GDP Flashcards
GDP overview?
- Measures total domestic economic activity in UK over period and is a flow
- Estimates use 3 approaches – output (value added), expenditure, and income
- Data sourced from survey and administrative sources, used in the compilation of individual components of GDP
- Data available and comparable on annual basis back to 1948, on quarterly back to 1955 and monthly back to 1997
- Current guidelines from 2 sources – European Union : European System of Accounts 2010 – United Nations : System of National Accounts
National Income Accounting?
- Non marketed output – when is there output but no expenditure? – for example domestic production : childcare, food preparation etc.
- In general, there is a pragmatic approach – production boundary
- Inside the boundary, a price or value is imputed and included in GDP
- Outside ignored
- Matters when you compare across countries over time – for example increasing labour force participation of women in UK since 60s – a move from outside (e.g., children) to inside (growth of childcare industry)
- Non marketed items inc in GDP – health (NHS), Education, defence, housing of owner-occupied households – over 30% of GDP
- Marketed but illegal –
- Non-prescription/recreational drugs, prostitution, alcohol (in certain countries) – they correspond to output, generating expenditure and income
- In past excluded from GDP, in 2014 became part of GDP due to ESA rules
Output method?
- Gross Value Added
- Corresponds to value added in VAT tax
- What about other input costs?
- GVA divided into 2 types of income – wage income and operating surplus – in case of self-employment, no distinction made
- If buy in a service, this is subtracted from GVA
- Normally GVA = operating surplus + wage costs
- Ensures output method equals the income added
Difference between price (inflation) measure and GDP?
The COICOP classification exists for both Narcotics and Prostitution. However, there is no “item” in the CPI index corresponding to either of them. Division 02 is restricted toAlcohol and Tobacco items only.
In the CPI index, there is a sampling of prices for a restricted range of only 800 items: most prices are left out of the CPI.
However, for GDP you need to collect data on all outputs (goods and services): this theONS does collect data on both Narcotics and Prostitution to include in the GDP figures.
Prostitution raises many issues. From the point of view of GDP, it is mostly not a voluntary transaction: is it valid to treat it like a haircut? You could argue that the “value”of the coercion is a negative output that may well outweigh the purchase price paid (i.e.GDP would be higher if there was no prostitution).
Narcotics: again, whilst people pay for highly addictive drugs, this can be seen as a “bad” not a “good”. Similar issues for gambling etc. Maybe they should be excluded from GDP
Expenditure method?
GVA = Expenditure (revenue) – intermediate costs
* Intermediate costs = GVA at earlier stages of production
* Expenditure = sum of GVA at all stages of production
* In practice very complicated – many inputs used to produce output, many outputs used as inputs e.g., petrol
* To disentangle need to look at input-output tables – called Supply and Use tables at ONS
* In practice often arbitrary and dep on who is selling it – if income generated by a sale is counted as income by tax authorities, then you inc it
Example looking at GVA?
E.g. second-hand cars.
If a second-hand car is sold by a company (Buy and go Cars), then it is.Helen bought a new car in 2016 for £20k. She sells it on 2020 for £8k to Buy and Go. Buy and go sell it to Tim for £10k. GVA of Buy and Go is £2k, included in GDP, and shows up as wages and operating income of Buy and Go. £8k is not included: there is net income ofHelen and expenditure of Tim that cancel out.
If a second-hand car is sold “peer to peer” then not in GDP. No GVA: Helen sells to Tim, no GVA generated. This follows tax rules. I am not taxed for income generated by sale of second-hand goods (exceptions, capital gains from artworks, gold etc.).
Car-boot sales: these are excluded - simply a transfer from one household to another.
e-bay: like “peer to peer”, but ebay charges for selling (included in GDP). Also, Paypal charges for transactions. Revenue of ebay and PayPal (from vendors and advertisers)included in GVA
Income method?
ums all income generated by production activities – excluded income from capital gains (housing, gold, works of art), loan interest payments
* 1. Compensation of employees – wages, salaries, employers contribution to pension and national insurance, bonuses, benefits
* 2. Gross operating surplus – balance between GVA and compensation of employees – conceptually, is gross trading profits, plus income from ownership of buildings (rents)
* 3. Mixed income – self-employed, is mix of 1 and 2
Expenditure method - componenets?
- 4 components
- HH final consumption C – goods and serves purchased by HH (COICOP) exc purchases of house and interest payments – 65%
- Government final consumption G – consumes its own output – valued at procurement cost, staff costs plus cost of intermediaries, plus consumption of fixed capital – 19%
- Gross capital formation I – investment in fixed assets by gov and private sector – inc R&D since 2010 – valuables : jewellery, precious metals etc. – 17%
- Exports – G/S prod in UK, purchased by RoW – imports, goods and services prod in RoW purchased by UK – X-M - -1%
Expenditure details and breakdown?
- Consumption broken down in detail in consumer trends - COICOP
- Housing div 4 largest category – 2017 was 25% of total consumption
- Imputed output of OOH equals imputed expenditure. There is also an imputed (wage)income exactly equal to output and expenditure. Equals 10% of GDP. Expenditure Shares are of total income including imputed income
Consumer trends?
- Spending less on 01 (food and non-alcoholic bev) 02 (alcohol and tobacco) 04 (housing) 11 (restaurants and hotels)
- Spending more on 03 (clothing and footwear) 09 (recreation and culture) 12 (miscellaneous)
Lots of interesting stuff in Consumer trends.
E.g. COICOP 12 is broken down (% of DIV 12).
Increase in 12.1 personal care. Less hairdressers (12.1.1), more “equipment” (12.1.3).
Reduction in insurance 12.5:
Much less life insurance 12.5.1.Financial services 12.6 up
Government expenditure breakdown?
Based on 2017 - 38% health, 18% education etc.
Share of GDP 18.4%
Seems v low - bc based on GVA - excludes transfer payments
Treasury produces annual PESA often used to look at government activities
Looks at annual income and expenditure of the government across all its activities - gives figures close to 40%
Prices?
- Various taxes and subsidies – treated differently in the different methods
- GVA at factor cost = total wage income plus operating surplus (income method)
- GVA at base prices = GVA at factor cost + taxes on production – subsidies on prod (production method)
- GVA at market prices = GVA at basic prices + taxes on products – subsidies on products (expenditure method)
- GVA production method uses base prices – base prices don’t inc taxes on products (VAT, alcohol etc.) – factor costs exc taxes on production (employers national insurance) and subsidies
- Also Gross Disposable Household Income – amount of money that all of the individuals in the HH sector have available for spending or saving after income distribution measures (taxes, benefits) have taken effect
Investment?
Investment: around 17% of GDP (historically low since 2009)
Gross Fixed Capital Formation (GFCF) is defined as acquisitions less disposals of fixed assets that are used repeatedly or continuously in production for more than one year. Includes housebuilding
Also includes: inventories, valuables(jewellery, Art).
Can divide it up by type of asset, or by Sector
Institutional sectors?
- Division of GDP into types of expenditures rests on division of economic agents
- Households. A household is a group of people sharing the same accommodation address (PAF again)who share some or all of their income and consume collectively certain types of goods and services. In Gregory King’s 1688 work, this included household servants living with household Also, nowadays, includes prisons, monasteries and nunneries.
- NPISH. Non-profit institutions serving households. Provide goods and services to households at or below market value. Derive income from grants, donations: not part of government. Churches, Universities, Charities, Trades Unions, Political parties.
- General Government: Local and central government, devolved admin (Wales, Scotland, and NI). NHS, Police force etc. Funded by taxes, redistributes income (benefits, state pension).
- Non-Financial Corporations (NFC). Produce goods and services and sell at market price. Can be state-owned or private. Do not deal in financial asserts as primary activity. Retailers, manufacturers, utilities, services
- Financial Corporations (FinCos). Primary activity is dealing with financial instruments. Can be state-owned (RBS) or private. Banks, Insurance, pension funds.
- RoW. All institutions and individuals not resident in UK. Includes all international organisations even if based in UK (e.g. ECB part of RoW for Germany, even though based in Frankfurt; world bank, IMF,UN not part of US GDP etc.).
Conclusions?
- GDP measures the flow of income generated in UK that is “within the boundary”: market transactions(70%) and non-market transactions (30%).
- GVA basic concept. Sets up a framework of measuring definitions. GVA is the Value of output less intermediate inputs. This output is equal to income (wages plus operating surplus) and expenditure.
- In the case of non-market output, a. Government expenditure: the value of the output is given an imputed value equal to the value of its wage and salary costs plus intermediates. Ensures expenditure equals GVA equals income. About 20% of GDP.b. OOH: the GVA is the rental value of housing. The household is assumed to “spend this money”and “receive it as income” – the two exactly cancel out. About 10% of GDP.
- The ONS publishes a breakdown of each type of expenditure and can track changes over time
