National accounts and the basic identities

Spanish national accounts  GDP: The GDP of a country is defined as the total market value of all final goods and services produced within a country in a given period of time (usually a calendar year). It is also considered the sum of value added at every stage of production (the intermediate stages) of all final goods and services produced within a country in a given period of time. GDP = consumption + Gross Investment + Public Expenditure + (Exports-Imports)  NDP: Net domestic product. If we include depreciation in GDP (gross investment instead of net investment) we get the NDP. NDP= consumption + Net Investment + Public Expenditure + (Exports - Imports)

 GNP: Gross National Product. It is measured including total expenditure of every citizen or national of one economy, total public expenditure and total national investment. It stresses who possess the output, not where it was generated. It was widely used until  NNP: Net National Product. It is obtained discounting depreciation from GNP. Production can also be: 1. Nominal: Production is valued at current prices of the year when goods are produced. Problem: if we only have nominal GDP data, an increase in inflation may appear as an increase in the GDP. 2. Real: Valued at constant prices (taking a year’s prices as a reference, or deflacting production according to inflation index). Spanish national accounts

Basic identities  In what follows we set some assumptions in order to simplify notation:  No depreciation (GNP = NNP).  No income or tranfer flows coming from nationals abroad, nor from foreigners living in the economy to their countries (GDP = GNP = NNP).  Public sector expenditure is aimed to purchase goods and services (G); the government only collect direct taxes (T). There isn’t public investment, nor indirect taxes, nor subsidies to companies.  Firms’ profits are completely paid to stakeholders. Companies don’t save, and they don’t pay taxes.

 All output measures are now the same: PIB = PNB = PNN.  Output (Y) matches national expenditure (NE), which can be defined as follows: NE ≡ C + I R + G + X – IM  I R = I P + I S, where I R is current investment, I P planned investment and I S stock investment.  C is consumption.  G, public expenditure.  X, exports.  IM, imports. Basic identities

 As output (Y) matches national income, available income is what we get after paying direct taxes: Y D ≡ Y – T ≡ C + S

Basic identities  Now, combining the three previous identities, we get the basic identity: C + I R + G + X - IM ≡ Y ≡ C + S + T  Applying algebra, we can get the indebtment identity, which represents the relation between private saving and private investment (S – I), budget deficit or superavit (G – T) and trade deficit or surplus (X – Q): S – I ≡ (G – T) + (X – IM)  We can also transform it a bit and we get: S + (T – G) – I ≡ X – IM  On the left hand side we have national saving minus investment, and on the other side the trade balance. If national saving is larger than investment, ( S + (T – G) – I > 0), then we finance the rest of the world; thus, we have trade surplus in our economy (X – IM > 0), while there is a trade deficit in the rest of the world.

Basic identities  Putting together all the identities we have used, we get: NE ≡ C + I R + G + X – IM YD ≡ Y – T ≡ C + S S – I ≡ (G – T) + (X – IM) C + I R + G + X - IM ≡ Y ≡ C + S + T

Fuente: Belzunegui y Cabrerizo (2007)

Current Account Balance, Public Superavit (+) or Deficit, Investment and Saving in the Spanish Economy