Mac Roe

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

Gross domestic product (GDP) is the value

of all final goods and services produced in a country (geographical area) for a given period
Indian GDP for 2010-11 was Rs. 78,75,626 crores at market prices Per capita GDP = Rs. 78,75,626 crores /1186m pop. = Rs. 66,404 in 2010-11
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Production Approach (cont.)

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 v N) + (i v K) + profit

Gross national product (GNP)

GNP = GDP + payments from overseas to domestically owned factors
Net domestic product (NDP)

NDP = GDP - depreciation depreciation is about 1.5% of GDP as of 200809.

National income (NY)

NY = NDP - indirect taxes NY represents factors payments indirect taxes are 3.16% of GDP in 2010-11
Of all factor payments

around 27% go to labour most of the remainder goes to capital and other factors
2.1 Production 2.2 Expenditure Approach 2.3 Some Important Identities 2.4 Measuring Gross Domestic Product 2.5 Inflation and Price Indices 2.6 Inflation and Interest Rates 2.7 Where to Find the Data
2.2 Expenditure Approach

The expenditure measure of GDP called GDP(E) comprises

household consumption spending (C) investment spending (I) government purchases (G) Net foreign expenses exports minus imports (NX)
The national income identity is Y | C + I + G + NX
Expenditure Approach
Indian GDP Components (Quarterly):
Industry / Year Figures in Rs. Crores 1. Private Final Consumption Expenditure 2. Government Final Consumption Expenditure 3. Gross Fixed Capital Formation 4. Change in Stock 5. Valuables 6. Export of goods & Services 7. Import of goods & Services 8. Discrepancies 9. GDP at market prices Q1 1031118 195413 535894 60804 34596 365290 453521 -6800 1762793 2010-11 Q2 Q3 Q4 1077076 1224350 1170430 196498 259898 254857 551793 576198 658212 63112 64571 72457 40120 42833 37717 374264 449579 507091 463086 481298 553760 -30812 -56716 77451 1808963 2079416 2224454
Source: Central Statistics Office (CSO); Table 164(a), Handbook of Statistics on Indian Economy, 2011
Consumption

From the earlier Table India s household consumption was Rs. 45,02,975 crores in 2010-11. This comprises 57.2% of GDP at market prices
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Government Purchases

Government spending represents purchases Transfer payments (e.g., pensions, subsidies etc.) are not purchases Government expenditure comprises purchases and transfers Only Govt. purchases are counted as part of GDP.
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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
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Net Exports

Domestic final demand comprises

total investment (34.7% of total demand) private consumption expenditure (57.2%) government purchases (11.5%) net exports (-3.2%)
net exports (NX)

are the difference between exports and imports Indian NX have been negative 1 3
Relationship between Two Approaches
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2.1 Production 2.2 Components of Aggregate Demand 2.3 Some Important Identities 2.4 Measuring Gross Domestic Product 2.5 Inflation and Price Indices 2.6 Inflation and Interest Rates 2.7 Where to Find the Data
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2.3 Some Important Identities

Simple economy no government and foreign trade (Two Sector) Output produced equals output sold Y|C+I (2.4)

Also income is consumed or saved Y|S+C Therefore I | S

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(2.5)
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)

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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)
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S - I | BD + NX shows important relations between S - I, BD and NX If S = I then the (positive) budget deficit must be equal to the (negative) external deficit (twin deficits) If S = Rs. 1000 cr, I = Rs. 950 cr and the budget deficit is Rs. 150 cr then NX equal to ? NX = -Rs. 100 cr. This is the trade deficit.
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2.1 Production 2.2 Components of Aggregate Demand 2.3 Some Important Identities 2.4 Measuring Gross Domestic Product 2.5 Inflation and Price Indices 2.6 Inflation and Interest Rates 2.7 Where to Find the Data
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2.4 Measuring GDP Issues Value Added Approach

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
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Measurement Problems

Most household-work, work in unorganized sector and illegal activity are not traded in the market Data on India s Underground Economy have been estimated India s underground economy was about 23% of GDP in 1997-98 (Chattopadhyay et al. 2005) Government services may not be priced by the market
2 2
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
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2.1 2.2 2.3 2.4 2.5 2.6 2.7 Production Components of Aggregate Demand Some Important Identities Measuring Gross Domestic Product Inflation and Price Indices Inflation and Interest Rates Where to Find the Data
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2.5 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
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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

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Inflation

Inflation (T) is the rate of change in prices
Pt Pt 1 T! Pt 1
India s inflation rate was reported to be 9.36% p.a. in October 2011 Over the long term the CPI and GDP deflator produce similar measures of inflation
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2.6 Inflation and Interest Rates

Interest rates reported in the media are nominal rates Real interest rate = nominal interest rate (expected) inflation rate A Treasury bond paying 5.01% p.a. with -0.7% annual inflation rate has a real return of ? Real return = 5.01% - (-0.7)% = 5.71%
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2.7 Where to Find the Data

Data is available on the Internet

Ministry of Statistics and Program Implementation: www.mospi.nic.in Reserve Bank of India: www.rbi.org.in International: www.worldbank.org/data www.oecd.org/statistics; www.imf.org
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Chapter 2

National Income Accounting

2.1 Production / Income Approach

Gross domestic product (GDP) is the value

Production Approach (cont.)

The production function (f) relates

Payments to factors comprise the

Production Approach (cont.)

Gross national product (GNP)

Net domestic product (NDP)

Production Approach (cont.)

National income (NY)

Of all factor payments

2.2 Expenditure Approach

The expenditure measure of GDP called GDP(E) comprises

The national income identity is Y | C + I + G + NX

Domestic final demand comprises

net exports (NX)

Relationship between Two Approaches

2.3 Some Important Identities

Also income is consumed or saved Y|S+C Therefore I | S

Government and Foreign Trade

Disposable income (YD) is consumed (C) or saved (S) YD | C + S (2.10)

Government and Foreign Trade

Government and Foreign Trade

2.4 Measuring GDP Issues Value Added Approach

2.5 Inflation and Price Indices

The CPI is more narrow but includes import prices

Inflation (T) is the rate of change in prices

2.6 Inflation and Interest Rates

2.7 Where to Find the Data

Data is available on the Internet

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