Download Measurement – class 2

Measurement – class 2
National Accounting - GDP
Practical information
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Statistics: 2 good textbooks
• For those who want to catch up:
– Wonnacott and Wonnacott (Eng. or Fr.)
– Full of examples, exercises
– Empirical approach
• For those who want more math:
– Tassi (Fr.)
– Theoretical approach
Econometrics: 1 good textbook
• Empirical, excellent
– Wooldridge: Introductory Econometrics, a
modern approach
– Full of examples, exercises
– Empirical approach
Measurement – class 2
National Accounting - GDP
What are National Accounts?
• A conceptual framework
• A number of people working in NSIs over
the world
• Goal = to provide conceptual and
measurement tools to describe the
economy COHERENTLY
What are National Accounts?
• National accounting – a set of rules and
definitions for describing and measuring
economic activity (production, income…)
in the aggregate economy – that is, in the
economy as a whole.
Question
• Any idea how much is the GDP of the US? Of
France? Of another country?
• (US $14,000,000,000,000 // FR 1.7 milliards €)
1.1. Defining GDP
• Introduction: the Germany, dec. 2004 example
1.1. Defining GDP
• OECD comments:
• “Based on strong export growth, the German
economy is recovering from three years of stagnation.
Weak domestic demand is still weighing on activity
although there are signs that investment is
strengthening. Private consumption declined as
consumers’ confidence remained subdued and rising
unemployment, tighter social security benefits, and
accelerating consumer prices reduced disposable
income growth.”
1.1. Defining GDP
1.1. Definition
• Gross Domestic Product (GDP) is the total
value of all the output (production) of an
economy during a given period of time.
• Represents the amount of money one would
need to purchase a year’s worth of the
economy’s production of all final goods
• It is the single most-used economic measure
1.1. Defining GDP
• Calculating GDP requires adding together million
of goods and services.
• All goods and services produced by an economy
must be weighted.
• Each good and service is multiplied by its price
• Once quantities of a particular good or service
are multiplied by its price, we arrive at a value
measure of the good or service
• All the units of value are added to arrive at GDP
1.1. Defining GDP
• Produced by whom?
– Firms
– Non-profit institutions
– Government bodies
– Households
• Produced where?
– On a given territory: difference GDP / GNP
1.1. Defining GDP
• Example: Germany vs Luxembourg
1.1. Defining GDP
• GDP Is a Flow Concept
– Only what is added to the economy between
Jan N and Dec. N
– The store of wealth is a stock concept
► Wealth accounts – a balance sheet of an
economy’s stocks of assets and liabilities
1.1. Defining GDP
• Introducing the OECD’s “pasta example”
1.1. Defining GDP
• GDP as an economically relevant
aggregate
• Does not depend on the way the economy
is organized
• Key concept: value added
– VA = value of the output – value of
intermediate consumptions
– Avoids double counting
1.1. Defining GDP
1.1. Definition
• GDP =  value added
=  outputs -  intermediate cons°.
More accurately, GDP =  gross value added +
taxes - subsidies on products
1.1. Defining GDP
• Why “gross”?
– It means the consumption of capital is not
counted
– New wealth created during the period = NDP
= GDP – cost of using up capital (CFC)
– A better measurement in theory
– But measuring CFC is complex and different
across countries
– Rankings and growth remain the same with
NDP or GDP
1.1. Defining GDP
• Demand = Investment + final consumption
– Investment = ‘Gross capital formation’ / ‘Gross
Fixed Capital Formation’ (excludes stockbuilding = “changes in inventories”)
• “Gross” because CFC not deducted
– Consumption = ‘Household final consumption
expenditure’. All purchases but dwellings,
counted as Household GFCF
1.2. The expenditure approach
OUTPUT (SUPPLY) = DEMAND
• Pasta example (2)
1.2. The expenditure approach
• GDP =  final demand aggregates
= HC + G + GCF + (X - M)
Can be rewritten as
SUPPLY = DEMAND
1.2. The expenditure approach
• Example: Germany, 2004
1.3. The income approach
• Production generates income, shared
between 3 “factors of production” : Labor,
Capital, Intermediate consumption
• Value added is shared between K & L
OUTPUT = INCOME
V.A. = Wages + Profits
= compensations + operating surplus
+ ‘mixed income’
Conclusion of part 1 (1/2)
• 3 approaches to GDP
– OUTPUT:  value added
– FINAL DEMAND : C + GCF + (X-I)
– INCOME : compensations + profits
The Circular Flow
Wages, rents,
interest, profits
Factor services
Household
Goods
Government
Firms
(production)
Financial markets
Personal consumption
Rest of the World
© 2004 The McGraw-Hill Companies, Inc.
Calculating GDP: Some
Examples
• Selling your two-year-old car to a neighbor
does not add to GDP.
• Selling your car to a used car dealer who
then sells your car to someone else for a
higher price, adds to GDP.
• The value of the dealer's services is added
to GDP.
Conclusion of part 1 (2/2)
• Ex: Germany, 2004
GDP Components of
Measurement
GDP Components of
Measurement
Consumption
69 %
GDP Components of
Measurement
Investment
13%
Consumption
69 %
GDP Components of Measurement
Investment
13%
Consumption
69 %
Government
Spending
19%
Investment
13%
Government
Spending
19%
Net Exports
-1 %
Consumption
69 %
2. What is production?
• Most of what is included in production is
uncontroversial
• Everything that is sold = OK
• But what about government (army,
education…?)
• Services by households: paying your
neighbor to mown the lawn ? Doing it
yourself?
2. What is production?
• Services of H to themselves: no
– Cooking, cleaning, child care…
– Main reason: would mean making very bold
estimates of market value
• Cost of such a service?
• Opportunity cost? Whose wage?
– Consequence 1 (Hicks): marrying your cook
reduces GDP (anecdotal)
– Consequence 2: dvp of services to
households while women go into the labor
force increases GDP twice (serious)
Unpaid domestic work: 30 to 50% of GDP
Source: OECD report
2. What is production?
• Services of H to themselves: no
– Exception: homeowners’ “housing service to
themselves”
– Rationale : growth in ownership rate would
make GDP decline? + international
comparisons
– No direct measurement possible  imputation
– Paid services by households are estimated
(babysitting…)
2. What is production?
• Goods produced by H for themselves: yes
– Esp. food produced for own consumption
– Not big in industrialized countries, but ++ in
developing countries
– Tools, furniture… as well
• The GOODS produced by Households are
included, the SERVICES are not (except housing)
2. What is production?
Source: Understanding National Accounts, OECD, 2006
Schéma ins and outs (0)
Production
Market transactions
Schéma ins and outs (1)
D = illegal activities
C = home production of
services (except housing)
A = Market transactions not
in production: “past and
future production”
B = production not on the
market but estimated
Schéma ins and outs (2)
2. What is production?
• The illegal & the underground economy
– Illegal = forbidden trades
• Not estimated, in practice, except some countries
• Under 1% of GDP in OECD countries
– Underground = allowed but hidden to escape
taxes
• Estimated by national accounts and included in
GDP
2. What is production?
• The underground economy : how does
INSEE (France) estimate its production ?
– Black labor: + 1% GDP
• Estimated sector by sector on ‘expert knowledge’
(investigations + sociological research)
– Tax evasion: + 3% GDP
• Inference from tax investigations + theoretical VAT
calculated on recorded transactions
2. What is production?
2. What is production?
• Market sectors whose output is difficult to
measure (1)
– Banks: how to value the lending of money?
• Difference between interests paid and interest
received = “FISIM”
• Formula = (rl-rr).L + (rr-rd).D
L = loans /D = deposit
– rr in Europe = average of inter-bank rate and longer-term
rates
– rr in the US = rate on US treasury bonds
• Output = consumption => allocated between firms’
int. cons. and households’ final consumption
2. What is production?
• Market sectors whose output is difficult to
measure (2)
– Insurances : Premiums = indemnities + claim
expenses + profit
• Output = claim expenses + profit
• Calculated as premiums received – indemnities
paid out
– Income from invested premiums
“theoretically” belong to the households
• Output = premiums received + investment income
– indemnities paid out
2. What is production?
• General Government
– Defense, education, health care, foreign
policy, economic policy…
– Output is calculated as the sum of production
costs:
•
•
•
•
Intermediate consumption
Compensation of civil servants & other employees
Consumption of fixed capital
Taxes (in rare cases)
– Pb: no return to investment!
• Ex: x-ray machine at a public hospital vs. at a clinic
3. Defining final uses
• The “expenditure approach”
• Final uses = final expenditure = demand
GDP
=  final demand aggregates
= HC + G + GCF + (X - M)
= domestic demand + external demand
3. Defining final uses
• The subcategories of GDP can be
misinterpreted.
– For example, the line between investment and
consumption is often fuzzy.
• Ex: where would you classify the
expenses of companies on software?
3. Defining final uses
• Households
– By convention, all their purchases are final
– Even cars, or wine they will keep for years
– Except dwellings, counted as GFCF
3. Defining final uses
• Government
– By convention, general government
consumes the goods it produces
3. Defining final uses
• Firms: “The GFCF borderline”
– Most capital goods are straightforward:
machinery, warehouses, offices, factories…
– In principle, the difference btw GFCF and int.
cons. is “used entirely within a year”.
– How about software then? It is now included
in GFCF
– Mineral exploration is now included in GFCF
3. Defining final uses
• Firms: “The GFCF borderline”
– Intangible assets: trademarks, copyrights?
• Theoretically included in GFCF
– R &D expenditures?
• Not yet included, but will be in 2012
• Shows that national accounting is a live
process, ever adapting to changing
economic realities…
3. Defining final uses
3. Defining final uses
• Imports and exports
– “degree of openness” is important in
economics
3. Defining final uses
• Imports and exports
– Here, the definition of the Economic territory
is very important
– Ex: French overseas territories were
previously NOT included in France’s ntaional
accounts
– Now, they are  less import/export + output
of overseas firms included in France’s
production
– “resident units”: more difficult to define when
borders blur (transnational workers, firms…)
4.1. Measuring GDP
• How do we obtain these figures?
– These are STATISTICS : estimates,
approximation
– Very different from corporate accounting!
4.1. Measuring GDP
• Firms: sources from taxation
– Companies tax declarations (profit taxes)
– France: 2 million firms
– Problems with improvements in definition of
GFCF: software is not recorded as investment
by firms (current expenditure) 
approximation from other sources
– Value of copyrights as GFCF : not properly
estimated
4.1. Measuring GDP
• Government:
– “public accounts directorate” merges together
accounts of central gvt, local authorities and
other gvt institutions
4.1. Measuring GDP
• Households: more complicated
– No accountants doing the bookkeeping!
– Consumption: retail sales – the share
assumed to go to firms (rough estimate!)
– Car registrations
– Tax data for tobacco & alcohol sales
– Gas and electricity: until now, state
companies
– Little if no use of HBS (used products are not
to be counted in N.A. + value-added break up.
Ex: organized travel)
4.1. Measuring GDP
• Households: more complicated
– Compensations: from firms, gvt and non-profit
units
– Dividends = by difference
• Dividends received by H = dvd paid by firms – dvd
received by firm and gvt – net dvd from abroad
– Admittedly not entirely satisfactory
• Concentrates measurement errors on H
4.1. Measuring GDP
• Imports and exports
– OK for goods that go through customs: data
from customs service
– But services escape measurement!
– Have to rely on surveys of firms dealing with
the rest of the world
– Another challenge for national accounting!
– Plus, European market  no more
compulsory declaration, but customs surveys
– Total EU-EU exports > total imports by 5% !
4.1. Measuring GDP
• Statistical but no way of measuring its
accuracy
• No confidence interval
• Not “sample  survey  inference on
population” framework, but mix of sources,
adjustments…
4.2. Quarterly accounts
• Use monthly indicators to extrapolate
value of N.A. variables
• Example 1: turnover estimated through
VAT declarations, used to estimate growth
of output (neglecting changes in stocks)
• Example 2: car registrations (new license
plates) used to estimate car consumption
4.3. When is GDP “final”?
• Never… (new base years)
• April Year n + 3
Conclusion
• Measurement is necessary.
• GDP measurement categories have made
it possible to think and talk about the
aggregate economy.
“Lessons to be learnt” (1/2)
• Aggregation means comparison: making
things equivalent under some respect
(here: market value)
 Always wonder what kind of aggregation
made a figure possible
• Flow variables vs. stock variables
 Always wonder what you have and what
would be more relevant
“Lessons to be learnt” (2/2)
• Trade-off between getting information fast
& reliability
 statisticians vs. political demand
(unemployment figures as case in point)