Principles of Principles of National AccountingNational Accounting

Presented by:Presented by:

Gurnain Kaur PasrichaGurnain Kaur Pasricha

Sept 8, 2006Sept 8, 2006

OverviewOverview National Income Accounting National Income Accounting

Relationships/Identities:Relationships/Identities:1.1. Three measures of GDP.Three measures of GDP.2.2. Domestic and National ProductDomestic and National Product3.3. Domestic/National Product and Disposable Domestic/National Product and Disposable

IncomeIncome4.4. Savings-Investment Gap and the Current Savings-Investment Gap and the Current

AccountAccount5.5. Current Account Balance and Net Current Account Balance and Net

Lending/BorrowingLending/Borrowing6.6. Measures of Government Deficit.Measures of Government Deficit.

Real vs. Nominal MeasuresReal vs. Nominal Measures

Gross Domestic Product Gross Domestic Product GDPGDP

A commonly used measure of standard A commonly used measure of standard of living. (Other measures: GNI, GNDI all of living. (Other measures: GNI, GNDI all in ‘real terms’)in ‘real terms’)

Market valueMarket value of of finalfinal goods and services goods and services produced in the produced in the territoryterritory of an economy, of an economy, in a given time periodin a given time period. .

‘‘Final goods and services’ : Those that are Final goods and services’ : Those that are available for final uses in the given time available for final uses in the given time period. period. Final uses: Consumption, capital formation and exportFinal uses: Consumption, capital formation and export

‘‘Territory’: includes territorial waters, Territory’: includes territorial waters, embassies and missions abroad.embassies and missions abroad.

Circular Flow of IncomeCircular Flow of Income

Households Producers

Factor Services

Factor Payments ( I )

Payments for Goods & Services (E)

Goods & Services (O)

G&S

I. Expenditure ApproachI. Expenditure Approach

GDP = Final Consumption Expenditure of GDP = Final Consumption Expenditure of households (C households (Chh))

+ Final Consumption Expenditure + Final Consumption Expenditure of of General Government (C General Government (Cgg))

+ Final Consumption Expenditure + Final Consumption Expenditure of of NPISH (C NPISH (Cnn))

+ Gross Capital Formation ( I )+ Gross Capital Formation ( I )

+ Exports – Imports (NX = X - M)+ Exports – Imports (NX = X - M)

I.I Final Consumption Expenditure I.I Final Consumption Expenditure of Householdsof Households

Includes consumption of all Includes consumption of all durabledurable and and non-durable goods except own non-durable goods except own construction or improvement of residential construction or improvement of residential housinghousing

Services of owner occupied dwellings Services of owner occupied dwellings counted through imputed rentcounted through imputed rent

Estimated using retail trade and household Estimated using retail trade and household surveys for non-census years.surveys for non-census years.

I.II FCE of General GovernmentI.II FCE of General Government

General Government:General Government:• Central governmentCentral government• State governmentsState governments• Local governmentsLocal governments• Social security fundsSocial security funds• Non-Profit Institutions serving the government Non-Profit Institutions serving the government

Excluded: Government agencies that can charge Excluded: Government agencies that can charge market prices or prices that cover over 50 % of market prices or prices that cover over 50 % of their costs.their costs.

I.II FCE of General GovernmentI.II FCE of General Government

Output of the General GovernmentOutput of the General Government= Current Expenditures on goods and services = Current Expenditures on goods and services

to produce government servicesto produce government services

+ Compensation of employees+ Compensation of employees

+ Consumption of Fixed capital+ Consumption of Fixed capital

+ Own major construction+ Own major construction

+ Own major repairs+ Own major repairs = Own-account capital formation

I.II FCE of General GovernmentI.II FCE of General Government

= Output = Output

lessless Sales to households and corporations Sales to households and corporations

lessless Own-account Capital Formation Own-account Capital Formation

plusplus Social Benefits in kind Social Benefits in kind

( g & s provided free)( g & s provided free)

Excluded: Excluded:

Interest payments, Social benefits in cash.Interest payments, Social benefits in cash.

I.III FCE of Non-Profit Institutions I.III FCE of Non-Profit Institutions Serving HouseholdsServing Households

Non-market output other than own account Non-market output other than own account capital formation capital formation

= Production Costs – Incidental Sales= Production Costs – Incidental Sales

Expenditure on market goods and services Expenditure on market goods and services supplied without transformation and free of supplied without transformation and free of charge.charge.

I.IV Gross Capital FormationI.IV Gross Capital Formation

= Gross Fixed Capital Formation= Gross Fixed Capital Formation

Additions to produced capital goods and Additions to produced capital goods and improvements to non-produced assets (e.g.. Land)improvements to non-produced assets (e.g.. Land)

+ Change in Inventories+ Change in Inventories

+ Acquisition less disposals of valuables + Acquisition less disposals of valuables

I.V Net ExportsI.V Net Exports

Exports and Imports are transactions Exports and Imports are transactions involving an exchange of goods and involving an exchange of goods and services between services between residentsresidents and and non-non-residentsresidents of an economy. of an economy.

Exclude transactions in non-movable non-Exclude transactions in non-movable non-produced assets (e.g. Land), buildings and produced assets (e.g. Land), buildings and in financial assets.in financial assets.

Residents vs. Non-ResidentsResidents vs. Non-Residents

A resident of an economy is an economic agent A resident of an economy is an economic agent whose center of economic interest is in the whose center of economic interest is in the economy in question. economy in question. Center of interest identified by Center of interest identified by

• length of stay – usually a year or more.length of stay – usually a year or more.• Ownership of land or structures Ownership of land or structures

Treatment of :Treatment of : Students Students International organizations International organizations Military personnel and civil servantsMilitary personnel and civil servants

I. Expenditure ApproachI. Expenditure Approach

GDP = Final Consumption Expenditure of GDP = Final Consumption Expenditure of households (C households (Chh))

+ Final Consumption Expenditure + Final Consumption Expenditure of of General Government (C General Government (Cgg))

+ Final Consumption Expenditure + Final Consumption Expenditure of of NPISH (C NPISH (Cnn))

+ Gross Capital Formation (GCF)+ Gross Capital Formation (GCF)

+ Exports – Imports (NX = X - M)+ Exports – Imports (NX = X - M)

II. Output ApproachII. Output Approach

GDP = OutputGDP = Output lessless Intermediate Intermediate

ConsumptionConsumption plusplus Net Indirect Taxes Net Indirect Taxes

Net Indirect Taxes Net Indirect Taxes = Taxes on goods and services= Taxes on goods and services

less less SubsidiesSubsidies

= Gross Value Added

II.I Output ApproachII.I Output Approach

‘‘Output’ Includes:Output’ Includes: Services of Owner Services of Owner

occupied housingoccupied housing Services of paid domestic Services of paid domestic

staffstaff Agricultural production for Agricultural production for

sale or own consumptionsale or own consumption Illegal and hidden goodsIllegal and hidden goods Own account development Own account development

of software*of software* Natural growth of cultivated Natural growth of cultivated

forestsforests

‘‘Output’ Excludes: Output’ Excludes: Waste and losses in Waste and losses in

production production Transfer payments Transfer payments

(eg. Birthday presents, (eg. Birthday presents, social security payments)social security payments)

Goods and services Goods and services produced in the household produced in the household for own consumption for own consumption

III. Income ApproachIII. Income Approach

GDP = Primary incomes generated in the GDP = Primary incomes generated in the domestic economydomestic economy

= Compensation of Employees= Compensation of Employees

+ Other taxes less subsidies on + Other taxes less subsidies on productionproduction

+ Consumption of fixed capital+ Consumption of fixed capital

+ Net Operating Surplus+ Net Operating Surplus

+ Net Indirect Taxes+ Net Indirect Taxes

Gross

Value

Added

GDP by Income ApproachGDP by Income Approach

= GVA + NIT= GVA + NIT

= Output – Intermediate = Output – Intermediate Consumption Consumption + NIT+ NIT

= GDP by Output Approach= GDP by Output Approach

Total Supply Total Supply

= Output= Output

- Intermediate - Intermediate ConsumptionConsumption

+ NIT+ NIT

+ Imports+ Imports

Total Uses Total Uses

= Final Consumption= Final Consumption

+ Gross Capital + Gross Capital FormationFormation

+ Exports+ Exports

=> GDP by Output Approach = GDP by Expenditure Approach

GDP to GNIGDP to GNI

GNI = Value of final goods and services GNI = Value of final goods and services produced by residents of the economyproduced by residents of the economy

= GDP = GDP

+ Primary Income receivable by + Primary Income receivable by residents from abroad residents from abroad

- Primary income payable to non- - Primary income payable to non- residents residents

NFIA

Gross National Disposable Income (GNDI)Gross National Disposable Income (GNDI)

= GNI= GNI

+ Current Transfers from ROW+ Current Transfers from ROW

- Current Transfers to ROW- Current Transfers to ROWNet Current

Transfers

Top Recipients of Net Income from Abroad, 2004

LSO

MDAKWT

CHEBIH

CHL BLZ YEMAGO LUX

IRL-20-15-10

-505

1015

202530

Per

cen

tage

of

GD

P

Data Source: WDI / GDF Central

Net Current Transfers as Percentage of GDP, 2004

JOR

BIH GHA LSO NPL

SAU MDV OMN LBYBHR-15

-10

-5

0

5

10

15

20

25

30

Per

cen

tage

of

GD

P

Data Source: WDI / GDF Central

Net Workers' Remittances as Percentage of GDP, 2004

JOR HND BIHJAM

NPL

KAZ LBYKWT SWZ SAU

-10

-5

0

5

10

15

20

Pe

rce

nta

ge

of

GD

P

Data Source: WDI / GDF Central

The Current AccountThe Current Account

CAB = Trade Balance (NX)CAB = Trade Balance (NX)

+ NFIA+ NFIA

+ Net Current Transfers from ROW+ Net Current Transfers from ROW

Current Account Balance, USCurrent Account Balance, US

Source: BEA

Saving-Investment Gap Saving-Investment Gap and the Current Accountand the Current AccountGNDI GNDI ≡≡ Gross Savings Gross Savings

+ Final Consumption+ Final Consumption C + I + NX C + I + NX

+ NFIA + NFIA

+ Net Current Transfers+ Net Current Transfers ≡≡ S + C S + C

I + CAB I + CAB ≡≡ S S

CAB CAB ≡≡ S - IS - I

Capital AccountCapital Account

UsesUses

Gross Capital FormationGross Capital Formation

Net acquisition of non-Net acquisition of non-financial, non-produced financial, non-produced assets from ROWassets from ROW

Net Lending (+) Net Lending (+)

or Net Borrowing (-) from or Net Borrowing (-) from ROW (∆NFA )ROW (∆NFA )

ResourcesResources

Gross SavingGross Saving

Net Capital TransfersNet Capital Transfers

Financial AccountFinancial Account

Change in Financial Change in Financial AssetsAssets

Change in Financial Change in Financial LiabilitiesLiabilities

Net Lending (+)Net Lending (+)

Or Net Borrowing (-)Or Net Borrowing (-)

((∆NFA)∆NFA)

Government FinancesGovernment Finances

RevenueRevenue TaxesTaxes Social ContributionsSocial Contributions Other RevenueOther Revenue

(Includes Sales, Central (Includes Sales, Central Bank Profits)Bank Profits)

GrantsGrants

Expenditure & Net LendingExpenditure & Net LendingCurrent:Current:

Wages and SalariesWages and Salaries Goods and ServicesGoods and Services Consumption of Fixed CapitalConsumption of Fixed Capital SubsidiesSubsidies Social BenefitsSocial Benefits Interest PaymentsInterest Payments Other ExpenseOther Expense GrantsGrants

CapitalCapital

Net Lending(+)/Borrowing(-) Net Lending(+)/Borrowing(-) (Fiscal Balance)(Fiscal Balance)

Government FinancesGovernment Finances

Fiscal Deficit = Total government outlays Fiscal Deficit = Total government outlays

( G + iD )( G + iD )

- Revenue (T)- Revenue (T)

= Primary Deficit (G - T)= Primary Deficit (G - T)

+ Interest Payments ( iD )+ Interest Payments ( iD )

= Net borrowing (= Net borrowing (∆D)∆D)

Government FinancesGovernment Finances

GDP

Dgi

GDP

TG

GDP

D

TiDGD

)(

For ratio of govt. debt to GDP to be constant, Primary Surplus = (i - g) D/GDP

Government Finances Government Finances & Current Account& Current Account

CAB = S – I CAB = S – I

= S= Spp + S + Sgg – I – Ipp – I – Igg

= S= Spp – I – Ipp + S + Sgg – I – Igg

= S= Spp – I – Ipp + + Fiscal BalanceFiscal Balance

If SIf Spp = I = Ipp, then, then

CAB = Fiscal BalanceCAB = Fiscal Balance

Real vs. NominalReal vs. Nominal Nominal GDP:Nominal GDP:

Real GDP:Real GDP:

GDP Deflator:GDP Deflator:

ttt QPGDP *

tst QPRGDP *

t

tt RGDP

GDPDeflator

Comparison across countriesComparison across countries Conversion using market exchange ratesConversion using market exchange rates PPP: An exchange rate between currencies that PPP: An exchange rate between currencies that

equalizes their purchasing power.equalizes their purchasing power. Eg: A Liter of Pepsi costs $2 in US and Eg: A Liter of Pepsi costs $2 in US and €€2.5 in 2.5 in

Germany, then the PPP exchange rate for Pepsi is Germany, then the PPP exchange rate for Pepsi is €1.25/$. €1.25/$.

PPP for product groups computed as geometric PPP for product groups computed as geometric average of within-group price relativesaverage of within-group price relatives

Aggregated using expenditure weights for product Aggregated using expenditure weights for product groups in GDP.groups in GDP.

Rankings of Economic Size, 2004

Country PPP Rank US$ Rank

United States 1 1

Japan 3 2

Germany 5 3

United Kingdom 6 4

France 7 5

China 2 6

Italy 8 7

Spain 11 8

Canada 13 9

India 4 10

Korea, Rep. 14 11

Mexico 12 12

Australia 16 13

Brazil 9 14

Russian Federation 10 15

Netherlands 18 16

Switzerland 36 17

Belgium 28 18

Sweden 31 19

Turkey 17 20

Relative Living Standards, 2004

Rankings of per capita GDPs

Country Name PPP Rank US$ Rank

Luxembourg 1 1

Norway 4 2

Switzerland 6 3

Denmark 8 4

Ireland 3 5

Iceland 5 6

United States 2 7

Sweden 16 8

Japan 18 9

United Kingdom 13 13

France 17 14

Belgium 11 15

Germany 19 16

Canada 10 18

Italy 20 19

Turkey 64 58

Venezuela, RB 81 59

Russian Federation 53 61

Argentina 41 62

Belize 73 63

Uruguay 56 64

India 106 119

““The wisest mind has something yet to The wisest mind has something yet to learn.”learn.”

George Santayana George Santayana (1863 - 1952)(1863 - 1952)