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## National Accounts

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**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.