National Income and Product Accounts

 The national income and product accounts provide the aggregate values of the final goods and services that are produced in a country during a specified period of time. They are designed to answer some basic questions: what and how much does our economy produce? Which are the producing sectors? How much is saved and invested? How are the shares of income divided among the factors of production: land, labor, capital and organization?

Approaches to National Income and Product Estimation:

 

There are three ways to estimate the aggregate output of an economy. They are

 

         Production or value-added method:

         Income method, and

         Expenditure method.

 

In the production method, gross output or sales in real terms including those for exports) of goods and services produced by the private (and public, if any) economic enterprises in various industrial sectors, by the government sector, and by private households, are estimated (including net increases in inventories); then the purchases of all intermediate goods used during the production process (including imported ones) are subtracted to obtain the total domestic value added. Therefore, it is the sum of value added of all producing sectors.

 

In  the income method,  the  aggregate  income  before  taxes  received  by the factors of  production is estimated by adding remunerations of employees and the operating surpluses of all producing units

 

In the expenditure method, final expenditures for private consumption, gross private investment, public consumption, gross public investment, net increase in inventories, and net exports (the difference between exports and imports of goods and nonfactor services) are all added together.

 

Because these three alternative methods of estimating the value of domestic production rely on different data sources. Statistical discrepancies may occur. However, the methods are consistent in principle and they should produce similar results.         

Various Measures of National Income:

 

         GDP vs. GNP/GNI

Market Value of all final goods and services produced domestically is GDP GNP/ GNI = GDP + Net factor income from the rest of the World

         Market Price vs. Factor Cost

GDP at market price - Indirect Taxes less Subsidies = GDP at factor cost

         Gross vs. Net

NDP = GDP - Depreciation

NNP = GNP - Depreciation

Macroeconomic Accounts

 Macroeconomic Accounts reflect the aggregate values of the macroeconomic activities. There are four major macroeconomic accounts, namely-

 

1.   National Income and Product Accounts

2.   Govt. Financial Account

3.   Balance of Payment Account

4.   Monetary Accounts

 

Macroeconomic Performance Indicators

 Treasury professionals are always influenced and guided by macroeconomic performance and movement of macroeconomic variables such as interest rate, exchange rate, national savings and investment etc. Therefore, a brief discussion on macroeconomic performance, operation of open economy macroeconomics, and macroeconomic accounts would not be out of place here for treasury professionals. Macroeconomic performance of a country can be judged by examining its macroeconomic accounts (national income account, fiscal account, monetary account and external sector account), which contain many macroeconomic variables like gross domestic products (GDP), the unemployment rate, inflation etc.

 GDP  is the most comprehensive measure of total output of an economy. It is the measure of the market value of final goods and services produced in a country during a year. There are two ways to measure GDP: one, nominal GDP which is measured in actual market prices and second, the real GDP which is calculated in constant or invariant prices. Movement in real GDP is one of best measure of economic performance of a country.

 Of all the macroeconomic indicators, unemployment is most directly felt by the individuals. The unemployment rate is the percentage of the labor force that is unemployed. The labor force includes all employed persons and those unemployed individuals who are seeking jobs. It excludes those without work but not looking for jobs. The unemployment rate tends to reflect the state of the business cycle: when output is falling (recession), the demand for labor falls, and the unemployment rate rises.

Macroeconomic performance also hinges on price stability or controlling inflation. The most common measure of the overall price level is the consumer price index, known as CPI. It measures the cost of a fixed basket of goods (including items such as food, shelter, clothing, medical care etc.) bought by the average urban/rural consumer. We consider changes in the overall price levels as the rate of inflation, which denotes the rate of growth of the price level from one year to the next. When prices decline, we call it deflation.

The macroeconomic performance of a country can be influenced by the government through adopting two major macroeconomic policies tools: Fiscal policy and Monetary Policy.                             

The fiscal policy is concerned with government revenue and expenditures. Government expenditures come in two distinct forms: one, government spending on goods and services, and two, government transfer payment. Govt. expenditures affect the overall level of spending in the economy and thereby, influence level of GDP.

 

The other part of fiscal policy, government revenues, is involved with government tax and non-tax sources of income. Taxation affects the overall economy in two ways: one, taxes affect people‘s income (disposable or spendable income) and second, taxes affect the prices of goods and factors of production.

The second major macroeconomic policy is monetary policy, which central bank conducts through the management of money, credit, and banking system. By changing the money supply, the central bank can influence many financial and economic variables such as interest rates, stock prices, housing prices, and foreign exchange  rates.  Restricting  the  money  supply  leads  to  higher  interest  rates  and  reduced investment, which, in turn, causes a decline in GDP and lower inflation. If the central bank is faced with a business downturn, it can increase the money supply and lower interest rate to stimulate economic activity.

 

Other than fiscal and monetary policies, countries often seek income policy, concerned with direct control over prices and wages and external sector policy such as trade policy, exchange rate policy etc.