Economics: National Income statistic I

Macroeconomics – study on aggregate output and general price level

Stock and flow as measures of the economic variables: stocks is measured at an instant of time but flow is measured in a period of time. For example, wealth is a stock but income is a flow (measured “per month”, measuring income at a point of time is meaningless)

GDP and GNP as the measurement of aggregate output:

1)       Gross domestic product is the total market value of production of all residential producing units (RPU) of a country of territory in a specified period (usually 1 year). RPU refers to individuals or organizations with engaged to product and maintain the economic interest at the territory. Note that GDP counts RPU as units, not individuals.

2)       Gross national product is the total market value of production of all residents of a country of territory in a specified period. Residents refers to individuals which maintains the economic interest at the territory, irrespective to their nationality.

Stuffs that excluded in GDP:

1)       Past inventories (out of the period) are not counted.

2)       Second-hard goods since the production value is counted in its first transaction, and this prevents double counting.

3)       Unpaid household services for self-consumption

4)       Intermediate products since they’re not on sale on product market (only sold on factor market), and this prevents double counting.

5)       Financial assets, capital gain and transfer payments, since they don’t involve production.

Approaches to measure GDP

1)       Expenditure approach: C+I+G+(X-M) = C+I+G+NX

C: private consumption expenditure (on households and private non-profit institutions). Note that renting premises and owner-occupied premises are both counted in C.

I: Gross investment expenditure refers to:

-          Gross fixed investment expenditure includes fixed capital like (all) building, construction, machinery, equipment, software, as well as transfer of ownership of land and buildings like stamp duties.

-          Change in inventories

It can also be refers to Depreciation + Net investment expenditure.

G: government consumption expenditure refers to expenditure on consumption by government departments that do not engage in market activities (e.g., Fire Services Dept.) and non-profit quasi-government institutions (e.g., Hospital Authority). Expenditure of other government dept. will be counted as I.

X: Exports, include domestic export of goods, export of services and re-export of goods.

M: Imports, includes imports of services and goods.     NX: Net exports

2)       Production approach: sum of value-added of all RPU

Value-added = Value of output – value of intermediate consumption

e.g. A sales imports a bottle of wine at $60 and sold It at $80, then his value-added is $20.

3)       Income approach: Rent + compensation of employees + capital consumption allowance + interest + profit (before tax)

Theoretically value obtained from the three approaches are the same.

Market price VS Factor cost

Since market price = factor cost + tax – subsidies, say P = C + t – s, then ΣPQ = ΣCQ + Σt – Σs, therefore GDP at factor cost = GDP at market price (abbreviated as GDP) – tax + subsidies.

GDP VS GNP

GNP = GDP + factor income earned by residents outside the economic territory (factor income from aboard) – factor income earned by non-residents within the economic territory (factor income paid aboard) = GDP + Net income from aboard (NIFA)