Economics Questions

TOPIC: THE NATIONAL INCOME ACCOUNTING SYSTEM (NIAS) OR THE SYSTEM OF NATIONAL INCOME AND PRODUCT ACCOUNTS (NIPA)

STRUCTURE OF PRESENTATION:

· DEFINITION OF THE NIAS OR NIPA

· WHAT IS THE SIGNIFICANCE OF THE NIAS OR NIPA IN A COUNTRY’S ECONOMY?

· PURPOSES OR FUNCTIONS OF THE NIAS OR NIPA:

· PRESENTATION AND EXAMINATION OF SOME KEY MACROECONOMIC INDICATORS, AGGREGATES OR INDICES USED TO MEASURE THE PERFORMANCE OF A COUNTRY’S ECONOMY:

· GDP

· GDP PER CAPITA

· GNP

· GNP PER CAPITA

· CAPITAL STOCK

· CAPITAL CONSUMPTION ALLOWANCES OR DEPRECIATION COSTS OF CAPITAL STOCK OR “WEAR AND TEAR COSTS”

· NDP

· NDP PER CAPITA

· NNP

· NNP PER CAPITA

· RATE OF INVESTMENT

· RATE OF SAVINGS

· RATE OF UNEMPLOYMENT

· RATE OF EMPLOYMENT

· RATE OF UNDEREMPLOYMENT

· RATE OF INFLATION

· RATE OF DEFLATION

· PRICE INDEX

· RETAIL SALES

· RATE OF RETAIL SALES

· HOUSING STARTS

· RATE OF HOUSING STARTS ETC

THE MAIN OBJECTIVES OF CLASS:

TO PROVIDE A DEFINITION OF THE NIAS OR THE SNIPA

TO EXPLAIN THE SIGNIFICANCE OF THE NIAS OR THE SNIPA

PURPOSES OR FUNCTIONS OF THE NIPA OR THE SNIPA

TO PROVIDE DEFINITIONS OF THE MAJOR MACROECONOMIC AGGREGATES IDENTIFIED IN THE STRUCTURE OF OUR PRESENTATION:

DEFINITION OF GDP

DEFINITION OF GDP PER CAPITA

DEFINITION OF GNP

DEFINITION OF GNP PER CAPITA

EMPHASIZE THE DIFFERENCE BETWEEN THE FOLLOWING INDICATORS:

GDP AND GNP

GDP PER CAPITA AND GNP PER CAPITA

THE SIGNIFICANCE OF DOMESTIC RESIDENTS V NATIONALS OR CITIZENS IN APPRECIATING THESE CONCEPTUAL DIFFERENCES

DEFINITION OF CAPITAL STOCK

DEFINITION OF CCAS

DEFINITION OF NDP

DEFINITION OF NDP PER CAPITA

DEFINITION OF NNP

DEFINITION OF NNP PER CAPITA

DEFINITION OF RATE OF INVESTMENT

DEFINITION OF RATE OF SAVINGS

DEFINITION OF RATE OF UNEMPLOYMENT

DEFINITION OF RATE OF EMPLOYMENT

DEFINITION OF RATE OF UNDEREMPLOYMENT

DEFINITION OF RATE OF INFLATION

DEFINITION OF RATE OF DEFLATION

DEFINITION OF PRICE INDEX

DEFINITION OF RETAIL SALES

DEFINITION OF RATE OF RETAIL SALES

DEFINITION OF HOUSING STARTS

DEFINITION OF RATE OF HOUSING STARTS ETC

DEFINITIONS OF MAJOR MACROECONOMIC AGGREGATES OR INDICATORS

The National Income Accounting System (NIAS):

What is the NIAS? The NIAS is a book-keeping or accounting system that keeps track of (or records) the performance of a country’s economy as measured by the major macroeconomic aggregates of the economy such as GDP, GDP Per Capita, GNP, GNP Per Capita, Capital Consumption Allowances, Rate of Inflation etc.

· WHAT IS THE SIGNIFICANCE OF THE NIAS OR NIPA IN A COUNTRY’S ECONOMY?

· PURPOSES OR FUNCTIONS OF THE NIAS OR NIPA:

· What are the main objectives of the NIAS?

· To measure and monitor the health of a country’s economy

· To compare the performance of different economies in the global economy to determine their relative progress 2

· To provide economic data for various interest groups such as labor unions, feminist groups, business groups, student groups and others to defend their economic interests

· To provide economic data for Prime Ministers/Presidents and their governments that are used to prepare briefings, speeches etc. for these governments on the US/International economies

· To track the changes in price, output and employment in a country’s economy

· What are the definitions of these macroeconomic aggregates or indicators? Key Definitions:

· GDP: is the total monetary value of final goods and services that are produced by the citizens of a country and the foreign citizens who reside within the geographic boundaries of a given country in a given year. • Example GDP in the US in 1992 was an estimated $10T

· The US federal government stopped using the GNP and began using the GDP as the main indicator to measure the performance and progress of the US economy in 1992

· GNP: is the total monetary value of final goods and services that are produced exclusively by the citizens of a country whether they reside within their own country or in foreign countries in a given year.

· Why was the decision to embrace the GDP and reject the GNP as the main indicator to measure the performance and size of the US economy taken in 1992?

· The short answer is that when measured by the GNP the US economy showed a rosy picture but when measured by the GDP the US economy was in trouble. The reason for this is that the US oil companies and other US companies operating abroad were doing very well i.e. making huge profits. Since their incomes are included in the US GNP the actual performance of the US economy was overstated.

· DEFINITION OF GROSS DOMESTIC PRODUCT OR GDP: IS DEFINED AS THE TOTAL MONETARY VALUE OF ALL FINAL AND LEGITIMATELY PRODUCED GOODS AND SERVICES THAT ARE PRODUCED BY THE DOMESTIC RESIDENTS WITHIN THE GEOGRAPHICAL BOUNDARIES OF A COUNTRY USUALLY IN A YEAR.

· GDP = DOMESTIC PRODUCTION

· DEFINITION OF DOMESTIC RESIDENTS OF A COUNTRY = THE CITIZENS + FOREIGNERS WHO LIVE AND WORK WITHIN THE GEOGRAPHICAL FRONTIERS OF A COUNTRY

ALTERNATIVELY EXPRESSED, A COUNTRY’S GDP = C + Ig + G + X-M

WHERE:

C = AGGREGATE CONSUMPTION EXPENDITURES= DURABLE CONSUMPTION EXPENDITURES + NON-DURABLE CONSUMPTION EXPENDITURES + EXPENDITURES ON SERVICES

Ig=BUSINESS INVESTMENT EXPENDITURES + RESIDENTIAL INVESTMENT EXPENDITURES + CHANGES IN INVENTORIES

G=AGGREGATE GOVERNMENT EXPENDITURES=FEDERAL GOVERNMENT EXPENDITURES + STATE GOVERNMENT EXPENDITURES + LOCAL GOVERNMENT EXPENDITURES

X= AGGREGATE EXPORT EARNINGS

M=AGGREGATE IMPORT EXPENDITURES

· DEFINITION OF GDP PER CAPITA =$GDP\POPULATION OF DOMESTIC RESIDENTS IN A YEAR =$16,500,000,000,000\310,000,000 =$52,225 IN A YEAR

· GDP PER CAPITA IS ALSO CALLED AVERAGE INCOME OR PER CAPITA INCOME

· DEFINITION OF GROSS NATIONAL PRODUCT OR GNP: IS DEFINED AS THE TOTAL MONETARY VALUE OF ALL FINAL AND LEGITIMATELY GOODS AND SERVICES THAT ARE PRODUCED BY THE NATIONALS OF A COUNTRY (i.e. the CITIZENS) OF A COUNTRY WHETHER THEY PRODUCE THEM DOMESTICALLY WITHIN THE GEOGRAPHICAL BOUNDARIES OF THEIR COUNTRY OR IN OTHER COUNTRIES IN A YEAR.

· GNP =NATIONAL PRODUCTION

FOR EXAMPLE, AMERICA’S GNP =THE TOTAL VALUE OF GOODS AND SERVICES PRODUCED BY AMERICAN WORKERS AND FIRMS WITHIN THE BOUNDARIES OF AMERICA + THE TOTAL MONETARY VALUE OF GOODS AND SERVICES PRODUCED BY AMERICAN WORKERS AND FIRMS IN OTHER COUNTRIES IN A YEAR.

· DEFINITION OF GNP PER CAPITA =$GNP\POPULATION OF CITIZENS IN A YEAR

· DEFINITION OF CAPITAL STOCK: IS DEFINED AS THE TOTAL MONETARY VALUE OR MARKET VALUE OF ALL THE PHYSICAL CAPITAL STOCK IN A COUNTRY SUCH AS MACHINERY, TOOLS, EQUIPMENT, BUILDINGS, NETWORK OF ROADS, BRIDGES, WATER SUPPLY SYSTEMS, TRANSPORTATION SYSTEMS, TELECOMMUNICATION SYSTEMS, SEWAGE SYSTEMS, ELECTRICAL GRIDS ETC THAT REPEATEDLY PARTICIPATE IN THE PRODUCTION\DISTRIBUTION OF GOODS AND SERVICES IN A YEAR.

· DEFINITION OF CAPITAL CONSUMPTION ALLOWANCES OR CCAS: IS DEFINED AS THE TOTAL MONETARY VALUE OF THE DEPRECIATION COSTS OR “WEAR AND TEAR COSTS” OF THE CAPITAL STOCK OF A COUNTRY THAT AS A RESULT OF ITS REPEATED USE IN THE PRODUCTION AND DISTRIBUTION OF GOODS AND SERVICES IN AN ECONOMY LOSE ITS VALUE DURING A GIVEN YEAR.

· DEFINITION OF NET DOMESTIC PRODUCT OR NDP=$GDP - $CCAs

Equation 1> NDP = GDP- CCAS

Equation 2> GDP = C + I g + G + X-M

Equation 3> NDP = C + I g + G + X-M-CCAs

Equation 4> NDP = C + (Ig-CCAs) + G + X-M

Equation 5>In = Ig -CCAs

Equation 5> NDP = C + In + G + X-M

$NDP < $GDP> $CCAs

· DEFINITION OF NDP PER CAPITA =$NDP\POPULATION OF DOMESTIC RESIDENTS IN A YEAR

· DEFINITION OF NET NATIONAL PRODUCT OR NNP= $GNP - $CCAs

· DEFINITION OF NNP PER CAPITA =$NNP\POPULATION

· DEFINITION OF RATE OF INFLATION = (PRICE INDEX CP - PRICE INDEX PP)\PRICE INDEX PP X 100

· DEFINITION OF RATE OF DEFLATION> SAME FORMULA AS RATE OF INFLATION (EXPLANATION REQUIRED)

· DEFINITION OF RATE OF INVESTMENT = $Ig\$GDP X 100

· DEFINITION OF RATE OF SAVINGS = $S\$GDP X 100

· DEFINITION OF RATE OF EMPLOYMENT =# OF EMPLOYED\# IN LABOR FORCE X 100

· DEFINITION OF RATE OF UNEMPLOYMENT =# OF UNEMPLOYED\# IN LABOR FORCE X 100

· DEFINITION OF RATE OF UNDEREMPLOYMENT =# OF UNDEREMPLOYED\# IN LABOR FORCE X 100

· Transfer Payments: are defined as the one sided transfer of funds from the budget to a group of people who qualify for them ie they are not required to repay these funds. Some examples of transfer payments are unemployment compensation, welfare programs such as food stamps, subsidized housing, MEDICAID, MEDICARE and others.

· Personal Income =NI-Corporate Taxes –SS Taxes –UDC Profits + Transfer Payments +-Net Interest Earnings\Net Interest Payments

· Disposable Income =PI -Taxes

· Gross Investment =Net Investment + CCAs

· Net Investment =Gross Investment -CCAs

· Capital Consumption Allowances or Depreciation Costs

There are three (3) conventional methods that are used to calculate the monetary value of a country’s GDP or GNP. • These three (3) methods are:

1. The Expenditure Method

2. The Income or Value-Added Method

3. The Output Method

What is the expenditure method?

The expenditure method is the aggregation or summation of all the expenditure variables or elements that make up a nation’s GDP or GNP whether in a closed or open economy i.e. Y=GDP=C+I+G+X-M---The case of an open economy C=$650b I=$210b G=$420 X=$40b M=$25b. Therefore by substitution of the above monetary values for the domestic and net export sectors we get: Y=GDP=C+I+G+X-M=$650b+$210b+$420b+$40b-$25b=$1295b For your practice: (a)What would be the monetary value of the GDP or GNP of a country with a closed economy model where Y=C+I? (b)What would be the monetary value of the GDP or GNP of a country in an open economy model where GDP=C+I+X-M? 10 (c) What would be the monetary value of the GDP or GNP of a country in an open economy model where GDP=C+G+X-M where all the numbers above remain the same except M=-$10b?

What is the Income method?

The income method is the aggregation or summation of all the income variables or elements that make up a nation’s GDP or GNP or NI whether in a closed or open economy. In other words the income method focuses on the computation of all incomes in a country’s economy or the national income. Thus if we define Y=GDP and GDP=NI→Y=NI Therefore by deduction Y=W/S+P+R+I Where: W/S=Wages/Salaries accrue to all categories of workers (manual/intellectual) P=Profits accrue to capitalists or owners of capital R=Rents accrue to landlords or owners of lands, buildings etc. I=interest payments on dividends accrue to (owners of financial assets egs. stocks, savings accounts, bonds etc.)

Suppose: W/S=$860b P=$980b R=$490b I=$185b By substitution of the above monetary values the NI for the economy in question becomes: Y=NI=W/S+P+R+I=$860b+$980b+$490b+$185b=$2515b or 11 Y=NI=$2.515t/yr=NDPfc -Why? Who remembers why NI=NDPfc? Hint 1992???

What is the Output method?

The output method is the aggregation or summation of the actual output of final goods/services that are produced yearly in a nation’s economy ie GDP or GNP whether in a closed or open economy. In other words the output method focuses on the computation of the respective levels of output from all the legitimate sectors that make up a country’s economy or the national income. For example let’s assume that the US economy is made up of six (6) sectors:

THE OUTPUT METHOD IN THE 199X

SECTOR	OUTPUT in $BILLIONS
MANUFACTURE	$250b
AGRICULTURE	$500b
TRANSPORT	$656b
EDUCATION	$765b
HEALTH CARE	$975b
FINANCE	$985b
TOTAL = GDP	$4131b

Conclusion: The GDP of any country calculated by all three (3) methods ie (a)Expenditure (b) Income and (c)Output are expected to be equal in theory though in practice they are usually off by a few $ billion.

What alternatives exist to the GDP as a measure of economic activity or economic performance?

The following are a few of the indices that exist as alternatives to the GDP:

• HDI or Human Development Index (United Nations)

• MEW or Measure of Economic Welfare (James Tobin/Robert Nordhaus)

• GPI or Gross Progress Indicator (Cobb/Halstead) among others

How do the above indices improve upon the GDP or GNP?

• PDI=GPI-IT-NTP • NDI=NI-IT

Key: PDI=Personal Disposable Income GPI=Gross Personal Income or Personal Income IT=Income Taxes 13 NTP=Non-Tax Payments NDI=National Disposable Income NI=National Income

Table-Value Added in Production of 1 gallon of Gasoline

Stage of Production	Value of Sales	Value Added
1. Oil Drilling	$1.50	$1.50
2. Refining	$0.80	$0.70
3. Shipping	$1.00	$0.20
4. Retail Sale	$3.00	$2.00
Total Value Added	$6.30	$4.40

· The domestic economy or domestic sector and

· The international or external economy or international or external sector

· So what are the constituents of the domestic economy or domestic sector?

· The domestic economy or sector of an open economy is made up of the following sectors: Y=GDP=C+I+G---or domestic absorption sectors or variables

· What are the components of the international or external trade sector?

· This sector of an economy is made up of X-M or Net exports

· What is an open economy? 5 An open economy is defined as an economy with an international or external trade or net export or BOP sector.

The international or external trade or net export or BOP sector is defined as X-M whereas earlier explained X=Export sector and M=Import sector.

Thus X-M=Net export sector or international trade or export or BOP sector.

There are three (3) possibilities for the relationship between X and M in an open economy.

These possibilities are:

• Where X>M---BOT surplus or surplus on the external trade account

• Where X<M---- BOT deficit or deficit on the external trade account

• Where X=M---- BOT equilibrium or equilibrium on the external trade account

Macroeconomic aggregates or indicators such as GDP, GNP, GDP Per Capita, GNP Per Capita, NDP, NNP and many others can be expressed in two ways, namely, in Real or Constant dollars or in Nominal, Current or Money terms.

So what is Real or Constant Dollars?

When macroeconomic aggregates like GDP and others are expressed in real or constant dollars it means that macroeconomists adjust them for changes in the price level or inflation i.e. macroeconomists exclude the effect of price changes on these aggregates or indicators.

So what is Nominal or Current Dollars?

When macroeconomic aggregates like GDP and others are expressed in nominal or current dollars it means that macroeconomists do not adjust them for changes in the price level or inflation i.e. macroeconomists do not exclude the effect of price changes on these aggregates or indicators.

Thus to convert a nominal or current macroeconomic aggregate to a real or constant aggregate i.e. to deflate them of inflation, we must use the following general formula:

Real $X= Nominal $X\Price Index x 100

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