1. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-1 Chapter 4 Australia’s national and international accounts

2. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-2 Learning objectives Describe the major components of Australia’s national accounts and the measurement and construction of gross domestic product (GDP) Demonstrate 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

3. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-3 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

4. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-4 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

5. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-5 What is included in GDP? Only final goods and services –These are goods and services that are being purchased for final use and are not to be subject to further processing, manufacturing or resale Intermediate goods are excluded to avoid double counting To avoid double counting calculate only the value added by each firm –The market value of a firm’s output less the value of intermediate component is value added

6. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-6 What is not included in GDP? GDP excludes non-productive transactions –Transactions where no production of goods or services occurs Two major types of non-productive transactions –Purely financial transactions –Sales of secondhand goods

7. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-7 What is not included in GDP? (cont.) Financial transactions are excluded –Public transfer payments –Private transfer payments –Buying and selling of shares and securities Sales of secondhand goods are excluded –These do not reflect current production –Involve double counting

8. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-8 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

9. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-9 Expenditure approach GDP is derived as a sum of: Consumption expenditures by households (C) Gross private investment expenditures by business (I) Government purchases of goods and services (G) Net export expenditures (NX) GDP = C + I + G + NX

10. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-10 Personal consumption expenditure (C) Also called household final consumption expenditure, includes expenditure on: Durable consumer goods –Cars, refrigerators, videos etc. Non-durable consumer goods –Milk, bread, shirts etc. Services –Doctors, mechanics cleaners etc.

11. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-11 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

12. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-12 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

13. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-13 Government purchases of goods (G) Includes all government spending (federal, state and local) on: Final government consumption expenditure Final government gross fixed capital expenditure Increases in stocks of government authorities

14. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-14 Net exports (NX) Net exports is the difference between the value of exports (X) and imports (M), or NX The amount by which foreign spending on Australian goods and services exceeds Australian spending on foreign goods and services

15. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-15 Income approach GDP is calculated as the sum of wages, salaries and supplements, gross operating surpluses, gross mixed income and indirect taxes, less subsidies

16. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-16 Compensation of employees Largest component Payments to suppliers of labour, including: –Wages –Salaries –Superannuation –Direct pensions –Compensation payments

17. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-17 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

18. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-18 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’

19. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-19 Taxes less subsidies Indirect taxes are treated as costs of production by businesses and added to the prices of goods and services –Indirect business taxes to the government are not earned income Subsidies are payments to business to encourage production of a particular commodity, or negative indirect taxes

20. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-20 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’

21. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-21 Inflating and deflating Two indices of price adjustment are: 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

22. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-22 Real and nominal GDP Real GDP = Money GDP Price index (as a decimal) The formula used for deflating

23. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-23 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 –GDP and the environment –The underground economy

24. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-24 International balance of payments Reflected in international balance of payments account –Records all transactions between the entities in Australia and those in foreign nations

25. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-25 Balance of payment accounts Two basic subcategories of accounts: Current account — reflecting current transactions Capital and financial accounts –Capital account — transactions of a non-current and non-financial nature –Financial account — exchange of financial assets

26. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-26 Current account Goods and services –Merchandise trade –Balance on merchandise trade –Net services –Balance on goods and services Income –Net income –Unrequited transfers –Net unrequited transfers –Balance on current account

27. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-27 Capital and financial transactions Capital account Comprises capital transfers and entries from the acquisition (less disposal) of non-produced, non-financial assets Financial account The value of Australia’s transactions in domestic and foreign financial assets and liabilities

28. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-28 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

29. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-29 Capital and financial transactions (cont.) Financial derivatives, other investment and reserve assets –Financial derivatives represent secondary financial securities, or contracts that are linked to a primary financial instrument, indicator or commodity  Previously included under portfolio investment category

30. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-30 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

31. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-31 Appendix to Chapter 4 Other national accounting concepts

32. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-32 Other national accounting concepts National turnover –National turnover = GDP + Imports Gross national expenditure (GNE) –Sum of C + I + G National income (NI) –GDP less depreciation and net income paid abroad –Gross national income equals GDP less net income paid overseas

33. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal 4-33 Other national accounting concepts (cont.) Domestic factor income (DFI) –GDP at factor cost less depreciation Household income (HI) –Total income received by persons normally resident in Australia Household disposable income (DI) –Household income minus taxes and charges