BUSINESS ECONOMICS National Accounts and Macro Concepts

The USA business cycle

MACROECONOMIC GOALS
 The following four objectives are the main focus of macroeconomic policy:  Full Employment  Price Stability  Economic Growth  Viable Balance of Payments

Other Important Macro Variables

5. Interest Rates What is the current BOE Bank Rate? 0.5% What is the Current Fed Funds Rate? 0-0.25% 6. Exchange Rates What is the current Euro/US$ rate? Yen/US$? US$1.38 = 1 Euro 81 Yen = US$1

Interest Rates and Exchange Rates

 The price of money is important as it impacts on spending which funded by borrowing both for consumers, firms and governments  Exchange rates impact the price and subsequent demand of imports and exports

 Macroeconomic Goals can be complementary or conflicting.  Economic Growth and Full Employment are complementary  Full Employment and Price Stability can be conflicting.

UAEs NATIONAL ACCOUNTS

NATIONAL ACCOUNTS HELP US TO:

 Assess the state of the UAE economy and identify any problems that need to be addressed  Identify appropriate macroeconomic policies to address such problems

Gross Domestic Product

 GDP is the total market value of all final goods and services produced in the economy during a specific time period  Measured in money terms and not in physical units  Usually measured over a year

What is included in GDP?

 Only final goods and services  Intermediate goods are excluded to avoid double counting  To avoid double counting use the value added approach
the market value of a firms output less the

value of intermediate components

INTERMEDIATE GOODS
 eg tyres  if you buy a tyre to put on your car to replace a worn out tyre it is a final good  but if you buy a new car the tyres are intermediate goods whose value is already included in the purchase price of the car

Within a Country
 Goods and services produced within the UAE are included in GDP even if they are produced by overseas residents living in the UAE or by foreign owned firms operating within the UAE.

Within a Country
 Goods and services are included in a nations GDP if they are produced domestically, regardless of the nationality of the producer.

GNP
 Gross National Product (GNP) is a different measure. It measures the value of production of a nations permanent residents.  In this case the value of the output of a Japanese permanent resident living in the UAE is included in Japans GNP

GNP
 If, for example, a UAE residents own a factory in Saudi Arabia, the profit from the production of that factory is included in the UAEs GNP.  Thus income is included in a nations GNP if it is earned by a nations permanent residents (nationals) no matter where they earn it.

What is not included in GDP?

 GDP excludes non-productive transactions  Two major types of non-productive transactions
purely financial transactions sales of second-hand goods

eg  depositing money in a bank  buying shares  Buying a 1999 Toyota  All of these are merely transfers of ownership.

Three Approaches to Measuring GDP

 Expenditure approach  Income approach  Production Approach

 These approaches should yield identical results because every dollar of expenditure generates a dollar of income and every dollar of production also generates a dollar of income in terms of National Income Accounting.  Expenditure = Income is an identity.  Look at The Circular Flow Diagram

Expenditure Approach
GDP is derived as a sum of:  Consumption expenditures by households (C)  Investment expenditures by business(I)  Government purchases of goods and services(G)  Net export expenditures(NX = X-M) GDP = C + I + G + NX

Expenditure Approach
GDP = C + I + G + NX Can be written as GDP = C + I + G + X M where X = Exports and M = Imports

Personal Consumption Expenditure (C)

Includes:  Durable consumer goods  Non-durable consumer goods  Services

Gross Private Investment (I)

Defined as:  Final purchases of machinery, equipment and tools  All building and construction  Changes in stocks (or inventories) Does not include financial investment or transfer of paper assets, e.g. buying of shares

Question
 If a bicycle producer produces $50m worth of bicycles but sells only $ 45m in the year, by how much does GDP increase?

Answer
 $50m  $45m consumption expenditure  $5m investment in stocks (inventories)

 Clearly production and income in the year were $50m, so the expenditure figure must match.  It is as if the firm bought $5m of its own product.

 Assume that:  Next year bicycle production =$50m  Bicycle sales = $55m  GDP increases by $55m consumption minus $5m stocks (inventories) decrease  = $50m  $55m - $5m = $50m

Gross vs Net Investment

 Net Private Investment is:
the addition to the capital stock of non-

government enterprises that has occurred in the current year

 Net Private Investment determines whether the economys productive capacity is expanding or declining

Gross Private Investment minus depreciation = Net Private Investment  Net private investment can be negative if depreciation exceeds gross investment.

Government Purchases (G)

Comprised of:  Final government consumption expenditure  Final government gross fixed capital expenditure  Increases in stocks of government authorities

Net Exports (NX)

 Net exports represent the difference between the value of exports and imports (X-M) or NX  Net Exports can be either positive or negative.  NX = X M  If M >X , then NX <0 ie negative.

Net Exports (NX)

How is the UAEs GDP affected if a UAE living in Australia buys a $45,000 Mazda sports car? Consumption rises by $45,000 but net exports (X-M) fall by the same amount so GDP is not affected as GDP = C + I + G + NX where NX = X M This makes sense because the goods are not produced in the UAE.

Income Approach
 GDP is calculated as the sum of compensation of employees, gross operating surpluses, gross mixed income and indirect taxes less subsidies

Compensation of Employees
 Largest component and includes:  Payments to suppliers of labour including:
wages salaries superannuation direct pensions compensation

Mixed Income
 For owner operated small businesses it may not be possible to separate Wage Income and Gross Operating Surplus  Hence the category Mixed Income.

The Production Approach

 Is a third way to measure GDP  It involves the use of the value added approach described earlier to calculate GDP

Nominal vs Real GDP

 Money GDP is GDP measured at current prices (also called nominal GDP) ie GDP at current prices  Real GDP is money GDP adjusted for inflation by a price index ie GDP at constant prices

Inflating and Deflating

Two indices of price adjustment  The Consumer Price Index
measures the price level of a market basket of goods and services of a typical family Please see http://www.gulfnews.com/business/General/10103649 .html

 The GDP Deflator (is an implicit price deflator)

measures the average level of price changes of C, I, G and Net Exports

Real and Nominal GDP

Nominal GDP Real GDP

x 100

Price Index

REAL GDP
 Given nominal GDP = $240bn  Price Index = 120  Real GDP = $200bn

 1991/92 Nominal GDP = $386,499  Price Index = 107.04  1991/92 Real GDP = ?

 RGDP = ($386,499/107.04)x100  = $361,079  Here we are deflating.

 1988/89 Nominal GDP = $339,582  Price Index = 95.61  1988/89 Real GDP = ?

 RGDP = ($339,582/95.61)x100  = $355,174  Here we are inflating.

GDP and Social Welfare

 In order to use of GDP as an index of social welfare (ie the standard of living), nominal GDP must be converted to real per capita GDP at the very least.  But even after doing this, there are still some problems because some important factors that influence our standard of living are not recorded in the GDP.  Chinas GDP has just surpassed Japan last week but Japans GDP per capita is 10 times that of China

Examples of these are:  Leisure  Home consumed production  Quality improvements  Composition changes  Environmental consequences  The underground economy

In addition:  If we are trying to compare real GDP per capita between different countries at a given time there is a problem caused by the fact that we need to convert real per capita GDP figures into a common currency (eg $US).  Using the current exchange rate may not give a true picture.