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)
What are other services that are not sold in markets but are provided by the government?
- national defence
- Education
- Police
- fire protection
What are ‘newly produced goods and services’
as a measure of current economic activity,
GDP includes only goods and services that are newly produced within the current period
Gdp excludes the purchases or sales of goods that were produced in previous periods
How can we classify goods and services?
Goods and services during a period may be classified as either intermediate goods and services and services that are final goods and services
What are intermediate goods and services?
Are those used up in the production of other goods and services in the same period that they themsleves wer produced
What are final goods and services
Are those goods and services that are not intermedate
Final goods and services are the end products of a process
What goods are counted in GDP
only final goods and services
What is a ‘capital good’?
Sometiems the distinciton between final and intermdiate goods are subtle :
Capital goods that is itself produced (not natural resources) and is used to produced other goods
However, unlike an intermediate good a capital good also is not used up in the same period that it is produced in.
What are examples of capital goods?
- Factory equipment
- Office equipment
- Factories
- office buildings
Are capital goods final or intermediate
Final goods and are included in GDP
What is another second reason fir the distinction between final and intermediate goods?
Its the treatment of inventory invstment
What is inventory?
Inventories are stocks ir unsolds goods , goods in processs and raw materials held by firms
What is inventory investment?
Its the amount by which invetories increase during the year
(difference between beginning and end inventory)
What is inventory investment treated as?
A final good and is included and a part of GDP
What is the difference between GND and GDP
The diffence cocnerns th treatment of ouput produced by capital and laour working outside its home (domestic country)
WHAT IS GNP?
GNP is the market value of final goods and servics newly produced by domestic factors of production during the current period that is produced regardless of location
What is factors of production also known as
Canadian capital and labour
Ex: When a canadian company builds roads in saudi its counted into what?
GNP
Ex: When a foreign cmpany produces clothes in Canada it is included in what?
GDP but not GNP
What are ‘net factor payments from abroad’?
This is income paid to domestic factors of production by the rest of the world minus income paid to foreign factors of production by domestic economy
What is the realtionship between GDP and GNP?
GDP+NFP = GNP
What is the expenditure approach to measuring GDP?
The expedntiure approach measures GDP as total spending on final goods and services produced ‘within a nation’ during a specified period of time
What are the four majour cateogires of soending that are added to get GDP?
- Consumption
- Invetsment
- Goverment purchaes of goods and services
- Net exports
What is the equation for the income-Expenfiture approach?
Y = C+ G+I+NX
What is consumption?
Its the spending by domestic hosuehods on final goods and services including produced abroad
Makes up of 60% of GDP in canada
Consumtpion expediture include four categories; what are they?
- Durable goods (These are long-lived goods such as vehicles, furniture , appliances) Not housing
- Semi-durable goods (Which are shorter-lived goods such as clothing)
- Nondurable goods (Food and utilities)
- Services (such as health care , financial services , rent , restaurant meals)
What is investment?
it includes both spending for new capital goods (fixed capital investment) and increases in firms’ inventory holdings called inventory investment
Who usually makes fixed capital investments?
- Private sector
- Government
How does the private sector purchase fixed capital investment?
This occurs in the form of physical structures but also in the form of products that are the result of intellectual property research and development
Does investments include spending on foreign produced goods?
YES
What do we need to remember about the increase in inventory?
increases in inventories are included in investment spending regardless of why they rose
If a firm produces goods it cannot sell this is counted as an investment by the firm
What are government purchases?
Governmet purchases of goods and services which does include any expenditure by the government for a currently produced gooff or service (foreign or domestic)
Purchases include those made by federal , provincial, municipal ad territorial government
What is a rule of thumb about purchases by the government?
not all cheques writte by the gvernment are for the purchases of goods and services
What are transfers?
This is a category that includes transfers between levels of government as well as government payments to individuals in the form of
1. public pensions
2. unemployment benefits
3. welfare payments
4. interest payments on debt
These are not payments that are made for currently produced goods and services so they are excluded from government purchases and are not counted in GDP as the calculation for expenditure approach
What are net exports
Exports minus imprts
What are exports
Exports are goods and services produced within a country that re purchased by foriengers
What are imports?
These are goods and services produced abroad that re purchased by coutnry’s residents
When are net exports positve and negative
If exports are > imports (positive)
If Exports < imports (negative)
The income approach to measuring GDP (what is it)
It calculates GDP by adding the income received by producers including profits , tax paid to government
What are all the componets for the income approach
- Compensation of employees
- gross operating surplus
- Gross mixed income
- Taxes less subsidies on production
- tax less subsidies on products and imports
What is compensation for employees?
this is the total runermation , in cash or any kind of payable by an enterprise to an employee in return for work done
What is gross operating surplus?
Its the income earned from the production earned of goods and services that is paid to owners of incorporated companies
These owners include corporations , governments , households and no profit institutions and their owndsrhip is typically in the form of stocks ad they earn dividends or investment income
What is gross mixed income?
This is the income paid to unincorporated enterprise because it is difficult to separate payments made to employees from payments to owners to unincorporated enterprise
These two types of income are combined and referred as ‘mixed income’
What are tax less subsidies on production?
These are taxes (less subsidies) hat companies pay on the use of labour , machinery , buildings and other assets used in the production of goods and services
What are tax less subsidies on products and imports?
This is the tax payable after a product is produced and sold in Canada or imported from above
When we sum up all four components of income approach to GDP what do we get?
We get an estimate of income based GDP
What is satistical discrepency?
It identifies the difference between stast Canada’s estimates of GDP from the expenditure approach and its estimate from the income approach
Essentially the discrepancy is added to income approach so that the two estimates coincide.
What is ‘private disposable income’?
This measures the amount of income the private sector (households and businesses) has available to spend
What is the equation for ‘private disposable inome’?
Private disposable income = Y + NFP+ TR+INT-T
Y = GDP
NFP = net factor payments from abroad
TR = transfers received from the government
INT = Intrest payments on government debt
T = taxes
How to calculate net government income?
Net government income = T- TR-INT
What is ‘wealth’?
Wealth determines how well off a household is. To see we need to know the current income but also the difference between what the household owns (assets) and owes (liabilities) –> this wealth
What is national wealth?
- The economic well-being of a nation depends not only on the income but its wealth.
- The wealth of an entire nation is called national wealth
What is an important determinant of wealth?
The rate of saving
Example:
A family that puts aside a quarter of its income per month will accumulate more wealth more quick than a family that spends all the income
- Similarly the rate at which national wealth increases depends on the rate at which individuals, businesses and governments save
What is the measure of saving?
The saving of any economic unit is the unit’s current income minus its spending on current needs
What is the saving rate of an economic unit?
Saving/income
What are three important measures of saving?
- Private saving
- government saving
- National saving
What is ‘private saving’?
Private savings are the savings of the private secotr
How to calulcate private saving?
Private disposable income - consumption
What/how to calulate governemnet savings
- Its the savings of the government
- Its the
Net government income - government purchases
What is another term for government saving?
Budget surplus
What is budget surplus?
Government revenue minus goverment expenditure
What is government revenue?
Tax revenue
What is government expenditure?
Sum of purchases of goods and services
Transfers
Intrest payments
T- (G+TR+INT)
Government budget deficit?
When government revenue is less than government expenditure the diffnce between expenditure and revenue
If this happens they say government savings are negative
What is national savings?
The savings of the economy as a whole :
Privaye saving + Government savigs
= Y+ NFP - C - G (summary equation)
How are private svaings put to use?
Its used to
- fund new capital investment
- provide resources the government needs to finance its deficits
- acquire assets
- Lend to foreigners
What is national savings?
S = I+ (NX+NFP)
S = I+CA
What does (NX+ NFP)
This is called the current account balance
What is the current account balance?
It equals the payments recieved from abroad in exchange for currently produced goods and services minus the analogous payments made to foreigners by the domestic economy
What is the equation for private saving?
I+(-Saving Govt) + CA
- SavGovt (government budget deficit)
What is the uses of saving identity?
I + (- sav Govt) + CA
What does the uses of saving state?
It sttaes that an economy’s private saving is used in three ways:
- Investment
- firms borrow from private savers to finance the constructions and purchase of new capital and inventory investment - Government budget deficit:
When the government runs a budget deficit it must borrow from private savers to cover the def between spending and revenue - Current account balance
When the Canadian current accounts balance is positive, foreigners receipts of payments from Canada are not sufficient to cover payments they make to canaada. To make up the difference foreigners must either borrow from Canadian private savers or sell to Canadian savers some of theirs
What are flow variables?
These are varibales that are measured per unit of time
- A flow variable is the rate of change in a stock variable
What are stock variables
These are economic variables defined at a point of time
Example of filling a bath tub stock or flow variable
the amount of water in the time at any moment is stock variable
the rate at which water enters the tub is the flow variable
: its units (litres per min) have a time dimension
What is net worth?
The wealth of any economic unit (asset minus liabilities)
Is wealth a stock or flow
- stock variable
- measured in dollars
How is saving [stock vs flow]
its a flow variable measured i dollars per unit of time
What is national wealth?
Its the wealth o the residents of a country
What two parts of national wealth does it consist of?
- The country’s domestic physical assets (stock of capital goods and land)
- Its net foreign assets
What is net foreign assets?
Its equal the country foreign assets (stocks , bonds and factories owned by domestic residents ) minus foreign liabilities (domestic physical and financial assets) owned by foreigners [read pg 20]
What are nominal variables
These are varibles measued in terms of their current market value
What is the advantage of using market values?
It allows us to meaure economic activity and sum of different types of goods and services
What is a problem when measuring and using a nominal variable?
If we want to compare the value of an economic variable at two different points in time .
If the current market value of goods and services included GDP changes over time , you can’t tell whether the changes in the qusnities of goods produced or changes in prices
How to breakdown nominal variables?
owing to changes in physical quantiies and the part owing to changes in prices as we need to see from the nominal output how much is attributed to output and to price
How do we see how much an increase in nominal output is attributed to an increase in physical output?
- A simple way is to remove the effects of price changes and thus focus on changes in quantities of output and to do this is to measure the value of production each year using prices from some base year
What is a real variable?
This is an economic variable that is measured by the price of a base year
What is real GDP?
Measures the physically volume of an economy’s final production using the prices of a base year.
(Xt - xt-1)
What is nominal gdp?
its the value of an economy’s final output measured at current market price
What is a price index?
It measures the average level of prices for a specified set of goods and services relative to the price in a specific base year
What is gdp deflator?
Its the price index that measures the overall level of prices of goods and services included in GDP
- The GDP defator measures the average level of prices of goods and services included in GDP
- calculated quarterly
real GDP = nominal GDP / GDP deflator
What is CPI?
This measures the prices of consumer goods
- Calculated monthly
How to calculate CPI?
It’s the current cost of the basket consumer of goods divided by the cost of the same basket of goods in the base year
What is the ‘rate of inflation’?
it equals the percentage rate of increase in the price index period.
(105-100)/100 = 5/100 = 0.05 = 5% per year
(Pt+ 1 - Pt) / Pt
What are interest rates?
It is the rate of return promised by a borrower to a lender
- Interest rates vary according to who is borrowing and the amount
- An interest rate also indicates how quickly the nominal or dollar value of an interest-bearing asset increases over time but it does not reveal how quickly the value of changes in real , or purchasing power
What is the real intrest rate?
Is the rate at which the real value or purchasing power of the asset increases over time
What is the nomina intrest rate?
It tells us how the rate at which the nominal value of an asset increases over time
real interest rate = nominal interest rate - inflation rate
WHat is the expected real intrest rate
Nominal intrest minus expected rate of infaltion
