Week 1- National Accounts & GDP

Question 1

What may a fall in consumer spending indicate?

Answer 1

That the economy is heading for a downturn and requires stimulus

Question 2

What is the fundamental job of National Accounts?

Answer 2

To record economic transactions of a nation in a given time period

Question 3

How can the National accounts be used?

Answer 3

They are used both for domestic purposes, such as monitoring the economy, and for international comparisons

Question 4

Where are the UK National accounts published and who are they compiled/gathered by?

Answer 4

The UK national accounts are published in the Blue Book, compiled by the Office for National Statistics (ONS)

Question 5

What does the Blue Book contain?

Answer 5

The Blue Book is best known for headline statistics such as GDP, household consumption, the trade balance, and public sector net borrowing

But it contains much more than this. Detailed statistics are provided on transactions made by the corporate, household, government and non-profit sectors

The UK Environmental Accounts are also included

Question 6

What is the purpose of the data recorded/published in the Blue Book?

Answer 6

All this data has an important purpose:
- it informs policy decisions, like those taken by the Bank of England and the Treasury
- it also allows us to monitor the economy’s progress
- This data is also used for research purposes, such as testing macroeconomic models or assessing the government finances (as Truss and Kwarteng discovered to their cost)

Question 7

State what the UK GDP was recorded as in the National Accounts in 2016 and what does this signify/mean

Answer 7

£1,961 billion (basically around £2,000 billion)

This is £1961000000000 and it is an estimate of the total value of goods and services produced in the UK in 2016

Question 8

State what the value of the UK Household Financial Assets was as a percentage % of GDP in the National Accounts in 2016 and what does this signify/mean

Answer 8

The total value of financial assets owned by UK households was 318%, or more than 3 times UK GDP

Question 9

State what the UK Government Debt (% of GDP) was recorded as in the National Accounts in 2016 and what does this signify/mean

Answer 9

Government debt in 2016 was 86.8% of GDP, showing the government has debts almost as large as the national income. At first sight this might seem troubling, but what really matters is the dates at which the debt repayments are due

If relatively small amounts are due to be repaid each year, a government debt of 87% may not present any major problems

Conversely, if most debt were due next year, we would be in big trouble!

Question 10

State what the UK CO2 Emissions were recorded as in the National Accounts in 2016 and what does this signify/mean

Answer 10

This figure comes from the Environmental Accounts and can be used to assess progress against climate change targets

Question 11

Define GDP and state its purpose

Answer 11

Gross domestic product, or GDP, is the market value of the final goods and services produced in a country in a given time period

It is the key economic statistic that is used to measure economic progress and make international comparisons of living standards

Question 12

What specific measurement is used to make comparisons of living standards?

Answer 12

Comparison of living standards using GDP usually focus on real GDP per person/real GDP per capita

Question 13

What does the ‘Gross’ in Gross Domestic Product (GDP) tell you?

Answer 13

The Gross in GDP tells us that it is not adjusted for depreciation, the wear and tear and obsolescence of physical capital – such as machinery, buildings, trucks and computers – that is used to produce output

Question 14

Why does the GDP definition contain the words ‘market value’ and why?

Answer 14

GDP is a market value because quantities are valued using market prices

Question 15

Why does the GDP definition contain the words ‘final goods and services’?

Answer 15

GDP includes only the value of final goods and services
For example, a cake sold in a UK supermarket has been produced from various ingredients – or ‘intermediate goods’ – such as flour, eggs and sugar. We do not count separately the value of these intermediate goods because their value is already contained in the sale price of the cake

If we did, we would fall into the trap of double counting

Question 16

Why does the GDP definition contain the words ‘in a country in a given time period’’?

Answer 16

Finally, the phrase “in a country in a given time period” tells us that GDP only includes goods and services that were produced in a nation’s borders during the period in question

In other words, GDP is a flow of goods and services, not a stock

Question 17

What are 2 main approaches of calculating GDP?

Answer 17

1) The expenditure approach
2) The income approach

Question 18

What is the expenditure approach?

Answer 18

The expenditure approach works on the basis that the value of goods and services produced in a given time period should be reflected in what we paid for them. In particular, the expenditure approach sums up the different types of expenditure on goods and services to reach a value for aggregate expenditure/aggregate output/GDP

Question 19

What equation does the expenditure approach use and what does it mean?

Answer 19

GDP = C + I + G + (X – M)

The components of aggregate expenditure are: consumption expenditure by households C; investment
expenditure by firms I; government expenditure on goods and services G; and net exports X − M (exports minus imports)

Question 20

What can be said about the decomposition of UK GDP by type of expenditure in 2015?

Answer 20

Consumption expenditure is the largest single component of ag- gregate expenditure, at around 60%

Investment expenditure and government expenditure make a smaller contribution to UK GDP of around one-fifth

Finally, the contribution of net exports is small but negative, indicating that the UK is a net importer

See image in notes

Question 21

Give an example of consumption expenditure by households, investment expenditure by firms and government expenditure

Answer 21

If a household buys a new car, this is part of consumption expenditure

If a firm purchases physical capital such as machinery or new computers, this is part of investment expenditure

If the government buys waste disposal services or medical supplies, this is government expenditure

Question 22

Where is government spending on transfers (e.g. pensions and unemployment benefits) included?

Answer 22

Government spending on transfers (e.g. pensions and unemployment benefits) is not part of G because no new good or service is produced

Question 23

Where are purchases of new housing included?

Answer 23

We include purchases of new housing as part of investment expenditure, I

Question 24

Where are all other durable goods (goods that do not need to be purchased very often and last for at least 3 years/used for a period of time because they are not consumed or destroyed in use e.g. washing machines and cars are durable goods; ice creams are not) apart from new housing, included?

Answer 24

By contrast, all other durable goods are included in consumption expenditure, C

Question 25

What is the distinction made between new housing and second hand housing?

Answer 25

Note that it is only new housing that is included in I, since the sale of a second-hand house is merely a transfer of ownership from one household to another

Second hand houses have already been included in past expenditure in the year they were built and sold. The principle that second-hand sales are excluded applies to all goods in GDP

Question 26

Why are exports (X) added in aggregate expenditure?

Answer 26

Exports, X, are added in aggregate expenditure because these goods and services are sold to the rest of the world, implying an inflow of expenditure to the domestic economy

Question 27

Why are imports (M) subtracted in aggregate expenditure?

Answer 27

Imports, M, are subtracted from expenditure because they represent an expenditure outflow

Question 28

What is X – M known as and when is it positive or negative?

Answer 28

X – M known as net exports or trade balance

Net exports, X − M , will be positive if the value of what we export exceeds our expenditure on imports

Net exports, X − M , will be negative if the value of what we export is less than our expenditure on imports

Question 29

What are inventories?

Answer 29

Inventories are goods that were produced during the period but have not yet been sold

Question 30

Are inventories included in the expenditure approach to calculating GDP?

Answer 30

Inventories are part of production but are not reflected in expenditure. To ensure that aggregate expenditure does not miss this production, we include new inventories as part of I (investment expenditure by firms)

Question 31

What is the income approach to calculate GDP?

Answer 31

The income approach calculates GDP by aggregating incomes received by employees, corporations and the self-employed

The basic idea is that when goods and services are sold, the resulting income goes to factors of production (such as employees) or to business owners as profit

Because GDP is a measure of ‘domestic product’, UK GDP includes any income generated by sales of goods and services produced in the UK. The final destination of the incomes is irrelevant

Hence, the profit that Amazon makes on UK retail sales are included as part of UK GDP, but the profit made by Dyson on hoovers made overseas is not

Question 32

How many streams does the Blue Book separate income?

Answer 32

Into 3 streams

Question 33

What are the 3 streams the Blue Book separates income into?

Answer 33

1) Compensation of employees
2) Gross operating surplus
3) Mixed income

Question 34

What is the compensation of employees?

Answer 34

Compensation of employees is the wages and benefits that employers pay workers

Question 35

What is the gross operating surplus?

Answer 35

Gross operating surplus is the total profit made by companies plus the surplus of publicly owned enterprises

Question 36

What is mixed income?

Answer 36

Mixed income is a combination of rental income and income from self-employment

Rental income includes payment for use of land, housing and other rented inputs

Income from self-employment includes the profits of entrepreneurs and small business owners

Question 37

Does the income approach give a similar estimate of UK GDP to the expenditure approach?

Answer 37

When calculating the UK GDP in 2015, the income approach gives an estimate that is £4 billion larger than the expenditure approach

This may sound like a lot, but it is a relatively small discrepancy when compared to GDP estimates of almost £1,900 billion. In fact, the statistical discrepancy amounts to only 0.2%

That’s pretty good going for a calculation that involves millions of different transactions!

Question 38

How do you calculate the statistical discrepancy used when calculating the % difference between UK GDP in 2015 calculated using the income approach and using the expenditure approach?

Answer 38

% discrepancy = [(new - original) / original ] x 100

Choose your new and old figure accordingly so that you get a positive in the numerator and … a positive % discrepancy

Question 39

Why doesn’t the income approach simply sum/add compensation of employees, gross operating surplus and mixed income?

Answer 39

The reason is that expenditure and income will differ to the extent that indirect taxes and subsidies are present

For example, with indirect taxes such as VAT, some part of the revenue earned on each sale goes to the government as taxes (rather than to profit)

To account for this ‘leakage’ of income, we add ‘Indirect Taxes less Subsidies’ to get an estimate of GDP under the income approach

Question 40

How many main types of GDP are there?

Answer 40

2

Question 41

What are the main types of GDP?

Answer 41

1) Nominal GDP
2) Real GDP

Question 42

What is nominal GDP?

Answer 42

Nominal GDP tells us the market value of goods and services produced at a given point in time- it is GDP calculated at current market prices

Question 43

What is a negative of nominal GDP?

Answer 43

It is less useful for comparisons across time- the main issue is that it contains the effects of inflation

Question 44

Give an example of why using nominal GDP may be a problem and therefore suggest the alternative

Answer 44

For example, suppose all prices in the economy double this year, but the amount of physical stuff produced (and consumed and invested) remains unchanged. Nominal GDP will double in this case, but society is no better off!

To get a measure of production that corrects for inflation, economists calculate real GDP

Question 45

What is real GDP?

Answer 45

Real GDP is the value of final goods and services produced in a given year when valued at the prices of a reference base year (mitigates the effects of inflation by using the same prices)

By using the same set of prices in each year, we find out by how much production of goods and services has changed over time

Question 46

What does it mean if nominal GDP is greater than real GDP over a period of time?

Answer 46

Real GDP growth was lower than nominal GDP growth in all quarters because inflation was positive over this period

See notes image for graph

Question 47

What are recessions?

Answer 47

Recession is defined as a period when real GDP falls for at least two successive quarters

Question 48

When were the recessions in the last decade or so?

Answer 48

By looking at real GDP we see that there were additional (minor) recessions during 2011, 2012-13 and 2016-17 and that the main 2008 Great Recession lasted longer than two years

Question 49

What are the limitations of GDP?

Answer 49

1) One important limitation is that GDP only measures the value of goods and services bought in markets. It omits productive activities that happen outside markets, such as household production (e.g. child minding or making dinner) and transactions in ‘black markets’

2) GDP also does not take into account how long a country’s citizens live, the quality of the education they receive, environmental impacts, or whether human rights are respected

Question 50

How can researchers fill in the gaps left by GDP (overcome its limitations)?

Answer 50

• researchers have developed several alternative indicators e.g. UN’s Human Development Index (HDI) and the Social Progress Index (SPI)
• in addition, economists have turned their attention to the measurement of happiness and social well-being

Question 51

Are richer countries happier than poorer ones?

Answer 51

An important finding from this research is that richer countries do not appear, on average, to be happier than poorer ones

Question 52

Are alternative indicators used alongside GDP in practice?

Answer 52

The Office for National Statistics (ONS) now attempts to measure ‘national well-being’ as well as GDP

Only time will tell whether these additional indicators become influential in macroeconomic policy decisions

Question 53

Briefly state what HDI measures

Answer 53

HDI combines objective measures of real income, life expectancy and education

Question 54

Briefly state what SPI measures

Answer 54

SPI uses a large number of social and environmental indicators that capture three dimensions of social progress:
1) Basic Human Needs
2) Foundations of Wellbeing
3) Opportunity