ECON 215 Introduction to Economy of Ghana

1. ECON 215Introduction to Economy of Ghana Lecturer: Dr. Emmanuel A. Codjoe Contact Information: ecodjoe.ug@gmail.com Session 2 – National Income Accounting Part1

2. Session Overview • Session Overview: Every country needs to obtain a sense of how its economy performs over time. Therefore, each country attempts to measure the total economic output of goods and services in its economy over a given period of time. This session discusses the concepts employed in national income and how the national income is used.  Goals/ Objectives: At the end of the session, the student will • Understand and explain the concepts of national income accounting • Be aware of the national income accounting in the Ghanaian context • Know who is mandated to undertake the computation of the national income • Know how the undertaken in Ghana

3. Session Outline The key topics to be covered in the session are as follows: Topic One: Introduction to national income accounting Topic Two: Forms of national income computation Topic Three: Some Useful Identities

4. Reading List Refer students to relevant text/chapter or reading materials you will make available on Sakai

5. Topic One Introduction to national income accounting

6. National Income Accounting Concepts National Income can be defined as the general flow of goods and services produced in an economy in a given time period, usually a year. Thus, it is the summation of income from the various economic agents in the economy. Every country one way or the other computes it’snational income to see whether it is progressing or retrogressing. As an alternative of the term “national income”, equivalent terms such as national output/product and national expenditure may be used. National income accounting refers to the set of rules and definitions for measuring economic activity in the aggregate economy. In other words, how we go about measuring the total economic output of goods and services in an economy over a given period of time.

7. The Circular Flow of Income The circular flow of income describes how factors of production move from household to private firms and these factors are used to produce outputs. In return of the factors of production supplied by the households, the firms pay them their respective rewards. The output supplied by the firms are purchased by households, government and sometimes exported. Government purchases are financed by taxes from the households. Household saving(savings) are channeled into firms as investment.

8. The Circular Flow of Income Cont’d

9. Objectives of national income accounting National Income Accounting considers 2 main objectives which are: It attempts to present a description of the economy in statistical terms i.e. in the form of tables and accounts which will be understood by administrators and economists, thus national income accounting gives a summary of economic activities in the country in a particular time period It provides the aggregate basis for planning and policy, thus with the summary of the entire economy in the national income accounting policy makers and planners find it quite easy to implement policies and plan(plans)

10. Importance of National Income Accounting The estimates of national income provide useful information on the economic performance of an economy over time, the growth of the economy and structural changes, and the general economic position of a country. National income accounts form the basis for national economic policies since the accounts enable governments to know the direction in which total output of the economy, sectoral outputs, investment, saving and other macro-economic variables change. Thus, the government can adopt proper measures to put the economy on the right path. The national accounts is useful for planning purposes since it gives an idea of the sector that contributes more to the growth of the economy. This aids planners to adopt measures to activate the other sectors.

11. Importance of National Income Accounting Cont’d The national income accounts also provide data for deriving per capita income which is used to measure welfare. They are also used for assessing thedistribution of income in a country. The accounts help in comparing the level of progress between countries.

12. Topic Two Forms of national income computation

13. Output/ Product Approach This method computes national income by summing all net outputs of all productive activities of business firms, households and government. It calculates what each productivity of economic agents adds to the value of final output. It looks at the value that each activity adds to the raw material or other goods and services purchased from other activities. In this summation, intermediate goods are ignored. Intermediate goods are used for further production of other goods and services. Since it is difficult to determine whether a good is going to be used as a final product or further production, the valued added is usually used to determine the value which is added to a product at every production.

14. Output/ Product Approach Cont’d This approach helps to avoid the problem of double counting since some products are used for further production. For instance, let us consider the case of a manufacturer who produces sugar. In such a case it is difficult to determine whether the sugar is going to be used as a final product or used for further production. Suppose the sugar is used for breakfast (i.e. to prepare oats), in this case the sugar can be considered as a final goodssince it has been used by the final consumer. On the contrary, if the sugar is used by a baker to bake cakes then the sugar is not a final product since it serves as an intermediate good in this case. So if we add the value of the sugar to that of the cake, we would have repeated the value of the sugar since it is used in baking cake hence the problem of double counting will result.

15. Income and Expenditure Approaches Income Approach This method of computing the value of the national output is in terms of the incomes earned by the basic factors of production in the production of the incomes net output; the factors being land, labour, capital, enterprise. These factors earn wages and salaries, rent, interest and depreciation, and profits respectively. The sum of these incomes must equal the sum of the value added by the various producing units. Expenditure Approach This method looks at the expenditure on produced goods and services. The method sums the expenditures of the households, business firms and the government on final products. It includes all goods and services which are not used up in the production of some other goods and services.

16. Topic Three SOME USEFUL IDENTITIES

17. Some Useful Identities The National Income Accounting (NIA) are just a series of identities. However, these identities shed light on important economic realities. Y ≡ C + I + G + X This indicates that the national output (Y) is consumed (C), invested (I), purchased by the government (G) or exported (X).

18. Some Useful Identities Alternatively, we could express the NIA as Y ≡ C + S + T + M Here we observe that the national output can be used by households to finance consumption (C), save (S), pay taxes (T), or pay for imports (M).

19. Some Useful Identities These identities reveal important implications in terms of how the national income might be used. Moreover, by combining these uses of the national income, we can reveal interesting economic implications.

20. Some Useful Identities Y ≡ C + I + G + X -------------- (1) Y ≡ C + S + T + M -------------- (2) Taking (1) from (2) we arrive at this important and interesting outcome: Y ≡ (S-I) + (T-G) – (X-M) ------- (3)

21. Some Useful Identities If we assume for a moment we are dealing with a closed economy, then all output is either consumed or saved/invested. Where we have an open economy, then the identity above sheds some interesting light on the interactions between the economy and the rest of the world.