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CH1-National Income Accounting

CH1-National Income Accounting. HK Certificate of Education Examination. National Economic Objectives. Attaining full employment Attaining economic growth Stabilizing the general price level. National Income Accounting.

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CH1-National Income Accounting

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  1. CH1-National Income Accounting HK Certificate of Education Examination CH1-National Income Accounting-SV

  2. National Economic Objectives • Attaining full employment • Attaining economic growth • Stabilizing the general price level CH1-National Income Accounting-SV

  3. National Income Accounting • By measuring national income of the economic territory of an economy, one can estimate how well his economy performs in achieving its national economic objectives. CH1-National Income Accounting-SV

  4. Stock Concept • A stock is any measurement at a particular point of time. • Example: On 14th August 2004, Peter’s total wealth was $200,000. CH1-National Income Accounting-SV

  5. Flow Concept • A flow is any measurement that spreads over a certain period of time. • Example:Peter earns $8,000 as his monthly income. CH1-National Income Accounting-SV

  6. Stock or Flow? CH1-National Income Accounting-SV

  7. Intermediate Vs. Final Goods • Intermediate goods are goods and services produced for assisting further or other production. • Final goods are goods for final use or consumption. • A good can be an intermediate good or a final good, depending on how it is being used. CH1-National Income Accounting-SV

  8. Intermediate or Final Goods? CH1-National Income Accounting-SV

  9. Factors of production Factor Income Firms Households Expenditure Goods & services Real Flow Money Flow Basic Circular Flow Model CH1-National Income Accounting-SV

  10. Real Flow A A We consider the basic circular flow of a certain economy. Goods & Services Firms $200 $300 $20 Total market value of all final goods = $20 + $300 + $200 = $520 Households Factors of Production CH1-National Income Accounting-SV

  11. Real Flow A A We consider the basic circular flow of a certain economy. Goods & Services Firms $200 $300 $20 Total market value of all final goods = $20 + $300 + $200 = $520 Households National Product or National Output Factors of Production CH1-National Income Accounting-SV

  12. Money Flow $100 $100 $100 $20 $100 $100 B B On the other hand, we consider the households total expenditure on these goods. Real Flow Goods & Services A A Firms $200 $300 $20 Households Factors of Production CH1-National Income Accounting-SV

  13. Money Flow $100 $100 $100 $100 $100 $20 B B Expenditure on Final Goods & Services On the other hand, we consider the households total expenditure on these goods. Real Flow Goods & Services A A Firms $200 $300 $20 Households Total Expenditure on these goods = $20 + $300 + $200 = $520 Factors of Production CH1-National Income Accounting-SV

  14. Money Flow $100 $100 $100 $100 $100 $20 On the other hand, we consider the households total expenditure on these goods. Real Flow Goods & Services A A Firms $200 $300 $20 B B Expenditure on Final Goods & Services Households Total Expenditure on these goods = $20 + $300 + $200 = $520 National Expenditure Factors of Production CH1-National Income Accounting-SV

  15. Those households who provide factors services in the production would receive income from the firms. Money Flow Households’ total income = $200 + $50 + $150 + $120 = $520 Firms B B Expenditure on Final Goods & Services Households C C Factor Income Rental Income Wages Interest Profit $200 $50 $120 $150 CH1-National Income Accounting-SV

  16. Those households who provide factors services in the production would receive income from the firms. Money Flow Households’ total income = $200 + $50 + $150 + $120 = $520 Firms National Income B B Expenditure on Final Goods & Services Households C C Factor Income Rental Income Wages Interest Profit $200 $50 $120 $150 CH1-National Income Accounting-SV

  17. $20 $100 $100 $100 $100 $100 Real Flow Money Flow Goods & Services A A Firms $200 $300 $20 B B Expenditure on Final Goods & Services Households C C Factor Income Rental Income Wages Interest Profit $200 $50 $120 $150 Factors of Production CH1-National Income Accounting-SV

  18. $20 $100 $100 $100 $100 $100 From the above analysis, we find that: Real Flow The total market values of final goods & services Money Flow Goods & Services A A Firms $200 $300 $20 B B The total expenditures on the final goods & services Expenditure on Final Goods & Services Households C C Factor Income Rental Income The total income of the households Wages Interest Profit $200 $50 $120 $150 Factors of Production CH1-National Income Accounting-SV

  19. $20 $100 $100 $100 $100 $100 That is: Real Flow Money Flow Goods & Services National Product A A Firms $200 $300 $20 National Expenditure B B Expenditure on Final Goods & Services Households C C Factor Income National Income Rental Income Wages Interest Profit $200 $50 $120 $150 Ex 1:TB/P.8/MCQ1 Factors of Production CH1-National Income Accounting-SV

  20. National Output and … • National Output (NO) is the measure of total market value of all final goods & services. • National Expenditure (NE) is the measure of total expenditure on final goods & services. • National Income (NI) is the measure of households’ total income. • NO ≡ NE ≡ NI CH1-National Income Accounting-SV

  21. Gross Domestic Product (GDP) • Definition: GDP is an aggregate measure of the total value of production of all resident producing unitswithin the economic territory of an economy in a specified period, usu. a quarter or a year. CH1-National Income Accounting-SV

  22. Resident Producing Unit (RPU) • A resident producing unit maintains her centre of economic interests in the economic territory of an economy. • A RPU therefore ordinarily operates in the economic territory. CH1-National Income Accounting-SV

  23. Resident Producing Unit or Not? • A factory producing toys in HK Yes! CH1-National Income Accounting-SV

  24. Resident Producing Unit or Not? • A fast food shop in HK Yes! CH1-National Income Accounting-SV

  25. Resident Producing Unit or Not? • An Citibank Corporation in HK Yes! • An Citibank Corporation in USA No! CH1-National Income Accounting-SV

  26. Resident Producing Unit or Not? Yes! It depends CH1-National Income Accounting-SV

  27. Gross National Product (GNP) • Definition: GNP is a measure of the total income earned by residents of an economy from engaging in various economic activities, irrespective of whether the economic activities are carried out within the economic territory or outside. • GNP is identical to Gross national income (GNI), which is a contemporary term. CH1-National Income Accounting-SV

  28. Residents of an Economy • Residents maintain their center of economic interests in an economy. • Resident individuals refer to those who normally stay in the economic territory of the economy for at least 12 months or longer, or intend to do so, irrespective of their nationality. • Resident organizations (or RPUs) refer to those which ordinarily operate in the economic territory. CH1-National Income Accounting-SV

  29. Residents or Not? CH1-National Income Accounting-SV

  30. GDP Versus GNP CH1-National Income Accounting-SV

  31. GDP Versus GNP • GDP is more relevant for analysis related to production activities within the economy, e.g. employment, productivity, industrial output, investment in equipment & structure. • GNP is useful for analyzing economic situations relating to income of residents, investment behavior, domestic demand & inflation. CH1-National Income Accounting-SV

  32. Being Included in GDP or GNP? CH1-National Income Accounting-SV

  33. From GDP to GNP • GNP = GDP + (Factor income earned by residents from outside the economic territory – Factor income earned by non-residents from within the economy) = GDP + Net factor income from abroad or External Factor Income Flows CH1-National Income Accounting-SV

  34. From GDP to GNP • Factor Income = investment income + compensation of employees • Investment income = direct investment income(e.g. dividends) + portfolio investment income(e.g. security interest) + other investment income(e.g. deposits interest) CH1-National Income Accounting-SV

  35. From GNP to GDP • GDP = GNP – (Factor income earned by residents from outside the economic territory – Factor income earned by non-residents from within the economy) = GNP – Net Factor Income from Abroad or Net External Factor Income Flows Ex 2:TB/P.26/MCQ 6 & 7 Ex 3: TB/P.27/MCQ8 CH1-National Income Accounting-SV

  36. More About National Income Statistics • GDP at factor cost = GDP at market price – indirect business taxes + subsidies CH1-National Income Accounting-SV

  37. CH1-National Income Accounting-SV

  38. CH1-National Income Accounting-SV

  39. More About National Income Statistics • GDP at factor cost = GDP at market price – indirect business taxes + subsidies • GDP at market price = GDP at factor cost + indirect business taxes - subsidies • GDP per capita = GDP/population size • Net Domestic Product, NDP = GDP - depreciation CH1-National Income Accounting-SV

  40. More About National Income Statistics • Net National Product, NNP = GNP - depreciation • National Income, NI = W + I + R +  CH1-National Income Accounting-SV

  41. Measuring GDP(1): The Productor OutputApproach • GDP is total market values of all final goods and services produced by the resident producing units of an economy within a specified period. • Intermediate goods are excluded to avoid the problem of double counting. • In reality, it is hard to distinguish between final and intermediate goods. • thus, value-added method is adopted CH1-National Income Accounting-SV

  42. By Value Added Approach • (From C.S.D.)GDP is an aggregate measure of the total value of net output of all resident producing units of a country or territory in a specified period. • Net output is measured by value added • Value added = value of gross output – value of intermediate consumption • Intermediate consumption is the value of goods & services used up during production. CH1-National Income Accounting-SV

  43. By Value Added Approach • value added = sales revenue - input cost • By value added approach, • GDP = summation of value added in ALL stages of production + indirect business taxes (IBT) – subsidies (S) CH1-National Income Accounting-SV

  44. Stage 1: Growing wheat Input cost (wheat seeds) = $0.0 Sales revenue (wheat) = $2.0 Value added = $(2.0 - 0.0) = $2.0 CH1-National Income Accounting-SV

  45. Stage 2: Milling wheat Input cost (wheat) = $2.0 Sales revenue (flour) = $3.5 Value added = $(3.5 - 2.0) = $1.5 CH1-National Income Accounting-SV

  46. Stage 3: Baking bread Input cost (flour) = $3.5 Sales revenue (bread)= $6.0 Value added = $(6.0 - 3.5) = $2.5 CH1-National Income Accounting-SV

  47. Measuring GDP: Given: final good: bread ($6.0) Intermediate goods: wheat ($2.0) flour ($3.5) • By Output Approach, • GDP = $6.0 • By Value Added Method • GDP = $[(2.0 - 0.0) + (3.5 - 2.0) • + (6.0 - 3.5)]= $6.0 CH1-National Income Accounting-SV

  48. Items Being Excluded from GDP Ex 4:TB/P.13/Q2.1 Ex 5: TB/P.18/MCQ4 CH1-National Income Accounting-SV

  49. Measuring GDP(2): The Expenditure Approach GDP = C + I + G + (X - M) while (C + I + G + X) = total final demand X-M C G I CH1-National Income Accounting-SV

  50. Measuring GDP(2): The Expenditure Approach • on ‘C’: only expenditure on consuming final products counted • on ‘I’: I = gross domestic fixed capital formation + change in stocks • gross domestic fixed capital formation = expenditure on land, buildings & construction, plant, machinery, equipment & related expenses • change in stocks = unsold goods (values of raw materials & work-in-progress) CH1-National Income Accounting-SV

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