Measuring Economic Performance - PowerPoint

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					11. Macroeconomics and national income accounts
• GDP and its measurement • Output approach, income approach and expenditure approach

• The components of GDP
• From GDP to GNP to National Income • How good an indicator of a country’s living standards is GDP?

National income accounting
• National income accounting is about measuring economic activity • One of the most comprehensive measures of a country’s economic activity is the value of total production of its goods and services, called national product • The rate of economic growth is an important indicator of a country’s economic performance (although a high growth rate does not necessarily lead to less poverty)

Gross Domestic Product
• Gross Domestic Product (GDP) is the most widely reported measure to indicate a country’s economic performance • GDP is the market value of all final goods and services produced in a nation during a specific period of time, usually a quarter or a year • GDP excludes production abroad by British (i.e. domestic!) companies but includes the production undertaken in Britain by foreign companies (i.e. the value of activity within the country)

Gross National Product
• Gross National Product (GNP) is the market value of all goods and services produced by nationals (e.g. UK citizens) wherever they are located. • GDP/GNP are expressed in monetary terms, thus rely on the markets to establish the relative values of goods and services
E.g.: In the UK in 2003 the value of GNP at market prices was £1,121.2 billions Net factor income from abroad was £21.8 bn. => GDP at market prices was £1,099.4 bn.

supply demand Product Markets (Spending on goods & Services)

Actual goods & services



The circular flow


of income

Factor payments demand Factor Markets (Services of productive factors) supply

Factors of production

Points to remember when measuring GDP...
(a) Secondhand transactions are not included (since merely exchanges of previously produced goods)

(b) Private or public transfer payments are not counted (e.g. unemployment insurance benefits – not made in exchange of a service => no new production)
(c) Only final goods, intermediate goods not included (e.g. bread yes, flour no) => If any of these items were included in the calculations, the measurement of economic activity would be subject to ‘double-counting’

Three different ways of measuring GDP
• Output approach, income approach, expenditure approach
• GDP may be measured as the total output of final goods and services. This uses the concept of value added – Value added: difference between the value of a good as it leaves a stage of production and the costs of that good as it entered that stage – Summing the ‘value-added’ of the different stages of production gives the total value of economic activity

Measuring value added
Stage of production Value of Sales Value Added 1 – Oil Drilling 2 – Refining 3 – Shipping 4 – Retail Sale Total Value Added $0.50 $0.65 $0.80 $1.00 $0.50 $0.15 $0.15 $0.20 $1.00

• GDP may be measured as the total income earned by the factors of production (i.e. land, labour and capital) derived from producing the output => sum of factor incomes

• GDP may be measured by using the expenditure on total output. It is measured initially at market prices, including indirect taxes such as VAT but excluding subsidies. This approach provides a very useful identity Y = C + I + G + X – M (see why in a couple of slides!)

• The income and expenditure measures are expressed in monetary terms at the market prices that prevail (i.e. at current prices or in nominal terms)

• Nominal GDP (p x q) can grow because of three reasons:
– Output (q) rises and prices remain unchanged – Prices (p) rise and output remains unchanged – Both output and prices rise

• In order to control for price changes GDP can be calculated using a base set of prices. The real measures can then be obtained by deflating GDP by a relevant price index

The Expenditure approach is important for highlighting linkages between macroeconomic indicators ….

Component parts of expenditure based GDP
• UK GDP (Y), 2003 estimated (billion) = £1,099.4 a) Consumption expenditure (C) = £951.4
(on durables, non-durables, services)

b) Investment (I)
(stock-building, capital formation, housing)

= £175.8 = £231.7 = £276.0 = £308.4

c) Government expenditure (G)
(roads, health, education, but not transfer payments)

d) Exports of goods and services (X) e) Imports of goods and services (M)

(C, I,G have import component, thus M need to be subtracted from economic activity)

National Accounts Identity



Gross domestic product or ‘grossly deceptive product’?
• Non-market transactions
– The ‘care’ economy (underestimation of housewives/husbands work) – Subsistence agriculture

• Distribution, nature and quality of goods produced

• Leisure time
• The hidden economy
– Illegal activities – Informal sector

• Economic ‘bads’
– No distinction between green and polluting industries

• This list of omissions suggests that GDP figures are a dubious guide to the quality of life in different countries • Nevertheless GDP per capita is used a broad indicator of living standards • Examples of alternative measures: – HDI (weighted average of life expectancy, education and income) – GDI (HDI + gender inequalities)

Table 11.1 - Living standards indicators, 1993, various countries (US $)
(from World Bank Indicators and UNDP Human Development Report) GDP p.c. GDP p.c. (PPP) Ethiopia 100 420 Bangladesh 220 1290 Cuba 3000 Morocco 1040 3270 Mexico 3610 7010 UK 18060 17230 Japan 29740 20660 USA 31490 24680 HDI GDP rank - HDI rank HDI rank - GDI rank 0.237 0.365 0.726 0.534 0.845 0.924 0.938 0.940 5 -3 19 -34 -1 7 6 0
+ = HDI higher than GDP

0 -4 5 -2 -4 2 -9 -2
+ = GDI higher than HDI

PPP = purchasing power parity Adjusts for national variations in the price paid for goods (measure of actual spending power)

Other national accounts
• GDP + Net Factor Income (NFI) = GNP • Net National Product (NNP) = GNP - Depreciation
(depreciation: estimate of the capital worn out by producing GDP)

• National Income: total income earned by the owners of resources, including wages, rents, interest and profits NI = NNP - indirect taxes [taxes on goods sold, e.g. VAT] • Personal Income: total income received by households that is available for consumption, saving and the payment of personal taxes • Personal disposable Income (PDI): Personal Income minus personal income taxes plus transfer payments received by individuals – PDI = PI – income taxes + transfers

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