Transcript National Income Accounting

National Income Accounting
Measuring the total income and
spending in an economy
National Income Accounting
Gives us information on how the economy
is doing
defn: the whole process of measuring
and recording various economic aggregates
that give some indication of the economic
health of the country over time.
It is the responsibility of the government
provides information on economic activity
used to formulate good policies
TOTAL OUTPUT
 The economy’s total production of goods
and services is a good measure of the
country’s economic well being.
AKA -- “GDP”
Gross Domestic Product
GROSS DOMESTIC PRODUCT
 Is the market value of all FINAL goods
and services produced in the economy
during a period of time.
 It is a “flow concept” -- flow of output
during the year.
It is expressed in monetary terms $.
Using money as a common denominator
and adding the value in monetary terms of
all items produced during the year -- “market
value”.
GROSS DOMESTIC PRODUCT
 Example: Simple Economy
100,000 kg of potatoes at $0.50
8000 bottles of juice at $2.00
500 bikes at $50.00
GDP = $91,000
Measuring GDP
 output can be measured in 2 ways
1. Income approach
2. Expenditure approach
 both should give the same result because
the “total expenditure on the economy’s
output = total income earned in producing it.
The INCOME approach
 Wages, rent, profit and interest make up
the Canadian incomes
These four payments form the basis of
GDP using the income approach.
Statistics Canada uses its own
classification of income: wages and
salaries, corporate profits, interest income,
and proprietor’s incomes (including rent).
It also adds in direct taxes, depreciation ,
and a statistical discrepancy account.
Wages and Salaries
 Wages and salaries are the largest
income category, representing 51% of GDP.
This includes direct payments to workers
in both business and government, as well s
employer benefits such as contributions to
employer pension funds.
Corporate Profits
 this includes all corporate profits declared
to the government (profits paid as income
tax, dividends, and retained earnings.)
adjustments to the value of businesses’
unsold products are also included.
Interest Income
 Includes interest paid on business loans
and bonds.
Does NOT include interest payments
made by consumers and government.
(these are transfers of purchasing power)
Proprietor’s Income and Rent
 this includes the earnings of sole
proprietorships and partnerships.
The income of landlords from renting
property is also included in this category.
Indirect Taxes
 Provincial sales taxes are charged on
products rather than levied against
households or business, therefore, their
monetary value is NOT included in the main
income components of GDP using the
income approach
This value is included in the expenditure
approach
Depreciation
 Assets such as buildings, equipment,
tools, and automobiles, depreciate and need
to be replaced.
This is considered a cost of doing
business and therefore shows up in product
prices as well as the expenditure approach
Statistical Discrepancy
 Since businesses’ and individuals’ records
might be missing or incorrect, GDP figures
for the two approaches differ.
Therefore, GDP is actually an estimate
and will have a discrepancy.
To balance the figures, Stats Canada
divides the difference between the two
approaches (expenditure and income
approaches).
The EXPENDITURE approach
 Is the sum of purchases in product markets
Purchases included in GDP calculations fall
under four categories: 1. Personal
consumption (C), 2. Gross Investment (I),
3. Government purchases (G), 4. Net
Exports (X-M).
GDP = C+I+G+(X-M)
Personal Consumption
 is the largest component of total spending
Non-Durable Goods such as food are
consumed only once
Durable Goods such as cars and bikes are
consumed repeatedly over time
Gross Investment
This includes purchases of assets that
produce revenue -- equipment and machines
used by businesses.
Includes changes in the dollar value of
unsold goods and materials (inventories).
These are income-producing assets, therefore
an increase in an economy’s inventories over a
given year is positive investment spending.
Similarly, a decrease in inventories is seen as
negative investment spending.
Gross Investment
 the construction of all buildings, houses and
apartments is gross investment
Net investment (gross investment minus
depreciation) represents the yearly change in
the economy’s stock of capital, thus is included
in gross investment.
Government Purchases
 includes all spending by all levels of
government on goods and services. (eg.
Federal government buys a helicopter for the
Army.)
Government transfer payments, subsidies,
expenditures by government agencies are
excluded because these amounts are
considered part of gross investment.
Net Exports
This is the final category of purchases.
Includes purchases by foreignors (exports).
For example, if an Italian consumer buys a
Canadian computer, or an American tourist
spends a night in a Canadian hotel, the
payments for these transactions remain in the
Canadian flow of money, therefore contributing
to GDP.
Net Exports
Imports are also accounted for. For example,
if a Canadian automaker buys American steel,
the transaction leaves the Canadian circular
flow of money. Thus, the import spending is
subtracted from GDP.
Stats Canada uses Net Exports (X-M) to
reconcile spending inside and outside the
Canadian economy in calculating GDP.
PROBLEMS WITH GDP AS A
RELIABLE MEASURE
1. Does not measure all economic output
(underground economy, work at home)
2. Other Exclustions
(second hand sales, sales of stocks, bonds
(if they do not represent payments of
production)
PROBLEMS WITH GDP AS A
RELIABLE MEASURE
3. Not a measure of quality of life
(excludes leisure, increase in well-being)
4. Does not measure living standards
(Does not tell us anything about the number
of people who must share in the total output of
Good and Services)
PROBLEMS WITH GDP AS A
RELIABLE MEASURE
For example, China has a huge GDP per year,
but low GDP per person, therefore it is very
misleading
Real GDP per capita would tell us how much
each individual in the country would receive if
the total output was divided equally among
them
REAL GDP per Capita = real GDP
Population
OTHER ECONOMIC MEASURES
1. GNP - Gross National Product
2. NDI - Net Domestic Income
3. Personal Income
4. Disposable and Discretionary
Income
GNP - Gross National Product
GNP is the market value of all goods
and services produced by Canadian
factors, regardless of where those
factors are located.
GNP focuses on the EARNINGS of
Canadians
GNP - Gross National Product
Foreignors who produce in Canada are
NOT included in GNP -- they are
included in GDP
Canadian owned production abroad is
included in GNP -- they are not
included in GDP
GDP + Net Investment income from non-residents = GNP