ECON 100 Tutorial: Week 14
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office: LUMS C85
Question 1(a)
The data in the table below are for the UK in 2011. All numbers are in £million.
Household and NPISH expenditure
Central Government consumption expenditure
Local Government consumption expenditure
Fixed Capital Consumption
Net income from abroad
Exports of goods and services
Taxes on production and imports
Subsidies
974,252
210,065
128,934
170,986
15,174
492,646
205,562
11,433
Compensation of employees
Gross Fixed Capital Formation
Basic price adjustment
Mixed income
Acquisitions less disposals of valuables
Total operating surplus, gross
Imports of goods and service
Changes in Inventories
Source: UK National Accounts, The Blue Book, 2012
Using the expenditure side of the accounts, calculate the following:
i)
Gross Domestic Product at market prices
ii)
Gross National Income at market prices
iii)
Gross Value Added at basic prices
iv)
Net National Income
814,515
215,467
175,526
85,602
1,645
422,514
516,609
8,646
Uses of National Income Accounts
• Inform macroeconomic policy
• GDP measures domestic efficiency; GNI
measures standard of living of population
• Estimate economic growth
– rate of change in real GDP
• Compare with other countries' economic
performance
• Measure productivity (output per worker)
Question 1(a)(i)
Household and NPISH expenditure
Central Government consumption expenditure
Local Government consumption expenditure
Fixed Capital Consumption
Net income from abroad
Exports of goods and services
Taxes on production and imports
Subsidies
974,252
210,065
128,934
170,986
15,174
492,646
205,562
11,433
Compensation of employees
Gross Fixed Capital Formation
Basic price adjustment
Mixed income
Acquisitions less disposals of valuables
Total operating surplus, gross
Imports of goods and service
Changes in Inventories
814,515
215,467
175,526
85,602
1,645
422,514
516,609
8,646
Using the expenditure side of the accounts, calculate the following:
Gross Domestic Product at market prices
GDP = C + I + G + NX (from the book, pgs. 492-495)
GDP = Consumption + Investments + Gov’t purchases + Net Exchange
See Slide 20 from Lecture 1&2 for definition of Investment
In this example:
GDP = Household Exp. + Gross Fixed Capital Formation + Acquisitions + Changes in
Inventories+ Central & Local Gov’t expenditure + Exports – Imports
GDP = 974,252 + 215,467 + 1,645 + 8,646 +210,065 + 128,934 + 492,646
–
516,609
GDP = 1,515,406
Note that the figure in the Blue Book for GDP at market prices in the 2012 edition is
1 516 153. This takes account of the statistical discrepancy, which is not given here.
Question 1(a)(ii)
Household and NPISH expenditure
Central Government consumption expenditure
Local Government consumption expenditure
Fixed Capital Consumption
Net income from abroad
Exports of goods and services
Taxes on production and imports
Subsidies
974,252
210,065
128,934
170,986
15,174
492,646
205,562
11,433
Compensation of employees
Gross Fixed Capital Formation
Basic price adjustment
Mixed income
Acquisitions less disposals of valuables
Total operating surplus, gross
Imports of goods and service
Changes in Inventories
814,515
215,467
175,526
85,602
1,645
422,514
516,609
8,646
Using the expenditure side of the accounts, calculate the following:
Gross National Income at market prices
The Gross national income (GNI) is the total domestic and foreign output
claimed by residents of a country. This is made up of of gross domestic
product (GDP) plus incomes earned by nationals abroad, minus income
earned in the domestic economy by foreign nationals.
The GNI is similar to the gross national product (GNP), except that in
measuring the GNP one does not deduct the indirect business taxes. The
World Bank now use GNI rather than GNP.
GNI = GDP + Net Income from abroad
we just calculated that GDP = 1,515,406
GNI = 1,515,406 + 15,174
GNI = 1,530,580
Question 1(a)(iii)
Household and NPISH expenditure
Central Government consumption expenditure
Local Government consumption expenditure
Fixed Capital Consumption
Net income from abroad
Exports of goods and services
Taxes on production and imports
Subsidies
974,252
210,065
128,934
170,986
15,174
492,646
205,562
11,433
Compensation of employees
Gross Fixed Capital Formation
Basic price adjustment
Mixed income
Acquisitions less disposals of valuables
Total operating surplus, gross
Imports of goods and service
Changes in Inventories
Using the expenditure side of the accounts, calculate the following:
Gross Value Added at basic prices
GVA measures the contribution to the economy of each individual producer, industry or
sector in a country.
Is a productivity metric that measures the difference between output and intermediate
consumption. Gross value added provides a dollar value for the amount of goods and
services that have been produced, less the cost of all inputs and raw materials that are
directly attributable to that production.
It is used to calculate the GDP:
GVA + taxes on products - subsidies on products = GDP
Gross Value Added = GDP – Basic Price Adjustment
Gross Value Added = 1,515,406 – 175,526
Gross Value Added = 1,339,880
814,515
215,467
175,526
85,602
1,645
422,514
516,609
8,646
Question 1(a)(iv)
Household and NPISH expenditure
Central Government consumption expenditure
Local Government consumption expenditure
Fixed Capital Consumption
Net income from abroad
Exports of goods and services
Taxes on production and imports
Subsidies
974,252
210,065
128,934
170,986
15,174
492,646
205,562
11,433
Compensation of employees
Gross Fixed Capital Formation
Basic price adjustment
Mixed income
Acquisitions less disposals of valuables
Total operating surplus, gross
Imports of goods and service
Changes in Inventories
814,515
215,467
175,526
85,602
1,645
422,514
516,609
8,646
Using the expenditure side of the accounts, calculate the following:
Net National Income (also known as Net National Product)
GNI doesn’t take into account depreciation, so NNI (or NNP) is basically GNI – Depreciation.
Net National Income = GNI – Depreciation
Net National Income = GNI – Fixed Capital Consumption
Net National Income = 1,530,580 – 170,986
Net National Income = 1,359,894
Question 1(b)
Household and NPISH expenditure
Central Government consumption expenditure
Local Government consumption expenditure
Fixed Capital Consumption
Net income from abroad
Exports of goods and services
Taxes on production and imports
Subsidies
974,252
210,065
128,934
170,986
15,174
492,646
205,562
11,433
Compensation of employees
Gross Fixed Capital Formation
Basic price adjustment
Mixed income
Acquisitions less disposals of valuables
Total operating surplus, gross
Imports of goods and service
Changes in Inventories
814,515
215,467
175,526
85,602
1,645
422,514
516,609
8,646
Using the income side of the accounts, calculate the Gross Domestic Product at market prices.
In this example:
GDP = Compensation of Employees + Mixed Income + Total Operating
Surplus, gross + Taxes on Prod. & Imports – Subsidies
GDP = 814,515 + 85,602 + 422,514 + 205,562 – 1,4331
GDP = 1,516,760
Note: Again, the statistical discrepancy is not included in the table.
Question 1(c)
Explain why answers in (a)(i) and (b) are not identical.
a)i) GDP at market prices using expenditure method
= 1,515,406
b) GDP at market prices using income accounts
= 1,516,760
Problems with collecting the data and use of sampling
to collect some data mean that while the two figures
should in theory be the same in practice they differ.
The ONS therefore allow for this by adjusting the
figures to the output measure which in 2012 had a
value of £1,516,153.
The statistical discrepancies for the expenditure and
income measures were +£1106 and –£607 respectively.
Question 1(d)
The values for 2011 shown above are taken from the 2012 Blue Book. But
they are not the same as those for 2011 reported in the 2013 Blue Book.
Why is this?
Over time, new data comes in to National Statistics and they update their
figures to take account of this effect. The process can go on over many
years.
Errors in how data were collected and data entry errors can also emerge.
Monthly and quarterly economic data are compiled using statistics from
businesses replying to surveys and statisticians use unaudited management
accounts rather than audited financial accounts when making their first
estimates of GDP data. Also, income tax returns give very good estimates of
income figures.
But the statisticians may have to wait for up to three years for these to
become available.
These problems all contribute to inaccuracies with the initial results. But
while the initial data is less accurate it does mean GDP figures are available
more quickly to policymakers so they can make any necessary decisions.
Question 2(i)
For each of the three countries below, calculate the growth rate of real output.
How to calculate Growth Rates
Nominal Growth Rate vs. Real Growth Rate
• Nominal Growth Rate
= % change in nominal output (GDP) over time.
• Nominal is just counting some money.
• Real is adjusting the value of that money based on
how much it can buy relative to the value of
money in some base year, (i.e. 2000).
• Real Growth Rate
= Nominal Growth Rate – Inflation
Let’s look at what those numbers mean, using Germany as an example:
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Nominal
GDP (in
Nominal
billion
Output
US$)
Index
1886.40
100
1933.56
102.5
1959.97
103.9
1978.83
104.9
2022.22
107.2
2050.52
108.7
2127.86
112.8
2224.07
117.9
2269.34
120.3
2192.00
116.2
2286.32
121.2
Nominal
Growth
Inflation
Rate
Rate
-0.68
2.5
1.2
1.37
1.42
0.96
1.18
2.19
0.96
1.40
0.66
3.77
0.38
4.52
1.85
2.04
1.01
-3.41
1.4
4.30
0.59
Real
Real GDP
Growth
(in billion
Rate
US$, 2000)
1886.40
1.30
1910.92
-0.05
1909.89
-0.22
1905.73
1.23
1929.22
0.74
1943.49
3.39
2009.41
2.67
2063.08
1.03
2084.24
-4.81
1984.03
3.71
2057.69
The Nominal Output Index comes from using 2000 as the base year. We divide each year’s
Nominal GDP by the base year’s GDP to get the Nominal Output Index for that year.
The Nominal Growth Rate is the % change in the Nominal Output (from previous slide).
The Inflation Rate is given to us. It is calculated from the change in the value of money.
The Real GDP is calculated by multiplying the Real Growth rate with the base year’s Nominal
GDP..
2(i) Calculate the growth rate of real output.
Let’s look at Germany and find
the annual growth rate for 2002.
Nominal Growth = % change in Output
Nominal Growth (as a decimal) = (‘02 Output – ‘01 Output) ÷ ’01 Output
Nominal Growth (as a %) = ((‘02 Output – ‘01 Output) ÷ ’01 Output)*100
Real Growth
= Nominal Growth Rate – Inflation (current year)
= (((‘02 Output – ‘01 Output) ÷ ’01 Output)*100) – ’02 inflation
= (((103.9 – 102.5) ÷ 102.5) * 100 – 1.42
= 0.0
Question 2(i)
For each of the three countries below, calculate the growth rate of real output.
Practice calculating the growth rates!
Nominal Growth = % change in nominal output (GDP) over time.
Nominal Growth (as a %) = ((Output2 – Output1) ÷ Output1)*100
Real Growth Rate = Nominal Growth Rate – Inflation Rate
Question 2(i) solutions
Practice calculating the growth rates!
You should be comfortable with:
• Working with percentages
• Calculating Real vs. Nominal
• Using the appropriate formulas from memory
Question 2(ii)
Plot the rate of growth of real output on a graph for
each country.
Question 2(iii)
What might explain the differences in the countries’
experience?
Question 2(iii)
What might explain the differences in the countries’
experience?
Slower growth in the early part of the decade appears
to be linked to stronger recovery from the great
recession.
Think about income elasticity of demand for the good
that these countries produce. Spain produces tourism
and Germany produces manufacturing goods.
What can the income elasticities of these products tell
us about how the countries producing them would
react to a shock?
Question 3
In many developing countries, economic activity is mainly
concentrated in small-scale subsistence agriculture.
How would you expect this to affect comparisons of living
standards based on GNP measurements? (see Mankiw pgs. 498 – 502)
Not all activity will be measured, as many payments will be
made in kind or carried out by individuals themselves. As these
will not appear in market transactions they will not be
recorded in the national income accounts.
These problems occur in developed countries as well, but are
much more prevalent in developing countries.
Hence measures of GNI in developing countries tend to
underestimate economic activity and therefore the standard of
living of the population.
Question 3 (ctd.)
In many developing countries, economic activity is mainly concentrated in small-scale
subsistence agriculture.
What other problems might you encounter in making international comparisons of living
(see Mankiw pgs. 498 – 502)
standards?
Other problems with GNI measures:
• activities done as a mutual favour – sometimes to evade tax - are not
included ;
• voluntary work is not included;
• recycling of goods is often not included;
• location-specific considerations (eg need for heating, air-conditioning) are
not allowed for;
• the impact of pollution and other environmental problems are often not
considered;
• illegal activities, such as drugs markets, are ignored.
Many of these problems occur in both developed and developing countries.
Note also difficulties in deciding the exchange rate used to compare
countries. Changes in these rates can alter international comparisons .
The UN’s Human Development Index is an attempt to include some of the
other factors that might affect living standards such as health standards and
levels of education.
Check Moodle for a worksheet next week and
make an attempt at the problems before class.