Chapter 4
Australia’s National and
International Accounts
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PPTs t/a Macroeconomics 7/e by Jackson and McIver
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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.
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PPTs t/a Macroeconomics 7/e by Jackson and McIver
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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.
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PPTs t/a Macroeconomics 7/e by Jackson and McIver
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4-3
Why Study National
Accounts?
1. Assess and measure performance of
economy
2. Gauge health of economy
3. Uncover underlying problems in
economy
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PPTs t/a Macroeconomics 7/e by Jackson and McIver
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Why Study National
Accounts? (cont.)
4. Plot long-run course of economy over
time
5. Provide foundations for public policies
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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
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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
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PPTs t/a Macroeconomics 7/e by Jackson and McIver
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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
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PPTs t/a Macroeconomics 7/e by Jackson and McIver
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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
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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
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Personal Consumption
Expenditure (C)
Includes:
• Durable consumer goods
• Non-durable consumer goods
• Services
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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
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PPTs t/a Macroeconomics 7/e by Jackson and McIver
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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
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Government Purchases (G)
Comprised of:
• Final government consumption
expenditure
• Final government gross fixed capital
expenditure
• Increases in stocks of government
authorities
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Net Exports (NX)
• Net exports is the difference between
the value of exports (X) and imports
(M), or NX
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Income Approach
• GDP is calculated as the sum of
wages, salaries and supplements,
gross operating surpluses, gross
mixed income and indirect taxes, less
subsidies
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Compensation of
Employees
• Largest component
• Payments to suppliers of labour,
including:
–
–
–
–
–
wages
salaries
superannuation
direct pensions
compensation payments
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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
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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
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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
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PPTs t/a Macroeconomics 7/e by Jackson and McIver
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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
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Real and Nominal GDP
Real
GDP
Money GDP
=
Price Index
(as a decimal)
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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
–
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Balance of Payments
• Reflected in international balance of
payments account
–
Records all transactions between the entities in
Australia and those in foreign nations
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Balance of Payment
Accounts
• Two basic subcategories of accounts:
–
Current account—reflecting current transactions
–
Capital and financial accounts
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Current Account
• Goods and services
–
Merchandise trade
–
Balance on merchandise trade
–
Net services
–
Balance on goods and services
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Current Account (cont.)
• Income
–
Net income
–
Unrequited transfers
–
Net unrequited transfers
–
Balance on Current Account
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Capital and Financial
Transactions
Capital account
• Comprises capital transfers and
entries from the acquisition (less
disposal) of non-produced, nonfinancial assets
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Capital and Financial
Transactions (cont.)
Financial account
• The value of Australia’s transactions in
domestic and foreign financial assets
and liabilities
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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
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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
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Appendix to Chapter 4
Other National Accounting
Concepts
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Other National Accounting
Concepts
• National turnover
• Gross national expenditure (GNE)
• National income (NI)
• Domestic factor income (DFI)
• Household income (HI)
• Household disposable income (DI)
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Next Chapter:
The Macroeconomic
Environment
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