Week 3 - National Income Accounting

Question 1

What is the purpose of National Income Acounts

Answer 1

National income accounts provide a systematic method of aggregating production and consumption of diverse goods into a single measure of overall activity.

Question 2

What two models are the accounts based off?

Answer 2

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.

Question 3

What is the Production Function equation for output?

Answer 3

National Output = f (labour, capital, land, other).

Question 4

What are the 7 largest economies

Answer 4

1) US
2) China
3) Japan
4) Germany
5) UK
6) France
7) India

Australia was 12 in 2015

Question 5

What does GDP do?

Answer 5

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.

Question 6

Explain the Expenditure Approach to GDP

Answer 6

Measures spending by broad components of spending organised into the core categories of:

• Consumption - Government spending
• Investment - Net Exports

Question 7

What is the equation for the expenditure approach?

Answer 7

Y = C+I+G+NX

Question 8

What is one problem with the expenditure approach?

Answer 8

It assumes that all income is spent.

Question 9

Explain the role of transfer payments in the expenditure approach

Answer 9

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.

Question 10

Based on the expenditure approach, how do you tell if a country is developing?

Answer 10

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.

Question 11

What is Net Domestic Prodecu

Answer 11

NDP = C+U+G+NX - depreciation

Firms increase capital through investment, however, this depreciates and this effect should be netted out of GDP.

Question 12

What is the difference between GDP and GNI

Answer 12

Gross national income includes the incomes of Australians living overseas and excludes non-residents’ incomes. GDP just measures the economic activity in the economy.

Question 13

Explain the basis for the Income Approach

Answer 13

The circular flow model indicates that a person’s expenditure is another income (e.g. a consumer purchase in business income).

Question 14

What does the Income Approach measure

Answer 14

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.

Question 15

What is the income approach equation

Answer 15

Y =f(K,L)

Question 16

What is the share of labour in developed countries?

Answer 16

Based on the income approach, in most developed economies, the share of GDP from labour is 2/3

Question 17

Explain the Production Apprach

Answer 17

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

Question 18

Define the wealth accoutns

Answer 18

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.

Question 19

What items are excluded from economic activity?

Answer 19

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

Question 20

Issues with GDP

Answer 20

• 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)

Question 21

What is the difference between real and nominal GDP

Answer 21

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).

Question 22

Define inflation

Answer 22

Inflation refers to an increase in the overall level of prices throughout the economy.

Question 23

Formula for GDP deflator and relation to inflation

Answer 23

GDP Deflator = Nominal/Real * 100

The rate of change in the deflator is the rate of inflation

Question 24

Define CPI

Answer 24

The Consumer Price Index measures the average price of consumption based on a basket of goods in 11 groups.

Question 25

What are the 4 biases in CPI that may lead it to overstate true inflation?

Answer 25

• New goods bias
• Quality change bias
• Commodity substitution bias
• Outlet substitution bias

Question 26

List 3 things CPI Impacts

Answer 26

• Can distort private contracts
• Increased gov outlays (indexation)
• Bias estimates of real earning

Question 27

What is core inflation?

Answer 27

Core inflation excludes volatile items such as fuel and food

Question 28

Are trading shares included in GDP?

Answer 28

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

Question 29

Is the sale of a coin or car included in GDP?

Answer 29

If a profit is made, the profit is included as income. Otherwise, no new product is created and it is not included.

Question 30

Is the rebuilding of a home included in GDP?

Answer 30

Yes as it it part of investment.

Question 31

Is the sale of illegal drugs included in GDP?

Answer 31

No as it is part of the informal economy and not declared.

Question 32

Is the paying of a babysitter included in GDP?

Answer 32

No because it is informal.

Question 33

Rule of 70 for caclulating the period

Answer 33

n = 70/growth rate

Question 34

Log Rule for calculating the period

Answer 34

n = ln P/a / ln(1+r)