National accounts:
Part 3
MEASUREMENT ECONOMICS
ECON 4700
This chapter
• Some more thoughts on GDP
– Net vs. Gross
– Principle components of the IEA
– Seasonal adjustment
2
Some additional thoughts on GDP
• Net vs. Gross: Gross" means depreciation of capital stock is
not subtracted. If we substitute gross investment by net
investment (which is gross investment minus depreciation) in
the equation (C + I + G + XN), then we obtain the formula for net
domestic product.
• Depreciation is a term used in accounting, economics and
finance with reference to the fact that assets with finite lives lose
value over time.
• Capital refers to already-produced durable goods available for
use as a factor of production. Steam shovels (equipment) and
office buildings (structures) are examples.
•
"Capital as such is not evil; it is its wrong use that is evil. Capital in
some form or other will always be needed." Mahatma Gandhi
3
Some additional thoughts on GDP
Basic price ???
About 12% of GDP
4
Some additional thoughts on GDP
5
Some additional thoughts on GDP
6
Some additional thoughts on GDP
7
Some additional thoughts on GDP
• Basic prices: A basic price valuation includes the costs of
production factors (labour and capital) and indirect taxes and
subsidies on production factors. Income measures are
estimated at basic prices or market prices.
• Since its inception, GDP has been measured at factor cost. This
measure differs from the more prevalent market price measure
found in the income and expenditure accounts by its exclusion
of taxes on production (formerly called indirect taxes) and the
inclusion of subsidies. While the market price measure
represents the value of GDP as paid for by final consumers, the
factor cost measure, more appropriately in the case of industrial
production, takes the point of view of producers.
8
Some additional thoughts on GDP
• GDP will no longer be measured at factor cost, but
instead at basic prices. This new measure adds to
the factor cost measure some taxes on production
(such as property and payroll taxes, but not federal or
provincial sales taxes), and subtracts some subsidies
(such as labour-related subsidies, but not productrelated subsidies). The end result is that the new
basic prices measure of GDP stands somewhere in
between the lower and upper bounds defined by the
factor cost and market price measures, respectively.
9
Some additional thoughts on GDP
• GDP at factor cost excludes all taxes on production and
includes all subsidies whether they are on intermediate
inputs or labour and capital. In the basic price approach
only taxes and subsidies on intermediate inputs are treated
in this manner. Payroll taxes are payments to government
arising out of the input of labour services, and property
taxes are levies on the capital services of buildings and
other property. They are both part of production and are
included in the basic price measure. On the other hand,
subsidies to labour and capital are deducted from the gross
revenues of these factors as they are payments by
governments rather than earnings.
• By calculating GDP at basic prices, Statistics Canada makes
its estimates of economic activity more comparable to
those produced by a majority of other OECD countries.
10
Some additional thoughts on GDP
GDP, GNP:Q4, 2008
Gross Domestic Product (GDP) at market
prices
X 1 000 000
393 562
Add: Net investment income from non-residents
-4 875
(Always negative)
Gross National Product (GNP) at market prices
388 687
Deduct: Capital consumption allowances
Deduct: Statistical discrepancy
Deduct: Taxes less subsidies on products
Net national income at basic prices
49 719
1 345
26 449
311 174
11
Some additional thoughts on GDP
Gross Domestic Product (GDP)
††Personal expenditure on consumer goods and services
††††Durable goods
††††Semi-durable goods
††††Non-durable goods
††††Services
††Net government current expenditure on goods and services
††Government gross fixed capital formation
††††Structures
††††Machinery and equipment
††Government investment in inventories
††Business gross fixed capital formation
††††Residential structures
††††Non-residential structures
††††Machinery and equipment
††Business investment in inventories
††††Non-farm
††††Farm
††Exports of goods and services
††††Exports to other countries
††††Exports to other provinces
††Deduct: Imports of goods and services
††††Imports from other countries
††††Imports from other provinces
††Statistical discrepancy
Final domestic demand
2006
1446307
803502
105716
66818
195572
435396
279806
40336
28692
11644
-41
277885
98386
85698
93801
7824
8369
-545
816460
524706
291754
779414
487660
291754
-51
1401529
100%
56%
7%
5%
14%
30%
19%
3%
2%
1%
0%
19%
7%
6%
6%
1%
1%
0%
56%
36%
20%
54%
34%
20%
0%
97%
12
Seasonal adjustment
•
•
•
What is seasonal adjustment of a time series such as the CPI, GDP,
unemployment rate…?
Seasonal adjustment is a statistical method for removing the seasonal
component of a time series used when analyzing non-seasonal trends.
Series are made up of four components:
–
–
–
–
St
Tt
Ct
It
: The Seasonal Component (Not interesting)
: The Trend Component (Good for long term analysis)
: The Cyclical Component (Most important to analysts)
: The Error, or irrelevant component.
• Unlike the trend and cyclical components, seasonal components,
theoretically, happen at in the same magnitude during over the
same period of time each year. The seasonal component of a series
are often considered uninteresting and cause a series to be
ambiguous. By removing the seasonal component, it is easier to
focus on other components.
13
Seasonal adjustment
•
•
Examples of seasonal effects include a July drop in automobile production
as factories retool for new models, increases in heating oil production
during September in anticipation of the winter heating season, and higher
consumer expenditure in December.
Seasonal movements are often large enough that they mask other
characteristics of the data that are of interest to analysts of current
economic trends. For example, if each month has a different seasonal
tendency toward high or low values it can be difficult to detect the general
direction of a time series' recent monthly movement (increase, decrease,
turning point, no change, consistency with another economic indicator,
etc.). Seasonal adjustment produces data in which the values of
neighbouring months are usually easier to compare. Many data users
prefer seasonally adjusted data because they want to see those
characteristics that seasonal movements tend to mask, especially changes
in the direction of the series.
14
Seasonal adjustment
• The seasonal adjustment technique DOES NOT for example
eliminate the higher consumer expenditure in December but
redistributes the recursive peak in December (4th quarter) among
the other quarters of the year.
• It then becomes possible to observe the underlying trend through
the 3d and 4th quarter.
• Most analysis of economic events is mostly done in terms of
seasonally adjusted data.
• Here is an example:
15
20
01
20 /0
0 3
20 1/0
01 6
20 /0
01 9
20 /1
02 2
20 /0
02 3
20 /0
0 6
20 2/0
02 9
20 /1
03 2
20 /0
03 3
20 /0
03 6
20 /0
0 9
20 3/1
04 2
20 /0
04 3
20 /0
04 6
20 /0
0 9
20 4/1
05 2
20 /0
05 3
20 /0
05 6
20 /0
05 9
20 /1
0 2
20 6/0
06 3
20 /0
06 6
20 /0
06 9
20 /1
07 2
20 /0
0 3
20 7/0
07 6
20 /0
07 9
/1
2
Seasonal adjustment
1700000
1600000
1500000
GDP Raw
GDP SA
1400000
1300000
1200000
1100000
1000000
900000
800000
16
20
20
20
20
20
20
20
20
20
20
20
20
20
20
09
07
/
03
07
/
09
06
/
03
06
/
09
05
/
03
05
/
09
04
/
03
04
/
09
03
/
03
03
/
09
02
/
03
02
/
09
01
/
03
01
/
Seasonal adjustment
Seasonal adjustment factors
1.04
1.02
1
0.98
0.96
0.94
0.92
17
Seasonal adjustment
• What is an annual rate? Why are seasonally adjusted data often
shown as annual rates?
• Very generally, what we call the seasonally adjusted annual rate for
an individual quarter is an estimate of what the annual total would
be if non-seasonal conditions were the same all year, i.e., the value
that would be registered if the seasonally adjusted rate of activity
measured for a quarter were maintained for a full year. Annual rates
are used so that periods of different lengths–for example, quarters
and years–may be easily compared.
• This "rate" is not a rate in a technical sense but is a level estimate.
• The seasonally adjusted annual rate is the seasonally adjusted
quarterly value multiplied by 4 (12 for monthly series).
• The benefit of the annual rate is that we can compare one month's
data or one quarter's data to an annual total, and we can compare a
month to a quarter.
18
Seasonal adjustment
• Seasonal factor: are estimates of average weather effects for each
quarter. For example, the average January decrease in new home
construction due to cold and storms.
• Seasonal adjustment does not account for abnormal weather
conditions or for year-to-year changes in weather. It is important to
note that seasonal factors are estimates based on present and past
experience and that future data may show a different pattern of
seasonal factors.
19
Seasonal adjustment
• The following steps are followed to calculate seasonal factors:
– An annual average is calculated for each year.
– Each quarterly data point is divided by the corresponding annual
average. This variable represents the percentage of the annual
average.
• The quarterly percentages are averaged across the same quarter
for ten years of data = The seasonal factor.
20
Seasonal adjustment
• One last thought on S.A.
• http://www.mises.org/story/493
21
Introduction to I-O
•
•
•
The construction of the input output table first occurred back in the mid-1930s,
created by a man called Wassily Leontief. They were used to analyse the
American economy at the time. From this beginning input output analysis has
grown to be regarded as one of the most important tools of economic analysis.
An input output table is simply a table made up of a set of rows and columns
that analyse a firm, or multiple firms, inputs and outputs.
Numerical values are placed in these rows and columns, which turns into a
complicated picture of all the flows of goods and services between three types of
organisation and the rest of the world. These organisations are (i) households,
(ii) productive organisations (firms and farms) and (iii) the government.
Although, specific government departments who engage in producing
marketable outputs are considered productive organisations.
22
Introduction to I-O
• Whenever there is a transfer of a good or service between any
two organisations and the rest of the world, usually a cash flow
in the opposite direction will correspond. For example, Alpha
Cotton Fabric Co Ltd transfers 20000 yards of cotton fabric to
Beta Clothing Factory Ltd then unless Alpha Cotton fabric is a
charitable organisation; Beta Clothing Factory will make a cash
payment in return. This transaction of goods and services and
cash flows between the three types of organisations and the rest
of the world forms a complicated set of relationships, the basis
of the complex modern economy.
23
Introduction to I-O
• Purpose of input output tables. They are used to trace the flow
of intermediate production as it makes its way through the
structure of industry and to show how production, all along the
line form primary to intermediate, to finished goods, is affected
by the demand for final goods and services.
•
If we take an example with the assumption that the economy does not
engage in foreign trade and that the productive sector has been divided
into three producing industries.
24
Introduction to I-O
The rows represent the
value of the industry sales
and the columns represent
the value of purchases.
X12 represents industry 1 sales to
industry 2
X23 represents industry 3
purchases from industry 2
Table 1
Inter industry Sales
1
2
3
Final Demand
Gross Output
Inter industry 1
X11
X12
X13
Y1
X1
Purchases
2
X21
X22
X23
Y2
X2
3
X31
X32
X33
Y3
X3
Value Added
V1
V2
V3
Gross output
Xj
X1
X2
X3
X23 represents industry 2 sales to
industry 3
 Yi = Vj

Xi =
25
Introduction to I-O
•
•
The rows represent the value of the industry sales and the columns represent
the value of purchases. For example, X11 represents the sale of industry 1 to
itself that is retained production. X12 represents industry 1 sales to industry 2
and X13 represents industry 1 sales to industry 3. The industry sales to users of
the final goods and services is the industry’s final demand represented by Y and
the industry’s Gross output is the combination of inter industry sales plus the
final demand and is represented by an X. The other 2 industries listed follow
exactly the same pattern with industry 2 having (X21 + X22 + X23) inter industry
sales plus a final demand Y2 and industry 3 has inter industry sales of (X31 +
X32 + X33) plus a final demand Y3.
Whereas the rows represent the sales of the industry denoted by an i, the
column shows the purchase of the industry, denoted by a j. So X11,
X12 and X13 represent the inter-industry purchase made by industry 1.
Likewise X21, X22, X23 and X31, X32, X33 represent the purchase of
industries 2 and 3 respectively.
26
Introduction to I-O
•
•
The gross output of each industry minus the inter-industry purchases must equal
the value added by industry.
This value added consists of wage, interest and rental payments and the profits
of the industry. The final demand must equal the sum of all value added at each
stage of production.
• Then by denoting value added as Vj it must be that
• SUM Yi = SUM Vj
•
The input output table is perfectly consistent with accounting concepts. In the
input output table the sum of all gross outputs minus inter-industry sales must
equal gross output for all industries minus inter-industry purchases.
27