Please carefully explain the disadvantage of using chain-linked volume numbers for 2002 Q2 (instead of using expenditures at 2002 Q 1 dollar levels)
- they are not additive
- thus, we cannot calculate the aggregate by summation of the components
Corresponding Names of accounts + missing items
What are “social transfers in kind”?
Goods and services ...
- ... that are provided by general government or NPISHs
- ... and are delivered to individual households.
Why are “social transfers in kind” payable (left hand-side) and receivable (right hand-side) equal in the above account?
Because it is the aggregate account
or: because there are no social transfers in kind to and from non-residents
What is the general interpretation of value added?
Value created by production
Is value added completely paid as compensation to the owners of labor and capital? Please explain your answer.
no, part of value added is appropriated by the government: taxes (less subsidies) on production and imports contained in value added
What is the relation between gross value added and net value added? Please answer this question by completing the following equation: net value added = gross value added
net value added = gross value added - consumption of fixed capital
Compared to gross value added, what is the advantage of net value added? It does not include consumption of fixed capital
→ good since that is not a value “added”
(or: good since that is a cost of production)
An indicator of aggregate economic production should fulfil several requirements. Please name two of these
- avoid double counting
- measurable in practice
- independent of non-economic factors
- independent of the organisation of firms
What is the arithmetic relation between GDP and GNI? Please complete the following equation: GNI = GDP
GNI = GDP
+ income received by residents from abroad
- income created in the domestic country but paid to non-residents
What is the conceptual difference between GDP and GNI, i. e. what is the difference in approach?
- GDP is based on the place of production (or: place of creation of income)
- GNI is based on the residence of the receiver of income
“Social transfers in kind” payable (left-hand side) and receivable (right-hand side) are equal in the above account because it is the account of the total economy. Is adjusted disposable income higher or lower than disposable income for the following sectors?
- Private Households: higher
- General Government: lower
- NPISHs: lower
For private households, what is the difference between “actual final consumption” and “final consumption expenditures”. Please answer this question by completing the following equation: actual final consumption = final consumption expenditures ...
actual final consumption = final consumption expenditures
+ social transfers in kind, receivable
- social transfers in kind, payable
For the sector of private households, please give one advantage of actual final consumption as compared to final consumption expenditures
- better indicator of the standard of living because it includes the value of social transfers in kind (or: because it includes the value of all consumption goods and services acquired by households, whether by purchase or by transfer)
- better indicator for international comparisons because the degree of procurement of household consumption goods and services by government and NPISHs differs between countries
There are three ways to measure GDP (“approaches” to GDP). Please name two of these “approaches”.
- output approach
- income approach
- final-demand (or: final-expenditures) approach
Please briefly explain one of these “approaches”
- output approach: gross values added
- income approach: compensation of employees (or: labour income), gross profits
- final demand approach: consumption, gross investment and net exports
Which magnitude makes the difference between GDP and NDP?
consumption of fixed capital (or: depreciation)
For the “approach” explained in b), please precisely say which component has to be replaced by which other component in order to calculate NDP
- output approach: gross values added by net values added
- income approach: gross profits by net profits
- final demand approach: gross investment by net investment
What is the principle of treating illegal and underground production activities in GDP?
included in GDP
Please give an example of an illegal activity to be included in GDP
drug production; or: trade in stolen goods
How are illegal activities measured?
estimated
What is supposed to be the percentage share of illegal activities in GDP?
less than one percent
We want to compare the development of the standard of living of Pakistan and Germany. We do so by using growth rates of GDP in value (i. e. at current prices). Please name two deficiencies of this approach and indicate how to correct them.
(i) differing inflation rates: use growth rates in volume
(ii) differing currencies: use growth rates in same currency
(i) diff. purch. power (or: price levels): use growth rates in vol. obtained by PPP rates
(ii) differing population growth: use growth rates per capita
In brief, what does the capital account show?
acquisitions and disposals of non-financial assets
We are given the following incomplete capital account. Please give the names of the missing positions (A) to (C), with (C) as the balancing item
Why should we use value added instead of output as an indicator of production?
value added is independent of the organization of production or: value added avoids double counting
In which sense can we interpret value added as cost of production?
value added = cost of labor (or: salaries) + cost of capital (or: profits)
Is value added of the total economy a comprehensive indicator of national income? Please briefly explain your answer.
no, because net income from abroad must be added
(or: taken into account)
In principle, indicators of aggregate production do not include non-market goods and services provided by private households. Why not?
difficult to measure
Please name and explain one exception to this principle (International comparison)
(A) Production of goods for own consumption
Reason: important role in developing countries → important for international comparisons
(B) Housing provided by homeowners to themselves
Reason: (i) rate of homeownership varies between countries → important for international comparisons
or: (ii) long-term upwards trend in home ownership → important for intertemporal comparisons
In statistical practice, the index of the production volume for period 2 is obtained by dividing the value index by a certain price index. What is the name of that price index?
Paasche Index
Underground activities. Please give a general definition of underground activities.
legal activities, carried out illegally
Please give an example of an underground activity.
repair work paid in cash
How are underground activities determined?
We look at the “balancing item” of the accounts of household H. What is the name of the balancing item of the non-financial account?
net lending/net borrowing
What is the name of the balancing item of the financial account?
Net lending/Net borrowing
In the financial account of any agent, there are basically two types of financial transactions. Please name these two types of financial transactions.
- counterparts to non-financial transactions
- purely financial transactions
In how far do they have different implications for the financial position of an agent?
Non-financial transactions affect net lending/net borrowing, while purely financial transactions do not
What is the difference between gross saving and net saving?
What is the reason for a negative value of net saving?
Consumption exceeds disposable income
How can negative net saving be financed?
by disposing of assets or by incurring liabilities
The accumulation accounts are a set of four accounts. In general terms, what do all the accounts show on their left-hand side, what do they all show on their right-hand side?
- Left: changes in assets
- Right: changes in liabilities and in net worth
Please give the names of the four accounts
- capital acc.
- financial acc.
- other changes in volume of assets acc.
- revaluation acc.
For two of the accounts, please briefly describe what they show in particular
(i) Capital account: acquisitions and disposals of non-financial assets (or: left: transactions in non-financial assets right: changes in net worth due to saving and capital transfers)
(ii) Financial account: acquisitions and disposals of financial assets (or: left: transactions in financial assets right: transactions in liabilities; net lending/net borrowing)
(iii) Other changes in volume of assets account: Changes of assets and liabilities that are neither due to transactions nor to holding gains or losses (or: exceptional events causing changes in volume of assets or liabilities)
(iv) Revaluation account: holding gains and losses
The intermediate consumption and the value added at current prices, assuming no change in prices during the period. In contrast to a), let’s suppose that there were increases in prices of raw materials during the period. Please explain why we would have to modify the calculations in a)
- change in inventories of raw materials would include holding gains
- those gains would have to be excluded
value added is independent of the organization of production
or: value added avoids double counting
Exports and imports are defined using the concepts of “economic territory” and of “resident”. Please briefly explain one of those concepts
- Economic territory: area of the state
- Resident: unit whose “center of economic interest” is situated in the state
How is the degree of openness of a country measured?
exports plus imports as percentage of GDP
Which types of exports and imports are included in GDP?
goods and services
There are several sources of data for exports and imports. Please name two of them
- custom authorities
- tax authorities
- banks
- surveys of major traders
Why does the table use volume data, not data at current prices?
data at current prices include price changes; however, these do not indicate welfare changes
or: only volume changes indicate welfare changes
Why are data expressed “per head”?
changes of GDP can be caused by population changes; however, these do not indicate welfare changes or: only changes of GDP per capita indicate welfare changes
Why are data expressed “at PPPs” ?
GDPs in volume based on national prices can be different simply because the national price levels are different; however, these do not indicate different welfare levels
or: differences in purchasing powers of national currencies must be eliminated
In the headline of the table, we read “USA = 100”. What does that indicate?
all data are relative to the data of the USA or: are expressed as percentages of the US data
General government is an example of a non-market producer. What is the definition of a non-market producer?
provides goods and services at prices that cover less than half of the production costs
What is the problem of calculating output of a non-market producer?
cannot be calculated by using sales (or: revenue) data
or: must be calculated using costs of production
In the financial account of any agent, there are basically two types of financial transactions. Please name these two types of financial transactions
What is the general purpose of the accumulation accounts?
show flows that affect the balance sheets (or: that affect stocks)
Please name the four types of accumulation accounts.
- capital
- financial
- other changes in volume of assets
- revaluation
Why do we use “USA = 100”?
because we want to make directly visible differences in level compared to the USA and their changes
Negative Output
result not meaningful reason: company has provided insurance services
(or: fulfilled its role)
Households’ final consumption expenditure is the sum of four elements: (1) Purchases of goods and services (2) Partial payments for goods and services provided by general government (3) ... (4) ... Please name the elements (3) and (4)
imputed expenditures
consumption made outside the home territory
We take a closer look at item (2): partial payments for goods and services provided by general government. Please give one example for this category.
ticket for entry in museum
Or: payment for medical services not reimbursed by government
Please carefully explain one reason why this category (HH expenditure) is a problem for the system of national accounts
Household expenditure is a misleading indicator for comparison over time: Household payments change due to changes in regulations → change of consumption expenditure though consumption (or: welfare) of households does not change
or:
Household expenditure is a misleading indicator for international comparison: Household payments differ between countries to different regulations → differences of consumption expenditure though consumption (or: welfare) of households does not differ
Please carefully explain how the problem is solved in practice.
- Use of indicator “Actual household consumption”
- Next to household consumption expenditure, this includes “individual consumption expenditure of general government”
- It is therefore insensitive to shifts between the two elements of household consumption
Households’ final consumption expenditure is the sum of four elements: (1) Purchases of goods and services (2) Imputed expenditures (3) ... (4) ... Please name the elements (3) and (4).
- Partial payments for goods and services provided by general government
- consumption made outside the home territory
We take a closer look at item (2): imputed expenditures. Please name two examples for this category and briefly explain one of them
- owner-occupiers’ imputed rents: people living in dwellings they own are assumed to be selling housing services to themselves
- own-account consumption of goods: consumption of goods produced by people for themselves
- income in kind: goods and services employees receive as part of their wages
- Financial intermediation services indirectly measured (or: FISIM): bank services received free of charge (or: at prices below production cost)
Please name two difficulties of international comparisons
- methods for calculating (or: estimating) variables can differ between countries
- institutions can differ between countries
- currencies can differ between countries
- price levels can differ between countries
Please define the saving ratio (s)
Usually, currencies vary from country to country. For example, Germany has the euro while Great Britain has the pound. Does this play a role for the comparison of national saving rates? Please carefully explain your answer.
- No!
- both numerator and denominator are expressed in the national currency
- division of numerator by denominator eliminates currency (2)
When it comes to calculating the saving ratio, some countries use a gross approach while others use a net approach.(i) What is the difference between the two approaches?(ii) Why does the net approach necessarily lead to a lower saving ratio than the gross approach?
(i) gross approach includes consumption of fixed capital (CFC), net approach does not
(ii) by deducting the same amount CFC from gross variables in numerator and denominator, net approach reduces numerator relatively more than it reduces denominator
Output, Intermediate Consumption, Value Added. Suppose, that there had been inflation. Briefly indicate why this would have made the calculation more difficult
- change in inventories would include price changes
- these would have to be eliminated
Final uses are defined in a general, abstract manner as goods and services that are not intermediate uses. What is meant by “intermediate” uses?
goods and services ...
- ... consumed (or: used up, or: transformed)
- ... in production
- ... within the country
- ... during the accounting period
In economic theory, final uses of GDP have a special name and are considered to be extremely important. Please briefly explain.
- name: demand
- relevance: determine growth (or: GDP) in the short run
Please characterize in general terms a purely financial transaction.
does not change net lending/net borrowing
or: is only recorded in financial account
or: does not lead to entries in non-financial account
Which types of purely financial transactions exist?
1) Asset change
(2) Liability change
(3) Simultaneous change of assets and liabilities
Different terms
GDP at current prices
GDP in volume
GDP deflator
Public Deficit
- GDP at current prices = nominal GSP
- GDP in volume = GDP at 1995 prices = growth = real GDP = GDP at constant prices
- GDP deflator = GDP price index
- Public Deficit = General government net borrowing
Volume changes in inventories: levels or contributions to GDP?
- If accounts are calculating a perceiving year, data is in volume terms
- If accounts are calculated in current prices, they’re additive
- If data from year x is calculated with prices of year x, they’re additive and laspeyre volumes
In which branches are non-market activities found?
- Public administration and defence, education and human health
Which branch contains the imputation of rents for homeowner/occupies?
Public Administration and Defence, Education and human health
Value added is a concept used for branches not products
- Value Added wouldn’t be included by products
- Output is slightly different in terms of production
- Intermediate consumption would take on a different meaning
Why are no changes in prices important?
It makes possible to calculate change in inventories by simply substracting the value of the stocks at the end of the period from the stock value at the beginning. If prices were not constant this simple calculation would include holding gains or losses, those would have to be substracted or deducted in the calculation of intermediate consumption gross output
Definition welfare
= quantity of goods and services, therefore try to show changes in volume
Total consumption expenditure
by households don’t include expenditure by foreign tourists but in the consumption of two risks. It is included in exports of tourist services
Actual household consumption
is not equal to household consumption expenditure plus that of general government. Only the individual expenditure of general government and non-profit institutions are included in actual household expenditure
Actual consumption of general government
is equal to it’s collective consumption expenditure
Individual consumption
= benefit individual households, like primary education, reinversement of medicine, operating cost of pension funds
Collective consumption
either they can’t attribute the benefits to individual households or they also benefit enterprises like medical research, plice and fire bregades, cost of free concerts in municipal park or expenses of troops serving with UN forces
Fixed capital formation
includes transport equipment and live cattle, it’s an investment and part of capital formation
Pros and Cons of net value added
+
-
Net value added wants to measure a value created by production, so it’s good, because it doesn’t include consumption of fixed capital because it’s not created but used up
Practical reason: In practice it’s difficult to measure consumption of fixed capital. Meaning the calculation of net value added may be imprecise
On which prices is GDP based + relation of the price concept to others
- It is based on purchasers prices, which means prices paid by the purchaser
- Value added tax or similar tax, deductable by the purchase (Final Consumers can’t reduce it)
GDP from output at basic prices
- Concept is particularly relevant for the producers, because it was the prices he actually pays and receives
- He pays purchasers prices for intermediate consumption and receives basic prices for outputs
Gross value added at factor costs
Income available for distribution out of gross value added after all payments of taxes on production and the receives of all subsidies on production
- a holding gain adds to agents’ income
false
- a holding loss reduces agents’ income
False
- a transaction is generally recorded four times
true
- every non-financial transaction has a counterpart recorded as a financial transaction
True
- every financial transaction has a counterpart recorded in the non-financial accounts
- the price of an asset remains constant, at it’s purchase price
- human capital is included in the evaluation of national accounts wealth
- in a closed economy, the sum of the balancing items B9 is net lending/net borrowing is zero
- repayment of a loan leads to an increase in recorded assets
- the difference between the net values at 31 December in the current year and 31 December in the previous year is explained entirely by the balancing item B9 net lending/net borrowing of the agents concerned
Increase treasury bond in year x
- By increased market rate the discounted factor becomes smaller and the corresponding cash flows as well --> sum of the Present Value falls
- Bad Implication:
- The assumption we usually make is that the price of the bond corresponds to the present value
- The market prices of financial assets have become under pressure
- Price of financial and real assets have crashed down
- Price of bond in the secondary market falls and experiences a capital loss
Issue bond at a lower price
- bond is issued at new Present Value - In national accounts: old PV – new PV -> interpreted as additional interest payment by the government
- This additional interest payment is spread over the lifetime of the bond -> national accounts record annual interest payment of the value
- And: In addition to balance sheet of government:
- liability will be equal to new PV at time of issue
- liability will be raised by interest payment each year -> at maturity (end of year)
- liability will be old PV -> amount of government must be pay back
Zero-coupon bond
- During the lifetime of the bond there are no coupon payments
- All the coupon payments are made to maturity
- There is no reinvestment risk because everything is invested inside the bond
- The bond today is much lower – deep discount bond
- Deep discount bond: bond issued below “par” and redeemed at “par”
Calculation residual debt of central government
- Problem: T-account “for one of the late periods” is not sufficient/correct because it doesn’t fully indicate the changes in pesion rights
- financial accounts must be modified
- the modification have cross entries in the non-financial accounts
- Example: accounts for first period of retirement benefit payment
Producers price
price excluding value added tax that the producer invoices to the purchaser
Quadruple Entry
Treatment of dept cancellation
Output Bank
comissions - interest paid + interest received
Intermediate consumption Bank
purchases (not software) - change of inventory
Output Distribution
Value of Sales - value of production bought for resale - inventory change of resale
Intermediate Consumption Distribution
Operating expenses (packages)
Output Insurances
Premiums + Investment Income - Indemneties paid
Intermediate Consumption Insurances
Consumables - inventory change
Output Non-Profit / Non-Market
Sum of production costs
Intermediate Consumption Non-Profit / Non-Market
Goods and Services consumed in production within the country during the accounting period
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