The Measurement of Macroeconomic Performance Study Notes

Overview of National Accounts

• National Accounts serve as a primary measurement of a country's macroeconomic performance.

• The term encompasses various metrics including Gross Domestic Product (GDP), Gross National Product (GNP), Net National Product (NNP), and GDP per capita.

• A total value of "1 TRILLION" is mentioned in the context of GDP measurement.

• The learning material is organized by John Smith Management into two primary sections:     - Part A: Introduction to macroeconomic concepts and outcomes.     - Part B: Measuring macroeconomic performance.

Learning Outcomes and Objectives

• Identify the specific uses of National Accounts.

• Determine and define the four macroeconomic sectors.

• Describe the roles and influences of macroeconomic components on a country's economic performance.

• Measure economic performance using national accounts metrics such as GDP, GNP, NNP, and others.

Uses of National Accountings

• Health and Growth Assessment: To assess the health or economic growth of the economy by comparing levels of production at regular intervals.

• Long-run Tracking: To track the long-run course of the economy to determine if it has grown, remained constant, or declined.

• Sectoral Analysis: To measure the degree of contribution from different sectors to overall economic growth.

• Socio-economic Indicators: To measure income distribution, poverty levels, and the standard of living within a nation.

• Policy Formulation: To formulate policies for economic planning purposes intended to safeguard and improve the economy’s health.

Macroeconomic Components and Interactions

• Economic performance is fundamentally dependent on the "INTERACTION" between the four macroeconomic components.

• These components address critical national questions:     - Why are the prices of most goods and services in a country continually rising?     - Why are people in one country poorer than those in another (e.g., "Country X")?

• Key indicators of a healthy interaction include:     - Whether the price level of goods and services is stable or unstable.     - Whether national income is evenly or unevenly distributed among society.     - Whether the unemployment rate of a country is high or low.     - Whether the economic growth of a country is high or low.

• The interaction involves two fundamental flows:     - Sellers receive revenue (which becomes a receipt of income to resource owners).     - Consumers make payments on expenditure.

Circular Flow of Income: 2-Sector Economy

• Participants: Households and Firms.

• The Input (Factor) Market:     - Households supply Factors of Production (FOP): Labour, Land, Capital, and Entrepreneurship.     - Firms pay Factor Income: Wages, Interest, Rent, and Profit.

• The Financial Sector:     - Households save a portion of income ($S$) which flows into Banking Institutions.     - Banking Institutions provide funds for Private Gross Investments ($I_g$) flow into Firms.

• The Output Market:     - Firms deliver Goods and Services ($G+S$) to households.     - Households make payments to firms for purchased goods, represented as Household Consumption ($C$).

Circular Flow of Income: 3-Sector Economy (Closed Economy)

• Participants: Households, Firms, and Government.

• Additions to the flow:     - Disposable Income ($Y_d$): Calculated as total income minus taxes ($Y_d = Y - T$).     - Government Revenue: Governments receive Taxes ($T$) paid by households.     - Government Expenditure ($G$): Governments make payments on purchases of Goods and Services to firms/producers.

• Note: This is considered a "Closed Economy" because it lacks a foreign sector.

Circular Flow of Income: 4-Sector Economy (Open Economy)

• Participants: Households, Firms, Government, and Foreigners (Rest of the World - ROW).

• International Flows:     - Imports ($M$): Household expenditure on imported Goods and Services.     - Exports ($X$): Revenue received by domestic firms when the Rest of the World (ROW) purchases domestic Goods and Services.

• Total interactions determine the overall health and performance of the open economy.

Introduction to National Accounting Metrics

• Indicators used to justify if a country is improving or deteriorating economically:     1. GDP – Gross Domestic Product     2. GNP – Gross National Product     3. NNP – Net National Product     4. GDP per capita

• These accounts are obtained through three equivalent approaches:     - Product (Output) Approach: Measures the total market value of produce.     - Expenditure Approach: Measures total expenditure on Goods and Services ($G+S$).     - Income Approach: Measures total country income.

• Economic Equivalence:     - $\text{Total Expenditure} \equiv \text{Total Income}$     - $\text{Total Expenditure} \equiv \text{Total market value of Produce}$     - This holds because every dollar a buyer pays represents a dollar of income for a seller.

Calculating National Accounts: The Expenditure Approach

• Definition of GDP at Market Price ($GDP_{mp}$): The total market value of all final goods and services produced within a country by all factors of production regardless of its ownership in a given time period.

• Key Terms:     - Total Market Value: The amount a buyer pays, which may include taxes or be affected by government subsidies.     - Final Goods and Services: Only includes values of products bought by end consumers for final consumption.     - Produced Within a Country: Must be produced domestically.     - Regardless of Ownership: It doesn't matter if the resources are owned by locals or foreigners, as long as production is domestic.     - Time Period: Measured monthly, quarterly, or annually.

• The GDP Equation:     - $GDP = C + I + G + (EX - IM)$     - Or alternatively: $GDP = C + I + G + X_N$     - Components: Consumption ($C$), Private Gross Investments ($I$), Government Expenditure ($G$), Net Export ($X_N$).

Detailed Components of the Expenditure Approach (Handout 1)

• Households Consumption ($C$):     - Durable goods (e.g., cars/appliances): $\$50m$     - Non-durable goods (e.g., food/clothing): Reference item A.2     - Services: $\$50m$     - Fixed assets: $\$60m$     - Stocks/shares: $\$40m$     - Donations: $\$10m$     - Scholarships: $\$5m$     - Second-hand purchases: $\$20m$     - Non-market activities: $\$15m$     - Illegal activities: $\$30m$

• Gross Investments ($I$) by Firms:     - Residential properties (houses/shops/factory): $\$100m$     - Non-Residential Properties: $\$300m$     - Tools/Machinery/Equipment: Reference item B.3     - Stocks/shares: $\$800m$     - Donation: $\$10m$     - Scholarship: $\$125m$     - Second-hand purchases: $\$20m$

• Government Expenditure ($G$):     - Government purchases (equipment/office supplies): $\$400m$     - Maintenance/payments to private sectors: $\$500m$     - Infrastructure (roads/schools/hospitals/tech): $\$800m$     - Salaries of government employees (teachers, doctors, army, etc.): Reference item C.3     - Stocks/shares: $\$500m$     - Donation to foreign countries: $\$100m$     - Scholarships: $\$500$     - Financial aids: $\$300$

• Net Export ($X_N$): The difference between exported goods and imported goods.

Gross National Product (GNP)

• Definition: Total market value of all final goods and services produced by a country's residents or citizens in a given time period, regardless of where they are located in the world.

• GDP vs. GNP:     - GDP measures production within a country's borders.     - GNP measures production by a country's people and businesses regardless of location.

• Conversion Formula:     - $GNP = GDP + FIPR - FIPP$     - Factor Income Payment Received (FIPR): Income received by a country's citizens working abroad.     - Factor Income Payment Paid (FIPP): Income paid by a country to foreign owners of resources/residents working within the domestic borders.

• Scenario Example:     - Kent (American working in Malaysia): Produces $RM200$.     - Ali (Malaysian working in Malaysia): Produces $RM100$.     - Ah Kau (Malaysian working in Singapore/ROW): Produces $RM500$.     - Malaysia GDP Calculation: Includes Kent and Ali. $GDP = RM200 + RM100$.     - Malaysia GNP Calculation: Includes Ali and Ah Kau. $GNP = RM100 + RM500$.

Net National Product (NNP) and Depreciation

• Definition: The market value of the net output on final goods and services produced by a nation during a specific time.

• Adjusting for Depreciation:     - Depreciation is the gradual decrease in an asset's value due to wear and tear, aging, or obsolescence (e.g., cars, machines, computers).     - $NNP = GNP - \text{Depreciation}$

• Example Calculation:     - If $GNP = RM105,000.00$ and private sector depreciation is $RM20,000.00$, then:     - $NNP = RM105,000.00 - RM20,000.00 = RM85,000.00$

GDP per Capita

• Purpose: A more accurate measure of a society’s welfare than total GDP.

• Calculation:     - $GDP_{per\,cap} = \frac{GDP_{mp}}{\text{population}}$

• Comparative Case Study:     - Singasia: $GDP = \$400\text{ million}$; $\text{Population} = 18\text{ million}$.         - $GDP_{per\,cap} = \frac{400}{18} = \$22.22$     - Malamsia: $GDP = \$650\text{ million}$; $\text{Population} = 50\text{ million}$.         - $GDP_{per\,cap} = \frac{650}{50} = \$13.00$     - Conclusion: Singasia is "richer" on a per capita basis despite Malamsia having a higher total GDP.

Additional Relationships and Formulas

• Net Domestic Product (NDP):     - $NDP = GDP - \text{Depreciation}$

• Net Investment:     - $\text{Net Investment} = I_g - \text{Depreciation}$

• GNP from given GDP values:     - If $GNP = 100m$, $\text{Depreciation} = 5m$, $FIP (FIPP) = 10m$, and $FIR (FIPR) = 5m$:     - $GDP = 100m + 10m - 5m = 105m$     - $NDP = 105m - 5m = 100m$