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

Principles of National Accounting

Presented by:

Gurnain Kaur Pasricha

Sept 8, 2006


Overview

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

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.


Principles of national accounting

  • ‘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

Circular Flow of Income

Factor Payments ( I )

Factor Services

Producers

Households

G&S

Goods & Services (O)

Payments for Goods & Services (E)


I expenditure approach

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

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

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 government1

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 government2

I.II FCE of General Government


I iii fce of non profit institutions serving households

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

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

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

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 approach1

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

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


Ii i output approach

‘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

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


Principles of national accounting

GDP by Income Approach

= GVA + NIT

= Output – Intermediate Consumption + NIT

= GDP by Output Approach


Principles of national accounting

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

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


Principles of national accounting

Gross National Disposable Income (GNDI)

= GNI

+ Current Transfers from ROW

- Current Transfers to ROW

Net Current

Transfers


Principles of national accounting

Data Source: WDI / GDF Central


Principles of national accounting

Data Source: WDI / GDF Central


Principles of national accounting

Data Source: WDI / GDF Central


The current account

The Current Account

CAB = Trade Balance (NX)

+ NFIA

+ Net Current Transfers from ROW


Current account balance us

Current Account Balance, US

Source: BEA


Saving investment gap and the current account

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


Capital account

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


Financial account

Change in Financial Assets

Change in Financial Liabilities

Net Lending (+)

Or Net Borrowing (-)

(∆NFA)

Financial Account


Government finances

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 finances1

Government Finances

Fiscal Deficit = Total government outlays

( G + iD )

- Revenue (T)

= Primary Deficit (G - T)

+ Interest Payments ( iD )

= Net borrowing (∆D)


Government finances2

Government Finances

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

Primary Surplus = (i - g) D/GDP


Government finances current account

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

Real vs. Nominal

  • Nominal GDP:

  • Real GDP:

  • GDP Deflator:


Comparison across countries

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

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


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