Topic 1 - Macro economics and national objectives

Question 1

1.01 What are the three purposes of the national accounts?

Answer 1

* Provide a measure of the operation of the economy * In the short run help explain the economy’s performance & provide a source of information for formulating economic policy * In the long run it tracks growth or stagnation of the economy

Question 2

1.02 What is Gross Domestic Product and how is it measured?

Answer 2

It is the total market value of all final goods and services produced in the economy during a specified period. It is measured in money terms and not in physical units and is usually measured over a year.

Question 3

1.03 What is included in the calculation of Gross Domestic Product?

Answer 3

Only the value of final goods and services are counted.

Question 4

1.04 What are ‘final goods and services’?

Answer 4

They are those goods and services being purchased for final use and are not to be subject to further processing, manufacturing or resale.

Question 5

1.05 What two key items are excluded from Gross Domestic Product?

Answer 5

* Intermediate goods and services * Non-Productive transactions

Question 6

1.06 What are Intermediate Goods and Services?

Answer 6

Intermediate Goods and Services are those that are subject to further processing, manufacturing or resale.

Question 7

1.07 What is the ‘cost’ of intermediate goods and services referred to as?

Answer 7

As ‘Intermediate consumption’

Question 8

1.08 What would occur to the calculation of GDP if intermediate goods and services were included?

Answer 8

There would be ‘double counting’ as the items would be included more than once.

Question 9

1.09 What option does the economist use in calculating final goods and services other than using the last value sold to the end user?

Answer 9

Calculating the ‘value added’ which is the market value of a firms output less the value of its intermediate consumption.

Question 10

1.10 What are non-productive transactions? and what are the two main types?

Answer 10

They are transactions where no production of Goods and Services occur. The two main types are financial transactions and second-hand sales.

Question 11

1.11 Why are financial transactions and second-hand sales excluded from the calculation of GDP?

Answer 11

Because there is no production of Goods and Services, they are merely a transaction or they do not reflect current production.

Question 12

1.12 What are the three types of non-productive ‘financial’ transactions?

Answer 12

* public transfer payments (social security) * private transfer payments (funding from a parent to a uni student) * buying/selling of shares

Question 13

1.13 What are the two approaches to measuring GDP?

Answer 13

1) Expenditure approach - sum of all expenditures involved in taking that total output to the market 2) Income approach - sum of the incomes derived from production of the GDP

Question 14

1.14 What is the equation for the expenditure approach?

Answer 14

C + I + G + NX Personal consumption expenditures (C) + Gross Private Investment (I) + Government purchases of goods and services (G) + Net export expenditures (NX)

Question 15

1.15 What is Personal consumption expenditure (in reference to GDP) made up of and what are some examples?

Answer 15

Expenditure by households on: * durable consumer goods (car, fridge, dvds) * non-durable consumer goods (bread, butter) * services (doctors, lawyers)

Question 16

1.16 What is gross private investment (in reference to the expenditure approach to calculating GDP) and what is it made up of?

Answer 16

It is private gross fixed capital expenditure plus increases in stock/inventory. This includes: * final purchases of machinery, equipment or tools * all building and construction * changes in stock/inventory NOTE: does not financial investment / transfer of shares

Question 17

1.17 What is ‘government purchases of goods and services’ (in reference to the expenditure approach to calculating GDP and what is it made up of?

Answer 17

The sum of government final consumption expenditure, government gross fixed capital expenditure and increases in stocks of government authorities.

Question 18

1.18 What is net export expenditures (in reference to calculation of the GDP)?

Answer 18

It is the difference between the value of exports (X) and imports (M) ie X-M. And is the amount by which foreign spending on Australian G&S exceeds Australian spend on foreign G&S.

Question 19

1.19 What is the ‘income approach’ to calculating GDP?

Answer 19

It is the sum of: * employee compensation, * gross operating surpluses, * net operating surpluses and * taxes less subsidiaries

Question 20

1.20 In calculating the ‘income approach’ for GDP, what does compensation of employees include?

Answer 20

It is the largest component and includes * Wages * salaries * Superannuation * direct pensions * Compo payments

Question 21

1.21 In calculating the ‘income approach’ for GDP, what does gross operating surplus (GOS) include?

Answer 21

Rents, interest and profits.

Question 22

1.22 In calculating the ‘income approach’ for GDP, what does ‘net operating surplus’ include?

Answer 22

This is the GOS less depreciation.

Question 23

1.23 What is depreciation defined as? and what is its alternative name?

Answer 23

The annual charge that estimates the amount of capital equipment used up in each years production. It is also called ‘capital consumption allowance’.

Question 24

1.24 In calculating the ‘income approach’ for GDP, what does ‘taxes less subsidies’ include?

Answer 24

* indirect taxes - which are excise taxes, licence fees and customs duties. Businesses treat these as costs of production and so add them to their prices. * Subsidies are payments to business to encourage production of a particular commodity or use of a particular resource (effectively these are negative indirect taxes)

Question 25

1.25 The expenditure approach and the income approach generally produce the same figures, what is used to ensure this occurs?

Answer 25

Statistical discrepancy balancing items that represent the differences between the separate statistical estimates and the single GDP estimate produced by the ABS.

Question 26

1.26 What is real GDP? and what is its alternate name?

Answer 26

Real Gross Domestic Product is money GDP that is adjusted for inflation by an implicit price deflator. This is also called the ‘constant price GDP’.

Question 27

1.27 How is money GDP measured and what is its alternative name?

Answer 27

It is measured in current prices, also called ‘nominal GDP’.

Question 28

1.28 What is the advantage of using real GDP over Money GDP?

Answer 28

It allows comparisons over a number of years to be made without looking at actual prices in current value terms.

Question 29

1.29 What are the two indices used to adjust the price of Money GDP in order to create real GDP?

Answer 29

* Consumer Price Index (CPI) * Implicit Price Deflator (IPD)

Question 30

1.30 What is the Consumer Price Index and what does it measure?

Answer 30

It measures the price level of a ‘market basket’ of a variety of consumer goods and services that are purchased by a typical family.

Question 31

1.31 What is the Implicit Price Deflator?

Answer 31

It is a broadly based measure of the average level of prices in the economy based on consumer goods and services (C), investment goods (I), goods and services purchased by government (G) and goods and services exported and imported (NX).

Question 32

1.32 What is the formula used for deflating money GDP?

Answer 32

Real GDP = Money GDP/Price Index (as a decimal)

Question 33

1.33 What is the purpose of GDP? and generally why is this therefore not conducive as a measure of social welfare?

Answer 33

It is intended purely as a measure of national economic performance. It cannot measure social welfare because it excludes a variety of non-market transactions that may increase or decrease social welfare.

Question 34

1.34 What are the specific exclusions from GDP that make it a poor measure of social welfare?

Answer 34

* Changes in leisure time * Changes in product quality * The composition & distribution of output (is it ‘right’ for society) * The per capita output (size is measured not standard of living) * The environmental impacts (eg pollution) * Benefits and costs associated with ‘underground economic transactions’ are also excluded.

Question 35

1.35 What does BOP stand for and what is its purpose?

Answer 35

The International Balance of Payments account, and it records all transactions between the entities in Australia and those in foreign nations.

Question 36

1.36 What are the two basic subcategories of the International Balance of Payments account? (and any extra subcategories they may have)

Answer 36

They are the: * Current account - reflecting current transactions * Capital and financial accounts, including the Capital account - transactions that are of a non-current and non-financial nature; and the Financial account - exchange of financial assets.

Question 37

1.37 What is the current account balance?

Answer 37

It is the sum of the: * Goods and Services balance * Primary income balance, and * Current transfers balance.

Question 38

1.38 What is the goods and services balance and what is its alternative name?

Answer 38

It is the net difference between the value of exports and imports of current G&S. This is broken into ‘goods’ and ‘services’. The goods balance is also referred to as the ‘balance of trade’.

Question 39

1.39 What is specifically included in the goods and service balance (of the current account balance)?

Answer 39

* Merchandise trade * Balance on merchandise trade * Net Services * Balance on net services

Question 40

1.40 What is included in the ‘primary income balance’ portion of the current account balance?

Answer 40

* Net interest * Dividend payments and reinvested earnings * Net investment incomes associated with pensions and life insurance investments * Net payments made to employed workers located outside their country.

Question 41

1.41 What is the ‘current transfers balance’ part of the current account balance?

Answer 41

It is the net transfers both public and private, from the rest of the world to residents of Australia, including monies paid to/from Australia to students and net remittances to/from relatives abroad.

Question 42

1.42 What is another name for the ‘current transfers balance’?

Answer 42

It is the secondary income balance.

Question 43

1.43 What is the ‘Capital Account Balance’?

Answer 43

It is the sum of net capital transfers (migrants transfers and aid flow related to capital formation) and net sale of patents, trademarks, franchises and embassy land (non-produced, non-financial assets).

Question 44

1.44 What is the ‘Financial Account Balance’?

Answer 44

It is the net flows of funds associated with direct investment in shares and portfolio investment via shares and institutional loans, financial derivatives, other investment and changes in the value of reserve assets.

Question 45

1.45 Within the Financial Account Balance one of the groupings is ‘direct investment’, when does this occur?

Answer 45

When investment is made by non-residents in an Australian company, or when Australians make investment in foreign company controlled by Australian interests.

Question 46

1.46 Within the Financial Account Balance, one of the groupings is ‘portfolio investment’, when does this occur?

Answer 46

When non-residents buy shares/bonds from Australian companies, or Australians buy shares in foreign companies.

Question 47

1.47 Within the Financial Account Balance, one of the groupings is ‘Financial derivatives’, what do they represent?

Answer 47

The secondary financial securities or contracts that are linked to a primary financial instrument, indicator or commodity.

Question 48

1.48 Within the Financial Account Balance, one of the groupings is ‘Other Investments’, what is the purpose of this category?

Answer 48

It is a residual category for all financial transactions not covered in direct investment, portfolio investment or reserve assets.

Question 49

1.49 Within the Financial Account Balance, one of the groupings is ‘Reserve Assets’, what is the purpose of this category?

Answer 49

This category shows the changes in the value of assets held in the Reserve Bank of Australia’s balance sheet.

Question 50

1.50 What is the External Balance?

Answer 50

It is a level of the current account consistent with the maintenance of existing (or growing) levels of consumption, employment and national output over the long term.

Question 51

1.51 What would the impact of sharp and sustained increases in certain ratios such as net foreign debt to GDP or the current account balance to GDP indicate?

Answer 51

That future consumption may need to be sacrificed or reduced. This is because we must be able to service the income flows required by any increases in the level of foreign debt implied by inflows recored in the financial and capital accounts.

Question 52

1.52 How is national turnover calculated?

Answer 52

GDP + Imports = National turnover

Question 53

1.53 How is Gross National Expenditure (GNE) calculated?

Answer 53

Sum of C + I + G = GNE

Question 54

1.54 How is National Income (NI) calculated?

Answer 54

GDP - depreciation & net income paid overseas = NI

Question 55

1.55 How is Gross National Income (GNI) calculated?

Answer 55

GDP - net income paid overseas = GNI

Question 56

1.56 How is the Domestic Factor Income (DFI) calculated?

Answer 56

GDP at the Factor Cost - Depreciation = DFI

Question 57

1.57 How is Household Income (HI) calculated?

Answer 57

Total income received by persons normally resident in Australia = HI

Question 58

1.58 How is Household Disposable Income (HDI) calculated

Answer 58

Household Income (HI) - Taxes and charges = HDI