Chapter 4 Australia’s National and International Accounts 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 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. 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 (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. 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 Why Study National Accounts? 1. Assess and measure performance of economy 2. Gauge health of economy 3. Uncover underlying problems in economy 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? (cont.) 4. Plot long-run course of economy over time 5. Provide foundations for public policies 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 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 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 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 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? (cont.) • GDP excludes non-productive transactions • Two major types of non-productive transactions: – purely financial transactions – sales of second-hand goods 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 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 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 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 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 Personal Consumption Expenditure (C) Includes: • Durable consumer goods • Non-durable consumer goods • Services 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 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 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 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 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 Government Purchases (G) Comprised of: • Final government consumption expenditure • Final government gross fixed capital expenditure • Increases in stocks of government authorities 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 Net Exports (NX) • Net exports is the difference between the value of exports (X) and imports (M), or NX 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 Income Approach • GDP is calculated as the sum of wages, salaries and supplements, gross operating surpluses, gross mixed income and indirect taxes, less subsidies 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 Compensation of Employees • Largest component • Payments to suppliers of labour, including: – – – – – wages salaries superannuation direct pensions compensation payments 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 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 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 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 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 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 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 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 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 Real and Nominal GDP Real GDP Money GDP = Price Index (as a decimal) 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 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 – 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 Balance of Payments • Reflected in international balance of payments account – Records all transactions between the entities in Australia and those in foreign nations 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 Payment Accounts • Two basic subcategories of accounts: – Current account—reflecting current transactions – Capital and financial accounts 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 Current Account • Goods and services – Merchandise trade – Balance on merchandise trade – Net services – Balance on goods and services 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 (cont.) • Income – Net income – Unrequited transfers – Net unrequited transfers – Balance on Current Account 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 Capital and Financial Transactions Capital account • Comprises capital transfers and entries from the acquisition (less disposal) of non-produced, nonfinancial assets 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 (cont.) Financial account • The value of Australia’s transactions in domestic and foreign financial assets and liabilities 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.) • 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 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 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 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 Appendix to Chapter 4 Other National Accounting Concepts 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 Other National Accounting Concepts • National turnover • Gross national expenditure (GNE) • National income (NI) • Domestic factor income (DFI) • Household income (HI) • Household disposable income (DI) 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 Next Chapter: The Macroeconomic Environment 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