L4 - Interpreting National Income Measures

Question 1

What’s the expenditure method formula?

Answer 1

GDP(Y)= C + I + G + X - IM

Question 2

How do you show each component part of GDP?

Answer 2

Change in GDP/ GDP (T-1)=
Change in C/ GDP (T-1)+
Change in I/ GDP (T-1)+
Change in G/GDP (T-1) ETC…

Question 3

How do you calculate Private Savings (S)?

Answer 3

S= Y - T - C

Question 4

How do you re-arrange (C+I+G+X-IM) to identify various sectors in the national economy?

Answer 4

Substitute S= Y -T-C into the formula to give:

(S-I) = (G-T) + (X-IM)
Where:

(S-I) = Non-bank sector private surplus

(G-T) = Public Sector Deficit

(X- IM) = Overseas Sector Deficit

EXPLANATION IN NOTES

Question 5

What is (S-I)=(G-T)+(X-IM) known as?

Answer 5

The accounting identity.

Question 6

What are the features of the Accounting Identity?

Answer 6

• If Sa=Ia & Ta=Ga, then Xa=IMa. Then all sectors in balance
• Must always sum to zero due to the fact they are accounting identities derived from a closed form system
• Deficit Sectors borrow from & Surplus Sectors lend to financial sectors
• Sa = Ia then the budget deficit equals the current balance deficit. But importantly this is NOT a causal relation because this an identity; i.e. true by definition

Question 7

What is Economic Welfare?

Answer 7

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

Question 8

Why is Economic Welfare hard to measure and define?

Answer 8

1. The measure of Gross National Income (GNI )[and Net National Income NNI] is defective
2. Even if GNI is measured accurately there are still aspects of welfare not captured by the income measure

Question 9

What features are Omissions in the Measured National Income?

Answer 9

• Black Economy (About 12% in UK, 25% in Greece, Italy)
• Non-paid non-market activities
• Leisure time

Question 10

Why are comparisons of GDP across countries unreliable?

Answer 10

• Different countries use different accounting systems
• The size of GDP varies with the size of the country
• National GDP is measured in local currency so to compare GDP means converting all GDP into a common currency – even then if an exchange rate deviates from its purchasing power parity level (PPP) then the GDP comparisons will be unreliable

Question 11

How do you calculate Money GDP?

Answer 11

Q produced x £ per unit

EXAMPLES ON NOTES

Question 12

How do you calculate the GDP Deflator?

Answer 12

PGDP= GDP at current prices/GDP at constant prices x100

EXAMPLES ON NOTES

Question 13

What is the Rate of Inflation?

Answer 13

• Inflation rate between any two periods is measured by the percentage increase in the relevant price index (P) from the first period to the second period
• A fall in the price level we refer to a deflation

Question 14

How do you calculate the Inflation Rate?

Answer 14

(Pt – Pt-1 )x100/Pt-1
Where t is this period (2nd period) and t-1 is last period (1st period)

EXAMPLES ON NOTES

Question 15

How do you calculate the inflation rate if T refers to months?

Answer 15

If T refers to months then as the inflation rate is always expressed as an annual rate a further adjustment has to be made and the monthly increase has to be multiplied by 12 to give the approximate annual rate

EXAMPLES ON NOTES

Question 16

What are some other forms of Deflators?

Answer 16

• The Retail Prices Index (RPI) is a weighted average of a typical bundle of consumer goods - captures changes in the cost of living of households
• The Harmonised Index of Consumer Prices (HICP) is the index the Bank of England uses to target inflation, in common with other EU member states