Module 5: National Accounts Flashcards
Text Book
What are National income accounts?
This is an accounting framework used in measuring ‘current economic activity’
What are national income accounts based on? (what idea)
national income accounts are based on the idea that the amount of economic activity that occurs during a period of time can be measured in terms of:
- The product approach –> The amount of output produced excluding output used in intermediate stages of production
- The income approach
–> The income recieved by the producers of output - The expenditure approach
–> The amount of spending by the ultimate purchaers of output
- Each approach gives a different perspective on the economy
What is the fundamental principle underlying national income accounting?
- Expect for such problems such as incomplete or misreported data all three approaches give ‘identical’ (equivalent) measurements of the amount of current economic activity
how to calculate after-tax profit
Its revenue minus expenses (taxes, costs)
What is profit before tax
Revenue - costs (wages)
How might they ask us to use the three different approaches?
they might ask to find total value of economic activity generated by the two businesses?
What is the product approach?
This measures economic activity by :
1. Adding the market value of goods and services produced excluding any goods and services used up in the intermediate stages of production
2. The product approach computes economic activity by summing “the value added” of all producers.
What does the product approach make use of which concept?
Is it called the value-added approach?
What is the value-added approach?
Its the value added of any producer which is the value of its output minus the value of the inputs it purchases from other producers.
What do we sum up for the product approach
- We sum of the value added (output minus input –> the value of the inputs it purchases from other producers
What is the income approach?
This measures economic actiivty by adding all income received:
1. Wages
2. Taxes
3. After-tax profits
What is the expenditure approach?
it measures the activity by adding the amount spent by all ‘ultimate users’ of the output
What are the ‘ultimate users’?
Ultimate users is the businesses target audience to sell to.
It might be to another business or consumers (households)
Why are all three approaches equivalent?
- First observe that the market value of goods and services produced in a period by definition is equal to the amount that buyers must spend to purchase them. (product approach = expenditure approach)
- Also observe what the seller receives must be equal to what the buyers spend
(total income approach = expenditure approach)
- This will be shown through the seller’s receipts as it will show what the business has spent and what buyers have paid.
What is the fundamental identity of national income accounting?
Total production = total income = total expenditure
What is the ‘broadest measure of economic activity’?
This is GDP (gross domestic product)
How is a country’s GDP measured?
Its measured by:
1. The product approach
2. The expenditure approach
3. Income approach
How does the product appraoch measure GDP?
It defines a nation’s GDP as :
- The market value of final goods and services newly produced within ‘ a nation’ during a fixed period of time
What are market value?
Its the prices at which goods and services ar sold at.
What is the advantage of using market prices for when measuring GDP (using the product approach’?
it allows us to add the production of different goods and services.
- We can essentially find the total market value by multiplying each good by price and adding it up
What is the disadvantage of using market prices for when measuring GDP (using the product approach’?
A problem using market value to measure GDP is that some useful goods and services are not sold in formal markets
What are some useful goods and services that are ignored in the calculation of GDP?
- Nonmarket goods and services such as home-making and child-care services
- Actions to reduce pollution or improve environmental quality are not reflected in dp
What are some non-makret goods that are ‘partially incporated’ in official GDP?
The underground economy
What is the underground economy?
This includes both legal activities hidden from government records (avoid payment of taxes) and illegal activities (drug dealing)