1. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-1 Chapter 4 Australia’s National and International Accounts

2. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-2 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.

3. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 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  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-4 Why Study National Accounts? 1. Assess and measure performance of economy 2. Gauge health of economy 3. Uncover underlying problems in economy

5. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-5 Why Study National Accounts? (cont.) 4. Plot long-run course of economy over time 5. Provide foundations for public policies

6. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-6 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

7. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-7 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

8. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-8 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

9. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-9 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

10. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-10 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

11. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-11 Personal Consumption Expenditure (C) Includes: Durable consumer goods Non-durable consumer goods Services

12. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-12 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

13. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-13 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

14. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-14 Government Purchases (G) Comprised of: Final government consumption expenditure Final government gross fixed capital expenditure Increases in stocks of government authorities

15. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-15 Net Exports (NX) Net exports is the difference between the value of exports (X) and imports (M), or NX

16. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-16 Income Approach GDP is calculated as the sum of wages, salaries and supplements, gross operating surpluses, gross mixed income and indirect taxes, less subsidies

17. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-17 Compensation of Employees Largest component Payments to suppliers of labour, including: – wages – salaries – superannuation – direct pensions – compensation payments

18. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-18 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

19. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-19 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

20. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 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  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-21 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

22. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-22 Real and Nominal GDP Real GDP = Money GDP Price Index (as a decimal)

23. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 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 – Environmental consequences – The underground economy

24. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-24 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  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-25 Balance of Payment Accounts Two basic subcategories of accounts: – Current account—reflecting current transactions – Capital and financial accounts

26. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-26 Current Account Goods and services – Merchandise trade – Balance on merchandise trade – Net services – Balance on goods and services

27. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-27 Current Account (cont.) Income – Net income – Unrequited transfers – Net unrequited transfers – Balance on Current Account

28. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-28 Capital and Financial Transactions Capital account Comprises capital transfers and entries from the acquisition (less disposal) of non-produced, non- financial assets

29. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-29 Capital and Financial Transactions (cont.) Financial account The value of Australia’s transactions in domestic and foreign financial assets and liabilities

30. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-30 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

31. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-31 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

32. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-32 Appendix to Chapter 4 Other National Accounting Concepts

33. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-33 Other National Accounting Concepts National turnover Gross national expenditure (GNE) National income (NI) Domestic factor income (DFI) Household income (HI) Household disposable income (DI)

34. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia 4-34 Next Chapter: The Macroeconomic Environment