4- Interpreting National Income and Output Methods

Question 1

Savings equation from national income model

Answer 1

S = Y - T - C
T= income tax

Question 2

Sectoral balance equation and how to get to there

Answer 2

(S-I)=(G-T) + (X-IM)
non bank private (sector surplus) = public sector (deficit) + overseas sector (deficit)
- MUST always sum to 0.
- Found by substituting S equation into Y national income model.

Question 3

Sectoral balance-
If S=I and T=G
What does that mean for imports and exports

Answer 3

IM=X

Question 4

What is the result of sectoral balances?

Answer 4

No sector borrowing or lending.

Question 5

What else does it mean if S=I?

Answer 5

Budget deficit = current balance deficit

Question 6

What must deficit sectors do?

Answer 6

Borrow

Question 7

What must surplus sectors do?

Answer 7

Lend to the financial system.

Question 8

What new set of accounts do borrowing and lending lead to?

Answer 8

Flow of funds matrix- which identifies for each sector its net acqusition of financial assets (NAFA).

Question 9

GDP deflator equation

Answer 9

= (GDP at current prices/ GDP at constant/ base period prices) x 100

Question 10

Other deflators?

Answer 10

• RPI
• Harmonised Index of Consumer Prices (HICP)

Question 11

Harmonised Index of Consumer Prices (HICP)

Answer 11

The index the Bank of England uses to target inflation, in common with other EU member states.
It generally gives a lower value than the RPI since it has some different components and is computed as a geometric average rather than as an arithmetic average.

Question 12

Economic Welfare definition

Answer 12

The welfare gained from the consumption and production of goods and services.

Question 13

What doesn’t GDP measure?

Answer 13

• Living standards fully- need to use GDP per capita or PPP.
• Unreported activities (black economy)- for tax purposes, encouraged if tax is high.
• Non-marketed activities- hourse-work, work for free, leisure
• Omission play a part in the disparity between GDP measuring living standards.

Question 14

How to calculate the RPI?

Answer 14

• Calculated by ONS.
• Government statisticians periodically survey a representative group of households in what is called the Family Expenditure Survey- which shows how consumers spend their income.
• The average bundle of goods is determined, along with the proportion of spending that is devoted to each good.
• These proportions become weights attached to the individual prices in calculating the RPI.
• Higher importance, more weighted.

Question 15

Issue with RPI?

Answer 15

• It’s an average- different households spend differently.
• Weights need to be changed as consumption patterns change.

Question 16

Different ways in the UK to measure inflation?

Answer 16

• CPI- BofE use to set inflation target. It was called HICP. Calculated to conform EU practices.
• RPIX- same as RPI but excludes mortgage interest payments
• RPIY- same as RPIX but excludes the effects of indirect tax changes on prices. Reduces effect of inflation induced by monetary or fiscal policy. Known as ‘core inflation’.