Chapter 4
Australia’s national and
international accounts
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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)
• Demonstrate 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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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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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
– These are goods and services that are being
purchased for final use and are not to be subject to
further processing, manufacturing or resale
• Intermediate goods are excluded to avoid
double counting
• To avoid double counting calculate only the
value added by each firm
– The market value of a firm’s output less the value
of intermediate component is value added
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What is not included in GDP?
• GDP excludes non-productive transactions
– Transactions where no production of goods
or services occurs
• Two major types of non-productive transactions
– Purely financial transactions
– Sales of secondhand goods
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What is not included in GDP? (cont.)
• Financial transactions are excluded
– Public transfer payments
– Private transfer payments
– Buying and selling of shares and securities
• Sales of secondhand goods are excluded
– These do not reflect current production
– Involve double counting
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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)
• Gross private 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)
Also called household final consumption expenditure,
includes expenditure on:
• Durable consumer goods
– Cars, refrigerators, videos etc.
• Non-durable consumer goods
– Milk, bread, shirts etc.
• Services
– Doctors, mechanics cleaners etc.
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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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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 of goods (G)
Includes all government spending (federal,
state and local) on:
• 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
• The amount by which foreign spending on
Australian goods and services exceeds Australian
spending on foreign goods and services
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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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Taxes less subsidies
• Indirect taxes are treated as costs of production
by businesses and added to the prices of goods
and services
– Indirect business taxes to the government are not
earned income
• Subsidies are payments to business to encourage
production of a particular commodity, or negative
indirect taxes
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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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Inflating and deflating
Two indices of price adjustment are:
• 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
The formula used for deflating
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
GDP and the environment
The underground economy
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International 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
– Capital account — transactions of a non-current
and non-financial nature
– Financial account — exchange of financial assets
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Current account
• Goods and services
–
–
–
–
Merchandise trade
Balance on merchandise trade
Net services
Balance on goods and services
• 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,
non-financial assets
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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Capital and financial
transactions (cont.)
• Financial derivatives, other investment and
reserve assets
– Financial derivatives represent secondary financial
securities, or contracts that are linked to a primary
financial instrument, indicator or commodity
 Previously included under portfolio investment
category
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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
– National turnover = GDP + Imports
• Gross national expenditure (GNE)
– Sum of C + I + G
• National income (NI)
– GDP less depreciation and net income paid abroad
– Gross national income equals GDP less net income
paid overseas
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Other national accounting
concepts (cont.)
• Domestic factor income (DFI)
– GDP at factor cost less depreciation
• Household income (HI)
– Total income received by persons normally resident
in Australia
• Household disposable income (DI)
– Household income minus taxes and charges
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