Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz 1 Chapter 2 National Income Accounting

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz 2 Chapter Organisation 2.1Production 2.2Components of Aggregate Demand 2.3Some Important Identities 2.4Measuring Gross Domestic Product 2.5Inflation and Price Indices 2.6Inflation and Interest Rates 2.7Where to Find the Data

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz Production  Gross domestic product (GDP) is the value  of all final goods and services  produced in a country  for a given period  Australian GDP for 2000 was $656 billion  Per capita GDP = $656b/19m pop. = $ p.a. in 2000

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz 4 Production  The production function (f) relates  GDP (Y) to inputs called factors of production  the major factors are labour (N) and capital (K)  Y = f(N, K)  Payments to factors comprise the  wage rate (w) for N and interest rate (i) for K  these payments plus profits add to GDP  Y = (w  N) + (i  K) + profit

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz 5 Production  Gross national product (GNP)  GNP = GDP + payments from overseas to domestically owned factors  overseas payments are about 4% of GNP  Net domestic product (NDP)  NDP = GDP - depreciation  depreciation is about 5% of GDP

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz 6 Production  National income (NY)  NY = NDP - indirect taxes  NY represents factors payments  indirect taxes are a large 13.5% of GDP  Of all factor payments  around 75% go to labour  most of the remainder goes to capital  only small amounts go to profits

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz 7 Chapter Organisation 2.1Production 2.2Components of Aggregate Demand 2.3Some Important Identities 2.4Measuring Gross Domestic Product 2.5Inflation and Price Indices 2.6Inflation and Interest Rates 2.7Where to Find the Data

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz Components of Demand  The expenditure measure of GDP called GDP(E) comprises  household consumption spending (C)  investment spending (I)  government purchases (G)  foreign demand (NX)  The national income identity is Y  C + I + G + NX

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz 9 Components of Demand

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz 10 Consumption  From Table 2.1 Australia’s household consumption was $370 billion in 2000  This comprises 59.5% of GDP  It has increased from 56% in the 1970s  The rate is lower than for the US (68%) and Japan (62%)

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz 11 Government Purchases  Government spending represents purchases  Transfer payments are not purchases  Government expenditure comprises purchases and transfers  Transfers form more than two-thirds of government expenditure  Only the remainder are purchases of goods and services

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz 12 Investment  Investment means additions to the physical stock of capital  This includes new construction, machinery, factories and additional inventories  Investment in human capital increases the labour force knowledge and skill  Gross investment = net investment + depreciation

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz 13 Net Exports  Domestic final demand comprises  total investment (24% of total demand)  private consumption expenditure (60%)  government purchases (19%)  net exports (-3%)  net exports (NX)  are the difference between exports and imports  Australian NX have been mostly negative

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz 14 Chapter Organisation 2.1Production 2.2Components of Aggregate Demand 2.3Some Important Identities 2.4Measuring Gross Domestic Product 2.5Inflation and Price Indices 2.6Inflation and Interest Rates 2.7Where to Find the Data

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz Some Important Identities  Simple economy—no government and foreign trade  Output produced equals output sold  Y  C + I (2.4)  Also income is consumed or saved  Y  S + C (2.5)  Therefore I  S

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz 16 Government and Foreign Trade  Y  C + I + G + NX (2.8)  Disposable income (YD) includes transfers (TR) and is net of taxes (TA)  YD  Y + TR - TA (2.9)  Disposable income (YD) is consumed (C) or saved (S)  YD  C + S (2.10)

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz 17 Government and Foreign Trade  Using (2.9) and (2.10) to eliminate YD, substituting for C in (2.8) and rearranging gives S - I  (G + TR - TA) + NX  (G + TR - TA) represents the excess of government spending over receipts, called the budget deficit (BD)  This gives: S - I  BD + NX (2.12)

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz 18 Government and Foreign Trade  S - I  BD + NX shows important relations between S - I, BD and NX  If S = I then the budget deficit must be equal to the external deficit (twin deficits)  If S = $1000m, I = $950m and the budget deficit is $150m then NX must be equal to ?  NX = -$100m. This reflects Australia’s budget and trade deficits in the early 1990s

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz 19 Chapter Organisation 2.1Production 2.2Components of Aggregate Demand 2.3Some Important Identities 2.4Measuring Gross Domestic Product 2.5Inflation and Price Indices 2.6Inflation and Interest Rates 2.7Where to Find the Data

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz Measuring GDP  GDP is the value of final goods and services produced  Including semi-processed goods will cause double counting  GDP is therefore the sum of value added in each production stage  GDP excludes the resale of existing commodities

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz 21  Most household work and illegal activity are not traded in the market  Australia’s underground economy is  $55 billion in 1989/1990 prices  which is around 15% of GDP  Government services may not be priced by the market Measurement Problems

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz 22 Measurement Problems  Pollution and environment degradation effects not included in GDP  How to account correctly for improvements in the quality of goods?  National accounts data is collected and frequently revised  Quarterly GDP growth figures can change by 1–2% at an annual rate

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz Production 2.2Components of Aggregate Demand 2.3Some Important Identities 2.4Measuring Gross Domestic Product 2.5Inflation and Price Indices 2.6Inflation and Interest Rates 2.7Where to Find the Data Chapter Organisation

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz Inflation and Price Indices  Nominal GDP measures output at nominal (market) prices  An increase could be due to increased production and/or prices  There is a need to estimate real GDP  Physical output for each year is multiplied by the prices that prevailed in the base year  These estimates represent real GDP

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz 25 Price Indices  The GDP deflator is the ratio of nominal GDP to real GDP for a year  It is a broad-based price index  The consumer price index (CPI) measures  a typical urban consumers’ cost of purchases  based on a fixed basket of goods and services  The CPI is more narrow but includes import prices

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz 26  Inflation (  ) is the rate of change in prices Inflation  Australia’s inflation rate has fallen to around 3% p.a. in the 1990s  Over the long term the CPI and GDP deflator produce similar measures of inflation

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz Production 2.2Components of Aggregate Demand 2.3Some Important Identities 2.4Measuring Gross Domestic Product 2.5Inflation and Price Indices 2.6Inflation and Interest Rates 2.7Where to Find the Data Chapter Organisation

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz Inflation and Interest Rates  Interest rates reported in the media are nominal rates  Real interest rate = nominal interest rate - (expected) inflation rate  A 10-year Treasury bond paying 6.08% p.a. with 1.6% annual inflation rate has a real return of ?  Real return = 6.08% - 1.6% = 4.28%

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz Production 2.2Components of Aggregate Demand 2.3Some Important Identities 2.4Measuring Gross Domestic Product 2.5Inflation and Price Indices 2.6Inflation and Interest Rates 2.7Where to Find the Data Chapter Organisation

Copyright  2002 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Dornbusch, Bodman, Crosby, Fischer and Startz Where to Find the Data  Data is available on the Internet  Australian Bureau of Statistics:  Australian Treasury:  Reserve Bank of Australia:  US Bureau Econ. Analysis:  International: