Readings • Lequiller François and Derek Blades, 2006, Under standing NATIONAL ACCOUNTS, Organization for Economic Cooperation and Development, Chapter 1 and 2. Link • Bureau of Economic Analysis “Introduction to the National Income and Product Accounts” Link
Measuring the Economy • National accounts are the core statistical measure of the economy. • Accounts cover many features of the economy but organizing concept is Gross Domestic Product (GDP)
Quantity Aggregates • To understand the macroeconomy, we need to measure it. Chief measure of economy is the level of production: GDP • We need to combine the many goods produced or consumed in an economy into one measure. + + + + =?
All goods sold in an economy share a common unit of measure: the price at which they are sold. Gross Domestic Product (GDP) Sum up the value of goods • “GDP combines in a single figure, and with no double counting, all the output (or production) carried out by all the firms, non-profit institutions, government bodies and households in a given country during a given period, regardless of the type of goods and services produced, provided that the production takes place within the country’s economic territory.” L & B p. 15
GDP is a measure of production • Value added at production establishment i • GDP is the sum of VA across establishments.
Economic Concept • Value Added is production at firm level due to the combination of capital equipment and workers. • Value added is not equal to profits because the costs of worker and capital are not deducted.
GDP is a Gross Concept • One cost of production is depreciation of equipment and structures used for production. • This cost, referred to as consumption of fixed capital, is not subtracted from sales to construct value added. • Net Domestic Product = GDP – Consumption of Fixed Capital
Production ApproachSub-aggregates • Divide production establishments into sectors usually along the line of • Primary: Natural Resources (Agriculture, Forestry, Fishing, Mining, Quarrying) • Secondary: Goods production (Manufacturing, Construction, Utilities) • Tertiary: Intangibles Production
Link • Accounts are created by national statistical agencies • UN System of National Accounts is the “internationally agreed standard set of recommendations” used by most countries. • Annual data for many countries available at the UN Link
Hong Kong: Value Added by Sector Hong Kong Census and Statistics
How do we measure value-added of non-market goods? • Production of government bodies and non-market institutions is measured at cost (sum of labor payments plus capital consumption costs). • Value of housing services of owner-occupied housing valued at imputed rental value, i.e. market rent of similar housing stock. • Value of non-compensated household work valued at zero.
How do we measure financial services? • Banking industry output includes interest income on loans minus interest payments on deposits (plus fee income). • Insurance industry output is measured as premiums net of indemnity payments (w/ minor adjustments).
Demand • If we add up the value added at all stages of production we derive the value to the end user. • Sum of Final Demand Aggregates equals Sum of Value Added
Expenditure Approach • Purchase of Final goods by end users are divided into two categories: • Consumption: Household expenditure (durables, nondurables & services); government (nondurables & services) expenditure; nonprofit expenditures • Investment: Inventories, Fixed Investment (equipment, structures)
Reconciliation • Some demand for domestically produced value added comes from abroad, some domestic demand is satisfied by overseas goods. GDP = Consumption + Investment + Exports – Imports Exports – Imports = External Balance = Trade Balance = Net Exports <> 0
OECD National Accounts Main Economic Aggregateshttp://stats.oecd.org
Some Asian Expenditure Shares: 2008 Source: United Nations Main Aggregates Database Source: United Nations Main Aggregates Database
Value Added and Income • Production establishments are where income is generated. Funds raised can be paid for labor and finance costs, left over money is profit income. • Sum of domestic value added (GDP) is equal to wage payments plus financial and profit income referred to as “operating surplus and mixed income.”
GDP Equivalence http://stats.oecd.org/Index.aspx
GNI vs. GDI • Net Factor Income [NFI] is income earned on overseas work or investments minus income generated domestically but paid to foreigners.
Compare Macau and the Philippines GDP or GNI • Macau produces a lot of profits paid to overseas owners of casinos. • Philippines workers earn a lot of income overseas. • Which is larger Philippines’ GDP or Philippines GNI? • Does Macau have greater GDP or GNI?
Principle Tool: Growth Rates • For any variable, Xt, that is observed at different points at time t, the simple net growth rate is • This means gross growth rate is
Rule of Thumb • The growth rate of a product is approximately equal to the sums of the growth rates of the elements of a product. • The growth rate of a ratio is approximately equal to the difference between the growth rate of the numerator and the denominator.
Measuring stick of value is prices of goods in terms of money, but arbitrary changes in the stock of money arbitrarily change prices/the measure of value over time. • Comparing value across time requires abstracting from those arbitrary changes in value.
Value vs. Volume • Consider the sales of a hypothetical single good (called widgets) production firms. • Value of sales (call v) is the product of the number or volume of goods solds (call q) and the price of each good (call p) • Growth of value can be decomposed into growth of volume and growth in prices.
Aggregate Growth • Macroeconomic aggregates such as GDP and its sub-totals are the sum of values of sales (or purchases) from different firms. • We also decompose the growth of the aggregates into growth in prices (inflation) and growth in volume (output).
Volume Growth • Calculate growth as if prices are unchanged. • Divide goods into K distinct sub-categories. • Construct representative market basket of each category of goods, k. • Sample goods of type k to find average price of market basket k at time t and at time t-1:
Note: Data does not report only reports price indices relative to reference price level for subtype k at a fixed reference year (in this case, 2005). • Convert value of goods k at time t into time t-1 prices
Notes on Price Indices: New Goods • Market baskets used to construct don’t need to stay the same over long-periods. • New goods can be introduced as long as matched goods are compared in every t and t-1 period.
Notes on Price Indices: Quality • Some categories of goods (computers, cars) observe marked changes in quality over time. • Price growth rates for these components often reflect the price growth for certain characteristics (e.g. MHz,GB HD, etc.). These are referred to as hedonic price indices.
Volume Growth cont. • Sum the value of time t goods in time t-1 prices. • Divide by the value of time t-1 goods in t-1 prices.
Contribution to Growth • Each sub-component contribution to the growth rate is the product of its importance in expenditure at time t-1 and the size of its own growth rate • For each component k, this contribution can be calculated as:
Volume Indices • To compare the level of aggregate quantities at different points in time, total up the growth that appears in between periods. • Calculate the growth rate for all periods using the prices from the immediately previous periods to adjust current values. • Choose a reference period, ref, preferably in a recent period and set a chained index, CI, equal to 100 in that period
Chained Index • Define the index recursively in all periods using the equation The relationship between the levels of the chain volume index at any two points t and t+T is the product of the growth between the two points.
Real Quantities, Chained Prices • For comparison’s sake, quantities are often reported in $ terms using the quantity index to determine how it stands relative to the reference year.