Three national accounting systems System of National Accounts

Three national accounting "systems": • System of National Accounts 1993 (SNA 93; rev. 1953, 1968, 1993, 2008? ) • European System of Accounts 1995 (ESA 95 SNA 93) • NIPA (Nat'l Income & Product Accts, US) re: OECD, Understanding National Accounts 2006 http: //masetto. sourceoecd. org/vl=1134443/cl=17/nw= 1/rpsv/una/

The reference manuals • The standards governing national accounts are enshrined in two international reference manuals: the System of National Accounts 1993 (SNA 93), which is recognised globally, and the European version of this called the European System of Accounts 1995 (ESA 95). • The global manual (SNA 93) is co-signed by the five major international economic organizations: the United Nations, the International Monetary Fund, the OECD, the World Bank and the European Commission. • The European manual is totally compatible with the global manual and includes additional useful details. It also has a more legally binding character because, according to European regulations, EU member countries are obligated to implement it. • These manuals have contributed substantially to improving the international comparability of data, although further progress still has to be made in this endeavor. • The current complete version of SNA 93 is available online: http: //unstats. un. org/unsd/sna 1993/toctop. asp. A new version is now being prepared and due to be published in 2008.

Two basic aggregates: GDP & GNI • GDP Gross Domestic Product • GDP = outputs - (intermediate consumptions) • GDP = (gross values added) plus taxes on products minus subsidies on products * * * • GNI Gross National Income • GNI = GDP + primary income (including earnings) received from the rest of the world – primary income (including earnings) paid to the rest of the world

GDP vs. other aggregates • • • Why the bizarre title gross domestic product, or GDP? Domestic indicates that the output measured is produced within the economic territory of the country, or the group of countries, concerned. (It is in fact entirely possible to calculate GDP for a group of countries, such as that of the euro area. ) Gross means the consumption of fixed capital is not deducted. Domestic is also in opposition to national, as in GNI or gross national income, which is the current title of what was referred to as GNP, or gross national product, in previous systems of national accounts (GNP is still widely used out of habit). GDP measures the total production occurring within the territory, while GNI measures the total income (excluding capital gains and losses) of all economic agents residing within the territory (households, firms and government institutions). For large countries like Germany, the difference between GDP and GNI is small (0. 4%, as seen in the following table). But it is larger for a small country like Luxembourg, which pays out a substantial percentage of its GDP as workers' earnings and other so-called primary income to the rest of the world. Primary income includes interest paid on money invested in Luxembourg also receives substantial primary income from abroad, including interest. In the final analysis, the difference between GDP and GNI is around -11. 5% for Luxembourg. Ireland is in a comparable situation to Luxembourg, since it pays out substantial dividends to the parent companies of the American multinational firms that have set up there, partly, but not entirely, for tax reasons. The result is that Ireland's GNI is 16. 2% lower than its GDP. While for these three countries GNI is lower than GDP, the opposite also happens - Switzerland is a case in point.

GNI vs GDP (in millions of Euro) Year 2003 Germany Luxembourg Ireland Gross Domestic Product 2 128 200 23 956 134 786 + primary income (including earnings) received from the rest of the world +104 610 +52 972 +30 296 – primary income (including earnings) paid to the rest of the world – 118 630 – 55 722 – 52 139 = Gross National Income 2 114 180 21 206 112 943 – 0. 7 – 11. 5 – 16. 2 Difference between GDP and GNI (%)

The Three Faces of GDP Figure 5. 2

5 Measures of National Income Net income of foreigners Net exports 2001 U. S. Income Measures (in billions of $) Depreciation Indirect (business) taxes Personal consumer expenditures Employee compensation Gross private domestic investment Proprietors’ income Interest Rents Corporate profits Government consumption and investment GDP $10, 208 GNP $10, 203 National Income (NI) $8, 218 – Minus – Corporate profit taxes, corporate profits and social insurance taxes Personal income taxes – Plus – Transfer payments, net interest, and dividends Personal income Disposable income (DPI) $7, 417 (PI) $8, 724 • Above are 5 alternative measures of national income. • These range from GDP (broadest) to Disposable Income • Plus: GNI GNP; NDP NNP; Domestic Income; DPI=C+S+[%o. CL]

Two types of comparisons: in space & in time • Spacial comparisons: typically between countries (also: regional, etc. ) – here problems of purchasing power differences between countries (regions) and of exchange rates • Time comparisons: time series (short and long) – here problems of purchasing power changing over time ("price inflation and disinflation")

http: //web. worldbank. org/WBSITE/EXTERNAL/DATASTATISTICS/0, , content. MDK: 20399244~menu. PK: 1 504474~page. PK: 64133150~pi. PK: 64133175~the. Site. PK: 239419, 00. html downloaded on March 1, 2009 The Quick Reference tables available here show the most recent World Bank estimates of total population, gross domestic product (GDP), and gross national income (GNI). The tables include a ranking of countries both by total size and in per capita terms. Measuring the size of economies There are many ways to measure the size and performance of an economy. The relative size of economies, reflected in the rankings provided here—and changes in rankings from one year to the next—depend on the specific indicator and the method used to covert local currencies to U. S. dollars. 1. World Bank Atlas method 2. Purchasing power parities 3. Market exchange rates 4. Why do rankings change? 5. Ranking tables (revised estimates for 2007 posted September 2008 & October 2008): a. b. c. d. e. GNI per capita 2007, Atlas method and PPP GNI 2007, Atlas method GDP 2007, PPP Population 2007

1. World Bank Atlas method The World Bank’s official estimates of the size of economies are based on GNI converted to current U. S. dollars using the Atlas method. GNI takes into account all production in the domestic economy (i. e. , GDP) plus the net flows of factor income (such as rents, profits, and labor income) from abroad. The Atlas method smoothes exchange rate fluctuations by using a three year moving average, price-adjusted conversion factor.

2. Purchasing power parities Purchasing power parity (PPP) conversion factors take into account differences in the relative prices of goods and services— particularly non-tradables—and therefore provide a better overall measure of the real value of output produced by an economy compared to other economies. PPP GNI is measured in current international dollars which, in principal, have the same purchasing power as a dollar spent on GNI in the U. S. economy. Because PPPs provide a better measure of the standard of living of residents of an economy, they are the basis for the World Bank’s calculations of poverty rates at $1 and $2 a day. The GNI of developing countries measured in PPP terms generally exceeds their GNI measured using the Atlas method or using

3. Market exchange rates The total GDP data shown here measured in current U. S. dollars use annual, market exchange rates. This means that the values and derived rankings are subject to greater volatility due to variations in exchange rates. Inter-country comparisons based on GDP at market prices should, therefore, be treated with caution.

4. Why do rankings change? Year to year changes in the nominal level of output or income of an economy are affected by a combination of forces: real growth, price inflation, and exchange rates. Changes in any of the three can affect an economy’s relative size and, therefore, its ranking in comparison to other economies. • The economic series shown are measured in nominal terms, and so their level from year to year is affected by changes in the general price level. • The Atlas method dampens variability caused by fluctuations in exchange rates, • while the PPP method eliminates the effects of differences and changes in relative price levels. • Nominal GDP, perhaps the most familiar measure of aggregate economic activity, is most subject to price and exchange rate effects.

5. Ranking tables (revised estimates for 2007 posted September 2008 & October 2008): • GNI per capita 2007, Atlas method and PPP • GNI 2007, Atlas method • GDP 2007, PPP • Population 2007 Regional tables from the 2008 World Development Indicators: Key indicators: regional comparisons for People, Environment, Economy, States and Markets, and Global Links. Country comparisons: East Asia & Pacific, Europe & Central Asia, Latin America & Caribbean, Middle East & North Africa, South Asia, Sub-Saharan Africa Technical notes Country classification

Definitions More technical descriptions of the indicators discussed above are as follows: Gross national income (GNI) in US$ Atlas method: GNI is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad. Data are in current U. S. dollars, converted from countries’ respective national currencies using the Atlas method, which uses a three-year average of exchange rates to smooth effects of transitory exchange rate fluctuations. (GDP & GDP per capita growth rates, however, are calculated from data in constant prices and national currency units, not from the Atlas method estimates). The World Bank favors the Atlas method for comparing the relative size of economies and uses it to classify countries in low, middle and highincome categories and to set lending eligibilities in order to reduce short-term fluctuations in country classification.

Purchasing power parity gross national income (PPP GNI): This measure is GNI converted to international dollars using purchasing power parity. An international dollar has the same purchasing power over GNI as a U. S. dollar has in the United States. The World Bank favors this measure for accurate measurement of poverty and well-being; in effect, it substitutes global prices for local measured prices, thereby more accurately reflecting the real value of the good or service in question. This is especially true of non-tradable services (haircuts are the example) which are assumed to produce the same level of welfare from one country to another, but which vary widely in their measured local price.

Gross domestic product (GDP) in current prices: GDP is sum of gross value added, at purchaser prices converted at market exchange rates to current U. S. dollars, by all resident producers in the economy plus any product taxes (less subsidies) not included in the valuation of output. It is calculated without deducting for depreciation of fabricated capital assets or for depletion and degradation of natural resources. GDP is equal to GNI less net receipts of primary income. Value added is the net output of an industry after adding up all outputs and subtracting intermediate inputs. The World Bank does not use this measure for classification of countries into income groups or poverty levels, as it is subject to distortions caused by short-term exchange rate fluctuations, policies and interventions. However, GDP measured in constant, local currency units provides the basis for estimates of overall economic growth. For more information please see the notes and definitions included in the World Development Indicators 2008.

Nominal vs Real GDP (etc. ) • Economists and journalists have acquired the unfortunate habit of using the general term growth instead of specifying growth in real GDP. • A typical sentence is: "growth is 2%" instead of "growth in real GDP is 2%". This lack of precision sometimes results in bizarre terminology, such as negative growth, which is an oxymoron; it would be better to say a decrease of GDP in volume. • Incidentally, national accountants prefer the term GDP in volume to real GDP because inflation is just as real as growth.

Gross domestic product, in value and in volume, Germany, in millions of Euro Source: OECD (2006), National Accounts of OECD Countries: Volume I, Main Aggregates, 1993 -2004, 2006 Edition, OECD, Paris. Stat. Link http: //dx. doi. org/10. 1787/142154615437

Output of the U. S. Economy, 1900 -2004 Figure 4. 1

Volume vs value terms • The subject of measuring economic variables (and SNA/ESA/NIPA categories in particular) in terms of their changing volume rather than value (real vs. nominal) will be allaborated in the next presentation. • It'll deal with calculating SNA categories in constant prices, construction of deflators such as Laspeyres, Paasche and Fisher aggregate indexes, as well as chain-linked series of them.