Principles of national accounting
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Principles of National Accounting. Presented by: Gurnain Kaur Pasricha Sept 8, 2006. Overview. National Income Accounting Relationships/Identities: Three measures of GDP. Domestic and National Product Domestic/National Product and Disposable Income

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Principles of National Accounting

Presented by:

Gurnain Kaur Pasricha

Sept 8, 2006


Overview

  • National Income Accounting Relationships/Identities:

    • Three measures of GDP.

    • Domestic and National Product

    • Domestic/National Product and Disposable Income

    • Savings-Investment Gap and the Current Account

    • Current Account Balance and Net Lending/Borrowing

    • Measures of Government Deficit.

  • Real vs. Nominal Measures


Gross Domestic Product GDP

  • A commonly used measure of standard of living. (Other measures: GNI, GNDI all in ‘real terms’)

  • Market value of final goods and services produced in the territory of an economy, in a given time period.


  • ‘Final goods and services’ : Those that are available for final uses in the given time period.

    • Final uses: Consumption, capital formation and export

  • ‘Territory’: includes territorial waters, embassies and missions abroad.


Circular Flow of Income

Factor Payments ( I )

Factor Services

Producers

Households

G&S

Goods & Services (O)

Payments for Goods & Services (E)


I. Expenditure Approach

GDP = Final Consumption Expenditure of households (Ch)

+ Final Consumption Expenditure of General Government (Cg)

+ Final Consumption Expenditure of NPISH (Cn)

+ Gross Capital Formation ( I )

+ Exports – Imports (NX = X - M)


I.I Final Consumption Expenditure of Households

  • Includes consumption of all durable and non-durable goods except own construction or improvement of residential housing

  • Services of owner occupied dwellings counted through imputed rent

  • Estimated using retail trade and household surveys for non-census years.


I.II FCE of General Government

  • General Government:

    • Central government

    • State governments

    • Local governments

    • Social security funds

    • Non-Profit Institutions serving the government

      Excluded: Government agencies that can charge market prices or prices that cover over 50 % of their costs.


I.II FCE of General Government

  • Output of the General Government

    = Current Expenditures on goods and services to produce government services

    + Compensation of employees

    + Consumption of Fixed capital

    + Own major construction

    + Own major repairs

= Own-account capital formation


I.II FCE of General Government


I.III FCE of Non-Profit Institutions Serving Households

  • Non-market output other than own account capital formation

    = Production Costs – Incidental Sales

  • Expenditure on market goods and services supplied without transformation and free of charge.


I.IV Gross Capital Formation

= Gross Fixed Capital Formation

Additions to produced capital goods and improvements to non-produced assets (e.g.. Land)

+ Change in Inventories

+ Acquisition less disposals of valuables


I.V Net Exports

  • Exports and Imports are transactions involving an exchange of goods and services between residents and non-residents of an economy.

  • Exclude transactions in non-movable non-produced assets (e.g. Land), buildings and in financial assets.


Residents vs. Non-Residents

  • A resident of an economy is an economic agent whose center of economic interest is in the economy in question.

    • Center of interest identified by

      • length of stay – usually a year or more.

      • Ownership of land or structures

  • Treatment of :

    • Students

    • International organizations

    • Military personnel and civil servants


I. Expenditure Approach

GDP = Final Consumption Expenditure of households (Ch)

+ Final Consumption Expenditure of General Government (Cg)

+ Final Consumption Expenditure of NPISH (Cn)

+ Gross Capital Formation (GCF)

+ Exports – Imports (NX = X - M)


II. Output Approach

  • GDP = Output

    less Intermediate

    Consumption

    plus Net Indirect Taxes

  • Net Indirect Taxes

    = Taxes on goods and services

    less Subsidies

= Gross Value Added


‘Output’ Includes:

Services of Owner occupied housing

Services of paid domestic staff

Agricultural production for sale or own consumption

Illegal and hidden goods

Own account development of software*

Natural growth of cultivated forests

‘Output’ Excludes:

Waste and losses in production

Transfer payments

(eg. Birthday presents, social security payments)

Goods and services produced in the household for own consumption

II.I Output Approach


III. Income Approach

GDP = Primary incomes generated in the domestic economy

= Compensation of Employees

+ Other taxes less subsidies on production

+ Consumption of fixed capital

+ Net Operating Surplus

+ Net Indirect Taxes

Gross

Value

Added


GDP by Income Approach

= GVA + NIT

= Output – Intermediate Consumption + NIT

= GDP by Output Approach


Total Supply

= Output

- Intermediate Consumption

+ NIT

+ Imports

Total Uses

= Final Consumption

+ Gross Capital Formation

+ Exports

=> GDP by Output Approach = GDP by Expenditure Approach


GDP to GNI

GNI = Value of final goods and services produced by residents of the economy

= GDP

+ Primary Income receivable by residents from abroad

- Primary income payable to non- residents

NFIA


Gross National Disposable Income (GNDI)

= GNI

+ Current Transfers from ROW

- Current Transfers to ROW

Net Current

Transfers


Data Source: WDI / GDF Central


Data Source: WDI / GDF Central


Data Source: WDI / GDF Central


The Current Account

CAB = Trade Balance (NX)

+ NFIA

+ Net Current Transfers from ROW


Current Account Balance, US

Source: BEA


Saving-Investment Gap and the Current Account

GNDI ≡ Gross Savings

+ Final Consumption

  • C + I + NX

    + NFIA

    + Net Current Transfers ≡ S + C

  • I + CAB ≡ S

  • CAB ≡ S - I


Uses

Gross Capital Formation

Net acquisition of non-financial, non-produced assets from ROW

Net Lending (+)

or Net Borrowing (-) from ROW (∆NFA )

Resources

Gross Saving

Net Capital Transfers

Capital Account


Change in Financial Assets

Change in Financial Liabilities

Net Lending (+)

Or Net Borrowing (-)

(∆NFA)

Financial Account


Revenue

Taxes

Social Contributions

Other Revenue

(Includes Sales, Central Bank Profits)

Grants

Expenditure & Net Lending

Current:

Wages and Salaries

Goods and Services

Consumption of Fixed Capital

Subsidies

Social Benefits

Interest Payments

Other Expense

Grants

Capital

Net Lending(+)/Borrowing(-) (Fiscal Balance)

Government Finances


Government Finances

Fiscal Deficit = Total government outlays

( G + iD )

- Revenue (T)

= Primary Deficit (G - T)

+ Interest Payments ( iD )

= Net borrowing (∆D)


Government Finances

For ratio of govt. debt to GDP to be constant,

Primary Surplus = (i - g) D/GDP


Government Finances & Current Account

CAB = S – I

= Sp + Sg – Ip – Ig

= Sp – Ip + Sg – Ig

= Sp – Ip +Fiscal Balance

If Sp = Ip, then

CAB = Fiscal Balance


Real vs. Nominal

  • Nominal GDP:

  • Real GDP:

  • GDP Deflator:


Comparison across countries

  • Conversion using market exchange rates

  • PPP: An exchange rate between currencies that equalizes their purchasing power.

    • Eg: A Liter of Pepsi costs $2 in US and €2.5 in Germany, then the PPP exchange rate for Pepsi is €1.25/$.

    • PPP for product groups computed as geometric average of within-group price relatives

    • Aggregated using expenditure weights for product groups in GDP.


“The wisest mind has something yet to learn.” George Santayana (1863 - 1952)


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