THE USE OF MACROECONOMIC DATA, AND THE DEFINITION AND ACCOUNTING OF NATIONAL INCOME

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THE USE OF MACROECONOMIC DATA, AND THE DEFINITION AND ACCOUNTING OF NATIONAL INCOME (CONTINUED……………..) >>

Introduction to Economics ECO401

UNIT - 9

Lesson 9.1

THE USE OF MACROECONOMIC DATA, AND THE DEFINITION AND ACCOUNTING OF

NATIONAL INCOME

THE USE OF MACROECONOMIC DATA

As is said: "there are lies, damned lies and statistics." Likewise, macroeconomic statistics are

also susceptible of both manipulation and misinterpretation. In order to ensure that you

understand what a particular number or data representation really means, the following need

to be considered:

i. Data might be used selectively. Certain information might be excluded: e.g.

inflation as a whole might have increased but food inflation might have fallen.

ii. In graphs, the vertical and horizontal scales used might be such in a way so as to

paint a very dramatic (or totally benign) picture of things.

iii. Values used might be absolute, not proportionate. People might be paying higher

taxes, but as a proportion of income, the same may have fallen, as incomes

might have risen even higher.

iv. Questions of distribution might be ignored. For e.g., while the economy might

have become richer overall, the ownership of the higher wealth might be highly

skewed so that the richer have become richer and poor poorer.

v. Data might be nominal or real. Nominal data is recorded in money terms,

unadjusted for inflation. Real data is nominal data adjusted for changes in prices.

Most macroeconomic data is presented and analyzed in real terms so as to

permit meaningful intertemporal and cross-country comparisons.

vi. Certain time periods might be excluded: e.g. economic growth might be 4.5%

over the 1990-95 timeframe, but only 3.5% over the 1988-97 horizon.

vii. Data might be aggregate, ignoring per capita considerations: e.g. a country's

national income goes up but per capital income goes down due to a bigger

population.

viii. vii also applies in the context of growth rates. So if national income is growing at

5% p.a. but the population at 6% p.a., per capital income would be falling at the

rate of 1% p.a.

THE DEFINITION AND ACCOUNTING OF NATIONAL INCOME

Gross Domestic Product (GDP):

Gross domestic product (GDP) is the value of the total final output produced inside a country,

during a given year. GDP, like all measures of national income, is a flow (as opposed to stock)

figure accruing over the period of one year.

Concept of Flow and Stock:

A flow figure refers to a certain period of time. A stock figure implies a particular point in time

and therefore changes instantaneously. Flows accumulate into stocks. Changes in stocks

equal flows. In accounting terminology, stocks are balance sheet items, while flows are income

statement items.

Ways of Measuring GDP:

There are three equivalent ways of measuring GDP:

i. The product or value added method which sums the value added by all the

productive entities in the economy;

ii. The expenditure method which sums up the value of all the "final goods"

transactions taking place in the economy;

Introduction to Economics ECO401

iii. And the factor income method which sums up all the incomes earned by all the

factors of production in the economy (rent for land, wages for labour, interest for

capital, and equity returns for entrepreneurship).

The three methods are equivalent. One way to see why this must be so is because in an ex-

post sense, aggregate supply (i) = aggregate demand (ii) = national income (iii).

Value added is the difference between the value of goods produced and the cost of materials

and supplies used in producing them. Value added consists of the wages, interest and profit

components added to the output by a firm.

Final and Intermediate Goods:

Final goods are meant for direct use by the end consumer rather than for further processing.

Intermediate goods are those that are intended for further processing. So an iron rod, if

purchased by a household as a weapon against infiltrating thieves would categorize as a final

good, but if purchased by a firm for use in the making of an automobile would categorize as an

intermediate good.

GDP might be calculated at market prices (includes sales tax paid by consumer as part of the

final price) or at factor cost (excludes sales tax). If there is no sales tax, the two measures

collapse to the same thing.

Net Domestic Product (NDP):

Net domestic product (NDP) is obtained by subtracting depreciation from GDP. Depreciation is

the reduction in the value of a capital good due to the wear and tear caused during production.

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