Download ECON 215 Introduction to Economy of Ghana

ECON 215
Introduction to Economy of
Ghana
Session 2 – National Income Accounting Part1
Lecturer: Dr. Emmanuel A. Codjoe
Contact Information: [email protected]
College of Education
School of Continuing and Distance Education
2014/2015 – 2016/2017
Session Overview
• Session Overview: Every country needs to obtain a sense of how its
economy performs over time. Therefore, each country attempts to
measure the total economic output of goods and services in its
economy over a given period of time. This session discusses the
concepts employed in national income and how the national
income is used.
Goals/ Objectives: At the end of the session, the student will
• Understand and explain the concepts of national income accounting
• Be aware of the national income accounting in the Ghanaian
context
• Know who is mandated to undertake the computation of the
national income
• Know how the undertaken in Ghana
Slide 2
Session Outline
The key topics to be covered in the session are as follows:
• Topic One: Introduction to national income accounting
• Topic Two: Forms of national income computation
• Topic Three: Some Useful Identities
Slide 3
Reading List
• Refer students to relevant text/chapter or reading materials
you will make available on Sakai
Slide 4
Topic One
INTRODUCTION TO NATIONAL
INCOME ACCOUNTING
Slide 5
National Income Accounting Concepts
• National Income can be defined as the general flow of goods and
services produced in an economy in a given time period, usually
a year. Thus, it is the summation of income from the various
economic agents in the economy.
• Every country one way or the other computes it’s national
income to see whether it is progressing or retrogressing.
• As an alternative of the term “national income”, equivalent terms
such as national output/product and national expenditure may
be used.
• National income accounting refers to the set of rules and
definitions for measuring economic activity in the aggregate
economy.
• In other words, how we go about measuring the total economic
output of goods and services in an economy over a given period
of time.
Slide 6
The Circular Flow of Income
• The circular flow of income describes how factors of production
move from household to private firms and these factors are used to
produce outputs.
• In return of the factors of production supplied by the households,
the firms pay them their respective rewards.
• The output supplied by the firms are purchased by households,
government and sometimes exported.
• Government purchases are financed by taxes from the households.
• Household saving(savings) are channeled into firms as investment.
Slide 7
The Circular Flow of Income Cont’d
Slide 8
Objectives of national income
accounting
• National Income Accounting considers 2 main objectives
which are:
i.
It attempts to present a description of the economy in
statistical terms i.e. in the form of tables and accounts
which will be understood by administrators and economists,
thus national income accounting gives a summary of
economic activities in the country in a particular time period
ii.
It provides the aggregate basis for planning and policy, thus
with the summary of the entire economy in the national
income accounting policy makers and planners find it quite
easy to implement policies and plan(plans)
Slide 9
Importance of National Income
Accounting
• The estimates of national income provide useful information on the
economic performance of an economy over time, the growth of the
economy and structural changes, and the general economic position of a
country.
• National income accounts form the basis for national economic policies
since the accounts enable governments to know the direction in which
total output of the economy, sectoral outputs, investment, saving and
other macro-economic variables change. Thus, the government can adopt
proper measures to put the economy on the right path.
• The national accounts is useful for planning purposes since it gives an idea
of the sector that contributes more to the growth of the economy. This
aids planners to adopt measures to activate the other sectors.
Slide 10
Importance of National Income
Accounting Cont’d
• The national income accounts also provide data for
deriving per capita income which is used to measure
welfare.
• They are also used for assessing the distribution of
income in a country.
• The accounts help in comparing the level of progress
between countries.
Slide 11
Topic Two
FORMS OF NATIONAL INCOME
COMPUTATION
Slide 12
Output/ Product Approach
• This method computes national income by summing all net
outputs of all productive activities of business firms, households
and government.
• It calculates what each productivity of economic agents adds to
the value of final output. It looks at the value that each activity
adds to the raw material or other goods and services purchased
from other activities.
• In this summation, intermediate goods are ignored. Intermediate
goods are used for further production of other goods and
services.
• Since it is difficult to determine whether a good is going to be
used as a final product or further production, the valued added is
usually used to determine the value which is added to a product
at every production.
Slide 13
Output/ Product Approach Cont’d
• This approach helps to avoid the problem of double counting since
some products are used for further production.
• For instance, let us consider the case of a manufacturer who
produces sugar. In such a case it is difficult to determine whether
the sugar is going to be used as a final product or used for further
production.
• Suppose the sugar is used for breakfast (i.e. to prepare oats), in this
case the sugar can be considered as a final goods since it has been
used by the final consumer.
• On the contrary, if the sugar is used by a baker to bake cakes then
the sugar is not a final product since it serves as an intermediate
good in this case. So if we add the value of the sugar to that of the
cake, we would have repeated the value of the sugar since it is used
in baking cake hence the problem of double counting will result.
Slide 14
Income and Expenditure Approaches
• Income Approach
This method of computing the value of the national output is in terms
of the incomes earned by the basic factors of production in the
production of the incomes net output; the factors being land,
labour, capital, enterprise.
These factors earn wages and salaries, rent, interest and depreciation,
and profits respectively. The sum of these incomes must equal the
sum of the value added by the various producing units.
• Expenditure Approach
This method looks at the expenditure on produced goods and services.
The method sums the expenditures of the households, business
firms and the government on final products.
It includes all goods and services which are not used up in the
production of some other goods and services.
Slide 15
Topic Three
SOME USEFUL IDENTITIES
Slide 16
Some Useful Identities
• The National Income Accounting (NIA) are just a series of
identities. However, these identities shed light on
important economic realities.
• Y≡C+I+G+X
• This indicates that the national output (Y) is consumed (C),
invested (I), purchased by the government (G) or exported
(X).
Slide 17
Some Useful Identities
• Alternatively, we could express the NIA as
Y≡C+S+T+M
• Here we observe that the national output can be
used by households to finance consumption (C), save
(S), pay taxes (T), or pay for imports (M).
Slide 18
Some Useful Identities
• These identities reveal important implications in
terms of how the national income might be used.
• Moreover, by combining these uses of the national
income, we can reveal interesting economic
implications.
Slide 19
Some Useful Identities
• Y ≡ C + I + G + X -------------- (1)
• Y ≡ C + S + T + M -------------- (2)
• Taking (1) from (2) we arrive at this important and
interesting outcome:
• Y ≡ (S-I) + (T-G) – (X-M) ------- (3)
Slide 20
Some Useful Identities
• If we assume for a moment we are dealing with a
closed economy, then all output is either consumed
or saved/invested.
• Where we have an open economy, then the identity
above sheds some interesting light on the
interactions between the economy and the rest of
the world.
Slide 21