Welcome to the Session

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Welcome to the Session

• National Income Accounting

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National Income Accounting

• National Income Accounting Defined
• Circular Flow of Economic Activity
• Measures of Output
• GDP/GNP/NDP/NNP/NI/DI/DPI
• Nominal GDP vs Real GDP
• GDP Per Capita
• Inflation and Price Index
• Interest Rate and Real Interest Rate
• Shortcomings of GDP as a Measure of Economic
• Well-Being

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Measures of Output (Production)

• National Income Accounting refers to the
  measurement of aggregate economic activity,
  particularly national income and its components.
• Aggregate Total or Gross

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Revenue (GDP)
Spending (GDP)
MARKETS FOR GOODS AND SERVICES
Good and services sold
Good and services bought
HOUSEHOLDS
FIRMS
Land, labor and capital
Inputs for Production
MARKETS FOR FACTORS OF PRODUCTION
Income (GDP)
Wages, rent, interest and profit (GDP)
Flow of goods services
Flow of money Taka
THE CIRCULAR FLOW DIAGRAM
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Measures of Output (Production)

• Gross Domestic Product is the total monetary
  value of final output produced within a nations
  borders in a given time period at current market
  prices
• Gross Domestic Product is also referred to as
• Nominal Gross Domestic Product
• Current Gross Domestic Product

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Definition of GDP

• The market value of good i (Vi) is equal to Pi?Qi
• GDP sum of the market values of all final goods
  and services produced within the year.

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Measuring Gross Domestic Product

• The Expenditures Approach
• C I G (Xn) GDP
• The Flow of Income Approach
• Households supply business with the factors of
  production in return for payment in the form of
  wages, profits, rent, and interest
• The Value Added Approach
• Adds the increase in value at each stage of the
  production and distribution process

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GDP includes final goods and services only

• Final goods - goods and services that are not
  purchased for the purpose of producing other
  goods and services or for resale
• Eg. Rice (final) and unhusked rice (intermediate
  product)
• Including intermediate goods and final goods will
  result in double counting.

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Three Approaches for measuring GDP

1. Expenditure Approach (upper loop) measures GDP
   as the sum of expenditures on final goods and
   services.
2. Income Approach (lower loop) measures GDP as
   the sum of incomes of factors of production
   (wages, rent, interest and profit.
3. Value-added Approach measures GDP as the sum of
   value added at each stage of production (from
   initial to final stage)

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Expenditure Approach

• Uses the upper loop of the circular flow diagram.
• Example Suppose the economy has only one
  product, namely, rice.

Good Price per unit Q sold Expenditure
Rice 20 1000 20,000
GDP 20,000
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Income Approach

• Uses the lower loop of the circular flow diagram
  sum of payments to the various factors of
  production.
• Suppose that in the production of rice the sales
  and expenses are as follows

Sales P 20,000
Expenses
Wages 8000
Rent 4000
Interest 2000
Total 14,000
Profit 6,000
GDPSum of Payments to factors 20,000 P 20,000
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Value Added Approach

• Suppose that rice is the only final product of an
  economy It goes through several (3) stages of
  production.

Stage of Prodn Value of intermediate good Value of Sales Value-added
Farmer 12,000 12,000
Rice Miller -Milled Rice 12,000 15,000 3,000
Retailers - Rice 15,000 20,000 5,000
GDP Total Value Added 20,000
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Two Things to Avoid when Compiling GDP

• Multiple counting
• Only expenditures on final products what
  consumers, businesses, and government units buy
  for their own use belong in GDP
• Intermediate goods are not counted
• Used goods are not counted
• Transfer payments
• Transfer payments are not payments for currently
  produced goods and services
• When they are spent for final goods and services
  they will go into GDP as consumer spending

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Various Measures of Aggregate Economic Activity

• GDP (Gross Domestic Product)
• - or Net Factor Income
• GNP
• - Depreciation
• NNP
• - Indirect Business Tax
• National Income
• - RE TP
• Disposable Income
• - Personal Tax
• Disposable Personal Income

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Per Capita GDP

• Per Capita GDP calculations attempt to give us
  additional information about how we are doing as
  an economy.
• Per Capita GDP calculations may be a better
  measure of the standard of living.
• For citizens living in the same country over time
• For comparing standards of living between
  citizens of different countries

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Per Capita Nominal GDP
GDP
Per capita GDP -----------------------
---------
Population
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Per Capita Real GDP
To compare per capita GDP in one year with that
of another year we have to correct for inflation.
In other words, we really need to revise our
formula
Real GDP
Per capita real GDP --------------------------
------
Population
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Nominal GDP and Real GDP
Nominal GDP measures the value of output in a
given period in the prices of that period, or,
as it is sometimes put, in current prices. Real
GDP measures changes in physical output in the
economy between different time periods by valuing
all goods produced in the two periods at the
same prices, or in constant prices.
Nominal GDP
Real GDP --------------------------------
GDP Deflator
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The GDP Deflator
GDP deflator is the ratio of nominal GDP in a
given year to real GDP of that year.
Nominal GDP
Real GDP --------------------------------
GDP Deflator
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Nominal Vs. Real GDP
Commodity 2007 NGDP 2008NGDP 2008RGDP
Rice 10 at 100 1000 15 at 150 2250 15 at 100 1500
Cloth 20 at 200 4000 25 at 225 5625 25 at 200 5000
5000 7875 6500
GDP Deflator NGDP/RGDP 7875/65001.21
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Inflation and Prices
Inflation is the rate of change in prices, and
the price level is the accumulation of past
inflations. If Pt-1 represents the price level
last year and Pt represents todays price level,
then the inflation rate over the past year can be
written as
Pt - Pt-1
Inflation rate ----------------------------
----
Pt-1
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Shortcomings of GDP as a Measure of National
Economic Well-being

• Problems of GDP Measurement
• Non Market Activities (Household production)
• Imprecise Pricing of Govt. Activity
• Illegal production
• The underground economy
• Use of Resources to Avoid Bad
• Treatment of leisure time
• Quality of Goods