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Copyright 2007 McGraw-Hill Australia Pty LtdPPTs t/a Macroeconomics by Jackson and McIver

Slides prepared by Muni Perumal4-1

Chapter 4

Australias national and

international accounts

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Learning objectives

Describe the major components of Australias

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 adjustedto account for changes in the price level

Explain the limitations of GDP as a measure

of social welfare

Analyse and interpret the nature and structureof 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 goodsand 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 avoiddouble counting

To avoid double counting calculate only the

value added by each firm

The market value of a firms 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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Copyright 2007 McGraw-Hill Australia Pty Ltd

PPTs t/a Macroeconomics by Jackson and McIver


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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PPTs t/a Macroeconomics by Jackson and McIverSlides prepared by Muni Perumal

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

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4-9

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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4-10

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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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

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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

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4-13

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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4-14

Net exports (NX)

Net exports is the difference between the valueof exports (X) and imports (M), orNX

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, salariesand 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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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

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4-18

Net operating surplus

GOS less depreciation

Depreciation:

The annual charge that estimates the amount

of capital equipment used up in each years

production Also called capital consumption allowance

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4-19

Taxes less subsidies

Indirect taxes are treated as costs of productionby 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 ofC, I,

G and net exports

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4-22

Real and nominal GDP

RealGDP =Money GDP

Price index

(as a decimal)

The formula used for deflating

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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 paymentsaccount

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

transactionsCapital account

Comprises capital transfers and entries from

the acquisition (less disposal) of non-produced,

non-financial assets

Financial account

The value of Australias transactions in domestic

and foreign financial assets and liabilities

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transactions (cont.)Direct versus portfolio investment

Direct investment occurs when investment

is made by non-residents in an Australian

company, or when Australians make investmentin 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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transactions (cont.) Financial derivatives, other investment and

reserve assets

Financial derivatives represent secondary financial

securities, or contracts that are linked to a primaryfinancial instrument, indicator or commodity

Previously included under portfolio investment

category

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External balance

A level of the current account consistent withthe 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 accountingconcepts

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Other national accounting

concepts National turnover

National turnover = GDP + Imports

Gross national expenditure (GNE)

Sum ofC+ 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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Topic 1 - Ppt_ch04