Chapter 10 Australia’s National and International Accounts Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

Learning Objectives Describe the major components of Australia’s national accounts and the measurement and construction of gross domestic product (GDP). Develop an understanding of the relationship between the income, expenditure and production measures of GDP. Discuss the differences between nominal GDP (money GDP) and real GDP. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

Learning Objectives (cont.) Explain how GDP figures can be adjusted to account for changes in the price level. Explain the limitations of GDP as a measure of social welfare. Analyse and interpret the nature and structure of the balance of payments (BOP) accounts. Examine the consequences of the structure of the BOP accounts for achieving external balance. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

Why Study National Accounts? 1. Assess and measure performance of economy 2. Gauge health of economy 3. Uncover underlying problems in economy Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

Why Study National Accounts? (cont.) 4. Plot long-run course of economy over time 5. Provide foundations for public policies Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

Gross Domestic Product GDP is the total market value of all final goods and services produced in the economy during a specific period Measured in money terms and not in physical units Usually measured over a year Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

What is included in GDP? Only final goods and services Intermediate goods are excluded to avoid double counting To avoid double counting calculate value added the market value of a firm’s output less the value of intermediate component Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

What is included in GDP? (cont.) GDP excludes non-productive transactions Two major types of non-productive transactions: purely financial transactions sales of second-hand goods Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

Two Approaches to Measuring GDP Expenditure approach Measures GDP as the sum of all the expenditures involved in taking that total output off the market Income approach Sum of the incomes derived from the production of the GDP Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

Expenditure Approach GDP is derived as a sum of: Consumption expenditures by households (C) Investment expenditures by business (I) Government purchases of goods and services (G) Net export expenditures (NX) GDP = C + I + G + NX Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

Personal Consumption Expenditure (C) Includes: Durable consumer goods Non-durable consumer goods Services Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

Gross Private Investment (I ) Defined as: Final purchases of machinery, equipment and tools All building and construction Changes in stocks (or inventories) Does not include financial investment or transfer of paper assets, e.g. buying of shares Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

Gross and Net Investment Net Private Investment: Added investment of non-government enterprises that has occurred in the current year Net Private Investment + Depreciation = Gross Private Investment Net Private Investment determines whether the economy is expanding, static or declining Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

Government Purchases (G) Comprised of: Final government consumption expenditure Final government gross fixed capital expenditure Increases in stocks of government authorities Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

Net Exports (NX ) Net exports is the difference between the value of exports (X ) and imports (M ), or NX Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

Income Approach GDP is calculated as the sum of wages, salaries and supplements, gross operating surpluses, gross mixed income and indirect taxes, less subsidies Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

Compensation of Employees Largest component Payments to suppliers of labour, including: wages salaries superannuation direct pensions compensation payments Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

Gross Operating Surplus (GOS) Basically rents, interest and profits Accounts for the fact that rents, interest and profits are difficult to distinguish Excess of gross output value over sum of: intermediate consumption wages salaries supplements Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

Net Operating Surplus GOS less depreciation Depreciation: The annual charge that estimates the amount of capital equipment used up in each year’s production Also called capital consumption allowance Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

Money GDP vs Real GDP Money GDP is GDP measured in current prices (nominal GDP) Real GDP is money GDP adjusted for inflation by an implicit price deflator, also called constant price GDP Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

Inflating and Deflating Two indices of price adjustment: Consumer Price Index measures the price level of a ‘market basket’ of goods and services for a typical family Implicit Price Deflator measures the average level of price changes of C, I, G and Net Exports Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

= Real and Nominal GDP Money GDP Real GDP Price Index (as a decimal) Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

GDP and Social Welfare Problems in using GDP as an index of social welfare Non-market transactions: Leisure Quality improvements Composition and distribution of output Per capita output Environmental consequences The underground economy Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

Balance of Payments Reflected in international balance of payments account Records all transactions between the entities in Australia and those in foreign nations Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

Balance of Payment Accounts Two basic subcategories of accounts: Current account—reflecting current transactions Capital and financial accounts Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

Current Account Goods and services Merchandise trade Balance on merchandise trade Net services Balance on goods and services Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

Current Account (cont.) Income Net income Unrequited transfers Net unrequited transfers Balance on Current Account Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

Capital and Financial Transactions Capital account Comprises capital transfers and entries from the acquisition (less disposal) of non-produced, non-financial assets Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

Capital and Financial Transactions (cont.) Financial account The value of Australia’s transactions in domestic and foreign financial assets and liabilities Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

Capital and Financial Transactions (cont.) Direct versus Portfolio Investment Direct investment occurs when investment is made by non-residents in an Australian company, or when Australians make investment in foreign company controlled by Australian interests Portfolio investment occurs when non-residents buy shares/bonds from Australian companies, or Australians buy shares in foreign companies Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

External Balance A level of the current account consistent with the maintenance of existing (or growing) levels of consumption, employment and national output over the long term Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

Appendix to Chapter 10 Other National Accounting Concepts Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

Other National Accounting Concepts National turnover Gross national expenditure (GNE) National income (NI) Domestic factor income (DFI) Household income (HI) Household disposable income (DI) Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University

Next Chapter: Aggregate Demand and Aggregate Supply Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Economic Principles by Jackson, McIver, Bajada and Hettihewa Slides prepared by Muni Perumal, University of Canberra and Jay Bandaralage, Griffith University