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Premium member Presentation Transcript National Income Accounting: National Income Accounting N.Kanagaraj 13.661-404 Introduction : Introduction Study of the methods of measuring the aggregate output & income of an economy Basic principle of NIA: the value of total output identically equals the value of total income. Need of National Income Accounting: Need of National Income Accounting By measuring national income of the economic territory of an economy, one can estimate how well his economy performs in achieving its national economic objectives. Stock Concept: Stock Concept A stock is any measurement at a particular point of time. Measuring how much of something exists at a particular point in time. Example : O n 14 th August 2004, Peter’s total wealth was $200,000. 4 Flow Concept: Flow Concept A flow is any measurement that spreads over a certain period of time. Measuring changes in stock variables over time. Example: Peter earns $8,000 as his monthly income . 5 We will characterize the economy as being made up of 4 sectors and how they interact through 3 markets : We will characterize the economy as being made up of 4 sectors and how they interact through 3 markets 4 Sectors 1. Households (HH) 2. Firms 3. Government (G) 4. Rest of World (ROW) 3 Markets 1. Goods and Services (G&S) 2. Labor 3. Financial (Money) Circular Flow Diagram PowerPoint Presentation: Circular Flow Diagram The total value of output identically equals the total value of income since every payment by the buyer is at the same time a receipt of the seller. simplicity consider a world with no G and no foreign sector and only the G&S and Labor markets Intermediate Vs. Final Goods: Intermediate Vs. Final Goods Intermediate goods are goods and services produced for assisting further or other production. Final goods are goods for final use or consumption. A good can be an intermediate good or a final good, depending on how it is being used. 8 National Output: National Output National Output (NO) is the measure of total market value of all final goods & services. National Expenditure (NE) is the measure of total expenditure on final goods & services. National Income (NI) is the measure of households’ total income. NO ≡ NE ≡ NI 9 Gross Domestic Product (GDP): Gross Domestic Product (GDP) GDP is an aggregate measure of the total value of production of all resident producing units within the economic territory of an economy in a specified period The value of all final goods and services produced in a country in 1 year" 10 What GDP Excludes…….: What GDP Excludes……. 1.Paper Transactions: exchange of paper assets (e.g. stocks and bonds) does not correspond to current production unless a broker is paid. 2. Sale of Used Goods: not current production. 3. Illegal Activities. 4. Imputed Values of Nonmarket Production: Imputed is what you would have to pay if you had to pay. 5. Leisure. 6. Transfer Payments: Payments to individuals who have not supplied any current G&S in exchange. 7. Crime, Pollution Gross National Product (GNP): Gross National Product (GNP) "the market value of all goods and services produced in one year by labour and property supplied by the residents of a country 12 GNP vs. GDP: GNP vs. GDP GNP measures the output generated by a country's enterprises (whether physically located domestically or abroad) GDP measures the total output produced within a country's borders - whether produced by that country's own local firms or by foreign firms. GDP Versus GNP: GDP Versus GNP GDP is to analysis the production activities within the economy, e.g. employment, productivity, industrial output, investment in equipment & structure. GNP is useful for analyzing economic situations relating to income of residents, investment behavior, domestic demand & inflation. From GDP to GNP: From GDP to GNP Factor Income = investment income + compensation of employees Investment income = direct investment income(e.g. dividends) + portfolio investment income(e.g. security interest) + other investment income(e.g. deposits interest) PowerPoint Presentation: GNP = GDP + Net factor income from abroad or External Factor Income Flows From GDP to GNP From GNP to GDP GDP = GNP – Net Factor Income from Abroad or Net External Factor Income Flows Measurement of National Income: Measurement of National Income Income Approach NNP at factor cost OR National Income Output Approach GDP at factor cost Expenditure Approach GDP at market Prices 1.The income approach: 1.The income approach The income approach equates the total output of a nation to the total factor income received by residents or citizens of the nation. The main types of factor income are: Employee compensation (cost of fringe benefits, including unemployment, health, and retirement benefits); Interest received net of interest paid; Rental income (mainly for the use of real estate) net of expenses of landlords; Royalties paid for the use of intellectual property and extractable natural resources. PowerPoint Presentation: Factor incomes = compensation of employees (including wages, salaries & other employee benefits) + gross operating surplus of enterprises The income approach Items Being Excluded from GDP in income approach: Items Being Excluded from GDP in income approach Items Reasons Income from gifts, gambling & lucky draw No production involved 20 2.The output approach: 2.The output approach The output approach focuses on finding the total output of a nation by directly finding the total value of all goods and services a nation produces. Because of the complication of the multiple stages in the production of a good or service, only the final value of a good or service is included in the total output. Double counting: Double counting This avoids an issue often called 'double counting', wherein the total value of a good is included several times in national output, by counting it repeatedly in several stages of production. PowerPoint Presentation: The value of meat from the farm may be $10 Then $20 from the whole saler $30 for Retailer Then $60 from the supermarket. The value that should be included in final national output should be $60, not the sum of all those numbers, $90. The values added at each stage of production over the previous stage are respectively $10, $20, and $30. Their sum gives an alternative way of calculating the value of final output. Example - Meat production Formula FOR GDP: Formula FOR GDP GDP(gross domestic product) at market price = value of output in an economy in the particular year - intermediate consumption At factor cost = GDP at market price - depreciation + NFIA (net factor income from abroad) - net indirect taxes 3.Expenditure approach: 3.Expenditure approach The expenditure approach is basically an output accounting method. It focuses on finding the total output of a nation by finding the total amount of money spent. This is acceptable, because like income, the total value of all goods is equal to the total amount of money spent on goods. PowerPoint Presentation: The basic formula for domestic output takes all the different areas in which money is spent within the region, and then combines them to find the total output. Y = C + I + G + (X − M) Where: C = household consumption expenditures / personal consumption expenditures I = gross private domestic investment G = government consumption and gross investment expenditures X = gross exports of goods and services M = gross imports of goods and services Note: ( X - M ) is often written as X N , which stands for "net exports" The expenditure approach Items Being Excluded from GDP: Items Being Excluded from GDP Items Reasons Unreported transactions No data is available Illegal transactions No data is available Second-handed goods No current production involved Items Being Excluded from GDP: Items Being Excluded from GDP Items Reasons Expenditure on stocks, i.e. shares & bonds -no production involved -a mere transfer of ownership Expenditure on welfare payments No production involved Comparison of the 3 Approaches: Comparison of the 3 Approaches Expenditure Approach X I G C = Imported contents removed at the aggregate level, i.e. deducting M from (C + I + G + X) Comparison of the 3 Approaches: Comparison of the 3 Approaches Expenditure Approach X I G C Income Approach IBT - S Compensation of employees gross operating surplus Output Approach Value added: manufacturing sector Value added: services sector Value added: other sectors IBT - S GDP at factor cost GDP at market price PowerPoint Presentation: 1.Inclusion of Services: There has been some debate about whether to include services in the counting of national income. 2.Identifying Intermediate Goods: The basic concept of national income is to only include final goods, intermediate goods are never included, but in reality it is very hard to draw a clear cut line as to what intermediate goods are. 3.Identifying Factor Incomes: Separating factor incomes and non factor incomes is also a huge problem. Difficulties in Measurement of National Income PowerPoint Presentation: Unreported Illegal Income: Sometimes, people don't provide all the right information about their incomes to evade taxes so this obviously causes disparities in the counting of national income. Non Monetized Sector: In many developing nations, there is this issue that goods and services are traded through barter, i.e. without any money. Such goods and services should be included in accounting of national income, but the absence of data makes this inclusion difficult. Practical Difficulties in measurement of GDP PowerPoint Presentation: Growth Rate of GDP The Growth Rate of GDP: The Growth Rate of GDP GDP growth rate = [(GDP of current period – GDP of last period)/GDP of last period] x 100% Real GDP growth rate = [(real GDP of current period – real GDP of last period)/real GDP of last period] x 100% Uses of National Income Statistics: Uses of National Income Statistics as a measurement of living standard as a basis for international comparison of welfare or living standard as a basis for formulating government policies as a basis for formulating business decisions as an indicator of economic progress Limitations of National Income Statistics: Limitations of National Income Statistics nominal GDP neglects the effects of price change -real GDP is preferred real GDP neglects the effects of population size real GDP per capita is preferred Limitations of National Income Statistics: Limitations of National Income Statistics real GDP per capita ignores the problem of income distribution uneven distribution of income implies the problem of widening income gap Limitations of National Income Statistics: Limitations of National Income Statistics real GDP per capita ignores the effects of self-sustained products, non-marketed goods & unreported transactions real GDP per capita underestimates the real standard of living Limitations of National Income Statistics: Limitations of National Income Statistics real GDP per capita ignores the desirable and undesirable effects of production real GDP per capita neglects the effects of composition of GDP larger portion of consumer goods supports a higher present living standard while larger portion of capital goods implies a higher future living standard Factors Affecting National Income: Factors Affecting National Income Demand-side Factors: consumption (C) demand investment (I) demand government expenditure (G) demand net exports (X-M) demand Factors Affecting National Income: Factors Affecting National Income Supply-side Factors: labor productivity amount of capital (goods) amount of land level of entrepreneurship level of technology THANK YOU: THANK YOU You do not have the permission to view this presentation. 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