Measuring Domestic Output and National Income PDF

14 Measuring domestic output and national income Copyright 2015 McGraw-Hill Education  To ponder upon… Do we use economics every...

14 Measuring domestic output and national income Copyright 2015 McGraw-Hill Education  To ponder upon… Do we use economics everyday?  What does the size of the economy entails?  If I buy a Burger from McDonalds what part is included in the Measuring of the GDP  Economic Growth = Change in the GDP ?? Copyright 2015 McGraw-Hill Education  In this chapter you will learn: Definition and measurement of GDP and GNI Relationships between GDP, net domestic product (NDP), gross national income (GNI), household income, and disposable income The nature and function of a GDP price index The difference between nominal GDP and real GDP Some limitations of the GDP measure Copyright 2015 McGraw-Hill Education  Where from now? Gross Measuring Measuring Measuring GDP: GDP: GDP: Nominal vs Shortcomings Domestic Real GDP of the GDP Product Expenditure Income Production Copyright 2015 McGraw-Hill Education Assessing the economy’s performance National income It enables the economists accounting and policy makers to: Economy’s aggregate Assess the health of the performance analogous economy by comparing to private accounting for levels of production at individuals regular intervals. Track the long-run course of the economy to see whether it has grown, been constant, or declined. Formulate policies that will safeguard and improve the economy’s health. Copyright 2015 McGraw-Hill Education  GDP vs GNI Gross Domestic Product (GDP) The total market value of all final goods and services produced in a given year within the borders of the country. Citizen-supplied or foreign-supplied resources employed WITHIN the country. Gross National Income (GNI) The total market value of all final goods and services produced in a given year by the residents or registered business from a particular country anywhere in the world. Ownership-based Also what is earned abroad and repatriated by residents. Copyright 2015 McGraw-Hill Education  GDP at factor, basic and market prices Gross value added at factor cost (linked to Income approach) Plus other taxes on products Less other subsidies on products Gross value added at basic prices Plus taxes on production Less subsidies on production Gross Domestic Product at market prices (linked to the Expenditure approach) Copyright 2015 McGraw-Hill Education  Taxes and Subsidies on Production Taxes on production Refers to tax on production not linked to specific goods or services Eg Propery tax, UIF Why add them to wages, rent, interest and profits? For accounting convenience!!!!! Subsidies on production Subsidies paid to business in order to subsidize the production of a particular commodity to allow manufacturers to sell at a lower price. Why add them to wages, rent, interest and profits? For accounting convenience!!!!! Copyright 2015 McGraw-Hill Education  Taxes and Subsidies on Products Taxes on products Taxes payable per unit of some good or service Eg VAT, excise taxes, business property taxes, license fees, custom duties (import and export duties) E.g. sin taxes on alcohol or cigarettes Propose export tax on scrap metal Subsidies on production Subsidies paid to business in order to subsidise the production of a particular commodity to allow manufacturers to sell at a lower price. E.g. Past export subsidies, bread Copyright 2015 McGraw-Hill Education  Gross Domestic Product (GDP) Monetary measure Double counting Most products go through a series of production stages before they reach the market GDP includes only final goods; excludes intermediate goods Value added measurement Excludes non-production transactions, e.g. financial transactions and second-hand sales Copyright 2015 McGraw-Hill Education  Two Approaches to GDP Income approach Expenditure and (earnings or value-added allocations approach) (production) approach Wages / rental Final-product or incomes value-added Interest income / Concerns the profits Concerns income sum of money derived or created spent to purchase from production the output Copyright 2015 McGraw-Hill Education  Approaches to GDP Expenditure Income Approach Approach Consumption by Wages + Households + Rents + Investment by Businesses G + = D= Interest Government Purchases P + + Profits Expenditures + Statistical By Foreigners Adjustments Copyright 2015 McGraw-Hill Education  Expenditure approach Personal consumption Consumption by expenditures, C Households Investment by + Durable consumer goods, e.g. refrigerators Businesses + Non-durable consumer goods, e.g. groceries Government Consumer expenditures for services, Purchases e.g. doctors Expenditures + By Foreigners Copyright 2015 McGraw-Hill Education  Expenditure approach (2) Consumption by Gross private Households + domestic investment, I Investment by Machinery, equipment, and tools Businesses + All construction Changes in inventories Government Non-investment transactions Purchases Expenditures + By Foreigners Copyright 2015 McGraw-Hill Education  Expenditure approach (3) Gross Investment – Depreciation = Net investment Net Investment Gross Investment Depreciation Increased Stock of Capital Consumption Stock of & Government Capital Spending Year’s GDP January 1 December 31 Copyright 2015 McGraw-Hill Education  Expenditure approach (4) Consumption by Government Households purchases, G Investment by + Government consumption Businesses expenditure and gross Government + investment Expenditures for goods and Purchases services + Expenditures for social capital, e.g. schools and highways Expenditures By Foreigners Copyright 2015 McGraw-Hill Education  Expenditure approach (5) Consumption by Net exports, Households Xn Investment by + Xn = Exports (X) – Imports (M) Businesses Spending on SA output by Government + people abroad= exports (X) Spending by South Africans on Purchases foreign goods and services = Expenditures + imports (M) By Foreigners Copyright 2015 McGraw-Hill Education  Expenditure approach (6) Consumption by Households (C) GDP Investment by + Businesses (I) = Government + Purchases (G) C+I+G+Xn Expenditures + By Foreigners (Xn) Copyright 2015 McGraw-Hill Education  The income approach Wages Compensation of employees + Rents – Incidentally, the largest + Interest share of national income – Salary supplements also + included Payments to social insurance, pension, health + Profits and welfare funds for workers Statistical Adjustments Copyright 2015 McGraw-Hill Education  The income approach (2) Wages Net operating surplus + Rents – Rent from the supply of + property resources – Interest Interest – Proprietors income + + Profits Statistical Adjustments Copyright 2015 McGraw-Hill Education  The income approach (2) Wages Net operating surplus + Rents – Corporate profits + Corporate income taxes Dividends Interest Undistributed corporate + profits/ retained earnings – Consumption of fixed + Profits capital Statistical – Taxes and subsidies Adjustments Copyright 2015 McGraw-Hill Education  GDP Approaches compared Accounting Statement for the S.A Economy, 2013 (in billions at current prices) Copyright 2015 McGraw-Hill Education  The production approach: Example Stages of Production Sales Value Value Added Firm A: Sheep Farm R0 – R120 R120 Firm B: Wool processor R120 – R180 R60 Firm C: Suit Manufacturer R180 – R220 R40 Firm D: Clothing wholesaler R220 -R270 R50 Firm E: Retail Clothier R270- R350 R80 Total Sales Value R1140 Value Added R350 Copyright 2015 McGraw-Hill Education  Other National Accounts Net Domestic Product GDP-Consumption of fixed capital (NDP) GDP adjusted for depreciation Gross National Income GDP at market prices+ primary income from the rest of the world – primary income to the (GNI) rest of the world Disposable income (Yd) Personal income (Y) – taxes (T) Yd= C+S Copyright 2015 McGraw-Hill Education  Other National Accounts (2) All income received earned or unearned. Gross operating surplus mixed income + compensation for employees Househol + property income received – property income paid= d income Gross balance of primary income Gross balance of primary (HI) income + social benefits received+ other current transfers received – current taxes on income and wealth – social contributions paid= Gross Disposable income Copyright 2015 McGraw-Hill Education  Nominal Versus Real GDP How can we compare market values of GDP if the value of money is changing in response to inflation/deflation from year to year? – Nominal GDP based on the prices that prevailed when the output was produced (unadjusted) – Real GDP deflated or inflated to reflect changes in the price level. Real = Nominal GDP GDP Price Index (in hundredths) Copyright 2015 McGraw-Hill Education  Nominal Versus Real GDP(2) Price index – Measure of the price of a specified collection of goods and services (market basket) in a specific year compared to the price of an identical basked in a reference year. Price Price of Market Basket Index = In Specific Year x 100 In Given Price of Same Basket Year In Base Year Copyright 2015 McGraw-Hill Education  Nominal Versus Real GDP(3) Price index (3) (4) (1) (2) Price Price Unadjusted (5) Year Units of Pizza Index or Nominal Adjusted of per unit (Year GDP or Real output 1=100) (1)X(2) GDP 1 5 R10 100 R50 R50 2 7 20 200 140 70 3 8 25 250 200 80 4 10 30 - - - 5 11 28 - - - Copyright 2015 McGraw-Hill Education  Nominal Versus Real GDP(4) Derive real GDP from nominal GDP Method 1 Find nominal GDP for each year Compute a GDP price index Divide each year’s nominal GDP by that year’s price index (in hundredths) to determine real GDP Method 2 Break down nominal GDP into physical quantities of output and prices for each year. Find real GDP for each year by determining the rand amount that each year’s physical output would have sold for if base-year prices had prevailed. (The GDP price index can then be found by dividing nominal Copyright 2015 GDP by real GDP). McGraw-Hill Education  Shortcomings of GDP Non-market activities Particularly pertinent within South Africa The informal sector Leisure Improved product quality affects wellbeing GDP and the environment, e.g. effects of polluted water Non-economic sources of wellbeing The economics of happiness? GDP and national wellbeing Optimal mix of goods for society? Composition and distribution of the output Copyright 2015 McGraw-Hill Education  Key Terms national income government purchases accounting net exports (Xn) gross domestic taxes on production product and imports intermediate goods Gross national income final goods net domestic product multiple counting (NDP) value added Household income (HI) expenditures approach disposable income (DI) income approach nominal GDP Production approach real GDP personal consumption price index expenditures (C) gross private domestic investment (Ig) net private domestic investment Copyright 2015 McGraw-Hill Education