Week 3 - National Income Accounting Flashcards
What is the purpose of National Income Acounts
National income accounts provide a systematic method of aggregating production and consumption of diverse goods into a single measure of overall activity.
What two models are the accounts based off?
Circular flow - one person’s consumption is another’s income and income is recycled
Production Function - The economy can be seen as a machine that takes inputs, applies technology and produces outputs.
What is the Production Function equation for output?
National Output = f (labour, capital, land, other).
What are the 7 largest economies
1) US
2) China
3) Japan
4) Germany
5) UK
6) France
7) India
Australia was 12 in 2015
What does GDP do?
GDP is the basic measure of total output. It measures the market value of the final goods and services produced in an economy over a period.
Explain the Expenditure Approach to GDP
Measures spending by broad components of spending organised into the core categories of:
- Consumption - Government spending
- Investment - Net Exports
What is the equation for the expenditure approach?
Y = C+I+G+NX
What is one problem with the expenditure approach?
It assumes that all income is spent.
Explain the role of transfer payments in the expenditure approach
Sometimes, economic activity does not represent a new output but is simply a movement of funds. Transfer payment are normally gov payments and are not included as no goods a produced and the economic flows they derive from are already counted.
Based on the expenditure approach, how do you tell if a country is developing?
Developed economies are normally consumption lead. Less developed economies generally have more investment and those that remained heavily focused on it run the risk of falling into the middle income trap as generally, I needs to create infrastructure so C can increase enough to purchase the output.
What is Net Domestic Prodecu
NDP = C+U+G+NX - depreciation
Firms increase capital through investment, however, this depreciates and this effect should be netted out of GDP.
What is the difference between GDP and GNI
Gross national income includes the incomes of Australians living overseas and excludes non-residents’ incomes. GDP just measures the economic activity in the economy.
Explain the basis for the Income Approach
The circular flow model indicates that a person’s expenditure is another income (e.g. a consumer purchase in business income).
What does the Income Approach measure
Measures the sum of all income earned in an economy. A typical division is to calculate the share of income going to labour and capital.
What is the income approach equation
Y =f(K,L)
What is the share of labour in developed countries?
Based on the income approach, in most developed economies, the share of GDP from labour is 2/3
Explain the Production Apprach
The amount each producer contributes (value added) at all stages of production. Double counting is avoided by following the value added approach.
Primary Producer + Intermediate Producer = Final Producer
Define the wealth accoutns
The wealth accounts represent a balance sheet of an economy’s assets and liabilities and is a stock of collected flows measured at a point in time.
What items are excluded from economic activity?
Anything that can’t be identified in the form of a recognised exchange transaction:
- there is no measure of health
- changes to environmental conditions
- activity dockside of markets like gardening or parenting
- black market and informal activity
Issues with GDP
- GDP does not include everything
- GDP measure economic activity not well-being or happiness (increased health spending due to an outbreak would raise GDP)
- measurement problems exist (inflation can involve significant errors)
- subcategories are often interdependent (the line between consumption and investment is hard to define)
What is the difference between real and nominal GDP
Nominal is a measure of GDP when price and quantity have not been separated while Real GDP refers to the value of the actual quantity of goods and services holding price constant (adjusted for inflation).
Define inflation
Inflation refers to an increase in the overall level of prices throughout the economy.
Formula for GDP deflator and relation to inflation
GDP Deflator = Nominal/Real * 100
The rate of change in the deflator is the rate of inflation
Define CPI
The Consumer Price Index measures the average price of consumption based on a basket of goods in 11 groups.
What are the 4 biases in CPI that may lead it to overstate true inflation?
- New goods bias
- Quality change bias
- Commodity substitution bias
- Outlet substitution bias
List 3 things CPI Impacts
- Can distort private contracts
- Increased gov outlays (indexation)
- Bias estimates of real earning
What is core inflation?
Core inflation excludes volatile items such as fuel and food
Are trading shares included in GDP?
No as it is a financial transaction and nothing is produced. Brokerage would be included though as it serves as income and a service is produced
Is the sale of a coin or car included in GDP?
If a profit is made, the profit is included as income. Otherwise, no new product is created and it is not included.
Is the rebuilding of a home included in GDP?
Yes as it it part of investment.
Is the sale of illegal drugs included in GDP?
No as it is part of the informal economy and not declared.
Is the paying of a babysitter included in GDP?
No because it is informal.
Rule of 70 for caclulating the period
n = 70/growth rate
Log Rule for calculating the period
n = ln P/a / ln(1+r)
