National accounts

Question 1

What is meant with the statement that GDP is a value‐added concept?

Answer 1

GDP is a measure of the total production output within the territory of an economy.

To avoid double-counting of outputs, we only consider the value added by each firm. That is, we subtract from each firm’s output all output from outside that is consumed in the production process (intermediate consumption).

Summing up the value
added of all firms in the economy yields the GDP

Question 2

How does the construction of a family house affect GDP (which category does it fall into)?

Answer 2

Private investment (GFCF - recall from the lecture that dwelling purchased by households are considered investment rather than consumption, in contrast to all other purchases households make)

Question 3

How does a shop building up stocks of a product affect GDP (think category)?

Answer 3

Private investment (inventories increase)

Question 4

How does a Danish family buying a car from Germany affect GDP?

Answer 4

Not affected (private consumption increases GDP, but imports increase by the same amount and cancel this increase)

Question 5

How does a German family buying a set of Lego bricks from Denmark affect GDP?

Answer 5

Exports

Question 6

The Rasmussen family lives in their own house, how does this affect GDP?

Answer 6

Also private consumption (of course, no rent payments are made; but statistical offices impute the value of owner-occupied housing based on rents that are normally paid for living in this kind of house)

Question 7

Name 2 synonyms for GDP at current prices

Answer 7

Nominal GDP and GDP in value

Question 8

Name 4 synonyms for GDP in volume

Answer 8

GDP at “base year” prices, GDP at constant prices, “growth” (expressed as a growth rate) and Real GDP

Question 9

A synonym for GDP deflator?

Answer 9

GDP price index

Question 10

What is the first fundamental equation w.r.t growth rate i.e. how do we compute GDP in volume?

Answer 10

GDP in volume = GDP at current prices / (1+growth rate of GDP deflator)

Question 11

Define GDP

Answer 11

Formal definition: all the production (of goods and services) carried out by all the firms, non-profit institutions, government bodies and households in a given country (within the country’s economic territory) • during a given period

Question 12

Name the three ways to measure GDP

Answer 12

1. Total domestic production (measured as value added) › How much is produced?
2. Total expenditure on domestic products › How much is spent?
3. Total domestic income › How much is earned?

Question 13

Describe the expenditure approach to GDP. What is it the sum of and what are the main components?

Answer 13

GDP = the sum of final demand aggregates Main components of final demand:
Consumption (Private consumption (C) and Public (government) consumption (G)) and Investment (I)
In an open economy: Exports (X) minus Imports (IM) = Net exports (NX)

GDP = C + G + I + X –IM

Question 14

Why do we subtract imports in the expenditure approach?

Answer 14

GDP is about domestic production, but C + G + I also contain expenditures on foreign products

Question 15

What is the trade balance? When is there a trade surplus and when is there a trade deficit?

Answer 15

X-IM = Net exports or trade balance

Trade surplus if positive, trade deficit if negative

Question 16

Describe GDP using the income approach

Answer 16

Income from generated value added is shared among factors of production:
• labor, capital and intermediate onsumption

GDP = Compensation of employees + Gross operating surplus + Gross mixed income

Intermediate consumption: ignored in GDP

Labor: employees receive salary and social contributions -> compensation of employees

Capital: owners of firms receive profits, owners of buildings receive rents -> so-called”gross operating surplus and gross mixed income”

Question 17

Describe GNI/GNP

Answer 17

Gross National Income = GNI (also known as Gross National Product = GNP)

GNI measures total income of all economic agents residing within the territory

GNI = GDP + income received by resident units from abroad - income created by production in the country but transferred to units residing abroad

Question 18

Describe NDP

Answer 18

Capital depreciates over time (”wear and tear”) = consumption of fixed capital
› Consumption of fixed capital indicates what an economy loses during the period
› If interested in new wealth created during the period, compute Net Value Added= Value Added– Consumption of fixed capital
› Analogous to GDP: Net Domestic product (NDP) = Σ Net Value Added
› NDP hardly usedin practice:
• Computation varies between countries
• Conclusions of comparisons over time or across countries unchanged compared to GDP

Question 19

Describe the difference between the GDP deflator and the CPI

Answer 19

GDP deflator is an inflation indicator
› An alternative indicator is the consumer price index (CPI)
› CPI measures the changes in the prices of consumer goods and services purchased by households
• does not capture capital goods -> less general than GDP deflator
• also captures import goods more general than GDP deflator

Question 20

Mention 4 shortcomings of GDP

Answer 20

Short-run measure:
• GDP records money transactions at market prices
• Ignores environmental externalities of GDP growth (e.g. pollution, climate changes) for which no price is paid
• GDP not only disregards natural capital, but all sorts of assets: infrastructure, human capital

› Householdwork:
• GDP ignores householdservices (e.g. childcare, cleaning) – justified in 1940s and 50s when market prices were not available, but no longer today
• Digital economy: many more people work from home and some contribute free digital work (e.g. Wikipedia)

› Ever-evolvingtechnology:
• GDP might understate qualityimprovements due to technological advances

› Inequality: • GDP ignores changes in incomedistribution (substantial increase in inequality since 1980s)

Question 21

Describe HDI

Answer 21

A measure of welfare.
Components (since 2010): 1. Health (Life expectancy at birth) 2. Education (Mean years of schooling and Expected years of schooling) 3. Standard of living (GNI per capita measured at PPP)