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1.2 National Accounts
One could argue from
one point of view that national income accounting goes back to William
the Conqueror's 'Doomsday
Book' of the 11th century. From another perspective such
efforts began at least in the 17th and 18th
century with the work of first
William Petty in Ireland then
Francois
Quesnay
in France. In fact, however, it was not until 1944 that the concept became a
reality. Discussions between the United States
of America, the United Kingdom and Canada
resulted in adoption of the essential rules and framework for what
is now
called the System of National Accounts. These discussions emerged
partially in response to extensive statistical development conducted in
the United States by members of the Institutional School of Economics,
particularly the work of the
National
Bureau of Economic Research established by
W.C.
Mitchell as well as
Schumpeter's
extensive statistical work on business cycles. These collections of
statistical evidence were used in conjunction with the macroeconomic model
of national income and expenditure developed by
Keynes.
From this marriage of two distinct economic traditions, the
System
of National Accounts was born with Canadian statisticians acting as
midwife. In 1947, the
United
Nations proposed international standards for creation of the SNA with
associated sub-sets such as the
Standard
Industrial Classification (Chartrand 1988). A parallel system
of
'material balances' was adopted for Second World countries, i.e. the
Communist States.
In
contrast to the simple Benthamite assumption that economic behaviour can
be measured, Institutionalists have spent much time and effort extending
the technology of measurement. Mainstream economists tend to accept
available data and subject it to extensive manipulation in order to
approximate theoretic concepts rather than taking the time and effort
to build up data sets.
In
a sense, technology of measurement, at any point in time, is a
cultural artifact which may not be adequate for testing theoretical
propositions. Unlike physics, where theory and measurement go
hand-in-hand, in the social sciences theory is not directly related to
measurement. In fact, much of existing theory is speculation that
goes far beyond the available technology. It stands or falls not on
measurement but on believability. In future, with the advent of
"Point-of-Sale" computer systems, universal product codes and
Arbitron ratings, it may be possible to empirically test basic premises of
the economic theory of consumption including marginal utility.
Serious questions, however, will arise concerning governmental and
academic access to such private commercial data files. At present,
however, data requirements for testing far exceed the technology of
measurement.
Unfortunately,
it is becoming increasingly difficult to maintain existing data sets or
develop new ones. To a degree, this decline in the technology of
measurement reflects the pricing implications of the emerging
Information Economy (Chartrand 1989). Contrary to a popular
misconception, the Information Economy does not imply a Golden Age of
free-flowing information (Naimark May 6, 1988). Rather, it
involves the reification of the economic value of information, i.e.
monetarization of information.
The implications to mainstream economic thought,
which assumes economic behaviour takes place in an environment of
perfect information, cannot be underestimated.
a) Gross Domestic
Product
GDP is the aggregate or total of all final goods and services
produced in a country in a year. As will be demonstrated it is also equal to Gross Domestic Income
(GDI) which is the aggregate or total expenditure made on all domestic factors
of production. Today, most economists accept GDP as the best measure of the
productive capacity of a country.
To keep track of GDP two basic concepts need to be explored:
stocks & flows and the equality of GDP & GDI.
Stocks
& Flows
A
stock is a quantity that exists
at a given moment. A flow is a quantity added or subtracted per unit time.
GDP is the value of production IN a given country per time period, for example
monthly, quarterly or annually.
i - Capital &
Investment
-
capital: with respect to GDP is the stock of plant, equipment,
buildings and inventories of raw materials an semi-finished goods
-
investment:
is the flow of new capital per unit time
-
depreciation: is the decrease in the stock of capital resulting from
wear and tear per time unit
-
gross investment: is the total flow of capital per unit time
-
net investment: is the flow of new capital less depreciation per unit
time
ii -
Wealth, Income, Consumption & Saving
-
wealth: is the stock of all things (including financial assets) that
people own
-
income: is the flow of money received by people for supplying factors
of production
-
consumption: is the flow of money spent on consumer goods and services per unit
time
-
savings: is the difference between income and consumption per unit
time and which adds to wealth
b) Equality of Income, Expenditure &
Value of Production
Income is the payment
received for supply factor of production. Expenditure is the payment
for goods and services. The economy is made up of 4 players: households, firms, government
and rest of world (squares) and three markets – factor, goods & services
and financial markets (circles) [MBB
10th Ed
Fig. 2.6; MBB 11th Ed Fig. 2.2; PB Fig. 22.2]. The flows
involved include:
i -
Households
& Firms
-
aggregate income = total payment to households for factors of production
-
consumption expenditure = total payment by households for goods and services
-
investment
= total payment by firms for new plant, equipment, buildings and additions to
inventories
ii -
Government
-
government expenditures = purchases from firms including consumption and
investment expenditures
-
net taxes = taxes minus transfers
-
deficit = G-NT > 0 financed by borrowing
-
no taxes from firms – why?
-
government not producer of goods and services –
why?
iii - Rest of
World
-
net exports = X – M (imports) is NE; if NE > 0 then trade surplus, if NE < 0 then deficit
-
includes goods & services and financial markets
c) Gross Domestic
Product
-
aggregate expenditure Ye = C + I + G + NX on goods and services
-
aggregate income Yi = payments for factors of production including
payment of profits to households
-
injections and leakages
-
leakage = income not spent on domestically produce goods and services including
savings, net taxes and imports
-
injection = expenditure not originating in households including investments,
government expenditures and exports
-
Aggregate Income =
Aggregate Expenditure when:
Y = C + S + T
and Y
= C + I + G + X – M
and I + G + X (injections) = S +
T + M (leakages)
b) Measuring GDP
GDP can be measured in 2 ways: by Expenditure
and by Factor Income
Expenditure
-
using National Income & Expenditure Accounts (System of National
Accounts)
-
Personal expenditure on consumer goods and services
(not include
new residential housing part of investment)
-
Business investment
on plant and equipment including new
residential housing and inventories of raw materials, semi-finished products and
unsold final product
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Government expenditures on goods and services
excluding transfer
payments
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Export of goods and services
value of goods and services sold to
foreigners
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Imports of goods and services
value of goods and services sold to
foreigners
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Exclusions:
intermediate goods and services to avoid double
counting (goods and services that firms buy from each other), used goods
(already counted when new) and financial services
Factor Income
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Wages, salaries and supplementary labour income
including
take-home pay, taxes withheld plus fringe benefits
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Corporate profits
including dividends paid and retained or
undistributed profits
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Interest and misc. investment income
including net interest
payments by households, land rent and imputed rent for owner-occupied housing
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Farmers’ income and income from non-farm unincorporated businesses
due to difficulty in splitting income from different sources e.g. labour,
payment for use of capital, rent, etc
-
5 above items
= net domestic income at factor prices
-
difference between factor cost and market price due to indirect
taxes and subsidies where indirect taxes include sales and excise taxes (a tax
which one person is directed by law to collect with the expectation that the
person paying the tax will in turn extract it from another person, i.e.
consumer) and a subsidy is payment by government to producer and therefore
market price less than factor cost; therefore must add indirect taxes and
subtract subsidies
Net vs. Gross Domestic Product
-
total of factor income plus indirect taxes less subsidies = net domestic
product at market prices
-
gross domestic product includes depreciation or capital consumption
-
aggregate expenditure includes gross investment; aggregate factor income
includes net profit after subtracting depreciation therefore to balance must add
depreciation to net domestic income
Valuing Output of Industries
-
must count only value added, i.e. value of firm’s production less value
of intermediate goods purchased from other firms
-
sum of value added at each stage of production equals expenditure on
final good thereby avoid double counting
Why Expenditure & Income Approach to GDP
c) Price Level and Inflation
CPI
-
measures
average level of prices of goods and services purchased by
typical urban Cdn family
-
uses a base year to calculate cost of the typical ‘basket’ of goods
and services
-
then calculates cost of same basket in subsequent years to determine
change in price level where CPI = current cost of basic/base period cost x 100
GDP Deflator
-
average level of prices of all goods and services in GDP
-
nominal GDP is GDP valued in current year prices; real GDP is GDP valued
in base year prices
-
GDP Deflator = nominal/real x 100
-
balloon example, in a way allows measurement of physical or real rather
than inflationary growth
Meaning of Inflation Numbers
-
CPI used for cost of living adjustments (used to be used for income tax
purposes)
-
shows change in value of money and allows measurement of real growth
-
all price indices have 3 major biases: substitution (change in relative
prices leads consumers to substitute less for more expensive goods and services
but not reflected in base basket approach); new goods replace old; quality
change
d) How Real GDP Used
limitations: quality improvements; household production; underground
economy; health; leisure; environment; freedom and justice
use of supplementary ‘social indicators’
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