.capitalend of period = capitalbeginning of period + net investment

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Calculating GDPThe Expenditure Approach Government Consumption and Gross Investment (G) government consumption and gross investment (G) Expenditures by federal, state, and local governments for final goods and services.

Net Exports (X - M) net exports (X - M) The difference between exports (sales to foreigners of U.S.-produced goods and services) and imports (U.S. purchases of goods and services from abroad). The figure can be positive or negative.

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income approachy income approach A method of computing GDP

that measures the income wages, rents, interest, and profits received by all factors of production in producing final goods and services.

income approachy Move back from NI to GDP

Wages + rent+ net interest+proft= NI NI = NNPFCNNPFC + NET Indirect business taxes = NNPMP


y NNPMP + Depreciation = GNP y GNP

NFF = GDP


Calculating GDPThe Income Approach national income The total income earned by the factors of production owned by a country s citizens.

TABLE 21.3 National Income, 2007 Billions of Dollars 12,221.1 7,874.2 1,042.6 65.4 1,598.2 602.6 961.4 94.2 14.5 Percentage of National Income 100.0 64.4 8.5 0.5 13.1 4.9 7.9 0.8 0.1

National Income Compensation of employees Proprietors income Rental income Corporate profits Net interest Indirect taxes minus subsidies Net business transfer payments Surplus of government enterprisesSource: See Table 6.2.

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Calculating GDPThe Income Approach compensation of employees Includes wages, salaries, and various supplements employer contributions to social insurance and pension funds, for example paid to households by firms and by the government. proprietors income The income of unincorporated businesses. rental income The income received by property owners in the form of rent. corporate profits The income of corporations. net interest The interest paid by business.

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Calculating GDPThe Income Approach indirect taxes minus subsidies Taxes such as sales taxes, customs duties, and license fees less subsidies that the government pays for which it receives no goods or services in return. net business transfer payments Net transfer payments by businesses to others. surplus of government enterprises Income of government enterprises.

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y The following is information from the national income accounts for a hypothetical

country:

y y y y y y

GDP Net Investment Depreciation Consumption Government purchases of goods and services Government budget surplus

$6000 200 600 4000 1100 30

y What is: I. II. III. IV. V.

NDP? Net exports? Net taxes? Personal disposable income Personal saving?


y y y y y y y y y y y y y

GDP Net foreign factor income NNP NI Durable goods 632 Non Durable goods 1545 Services 2974 Exports 855 Imports 954 Business fixed investment Non residential structures 214 Producer s durable equipment 577


y Residential investment y Inventory Investment y GNP y Federal purchases y y y y y

311 15 7567 347 176 883 858 558

National defense Non defense State and local Govt expend. Capital consumption Allowance Indirect Business taxesAmnah Abbas Lecturer-Economics

national income accounting 2

Documents

y production

y total market value

y government

pak gdp

domestic production

measures of production

y business investment

final product