Overview of Macroeconomics

National Income Accounting

Introduction to Macroeconomics
Dr. Patrick Asuming
UGBS 603: Economics

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Outline

Overview of Macroeconomics

National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Macroeconomics

Macroeconomics studies the economy as an aggregate unit

It is unlike micro which focuses on individuals markets
macro focuses on all markets aggregated into one

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Macroeconomics

Macroeconomics studies the economy as an aggregate unit

It is unlike micro which focuses on individuals markets
macro focuses on all markets aggregated into one

Typical issues studied in Macro

Gross Domestic Product, Employment and Unemployment
Ination & interest rates
Fiscal and Monetary policy
Economic growth and business cycles

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Why Should Managers Study Macroeconomics?

Understand the impact of government policy
The MPC last month raised the monetary policy rate to 25%,
what does this mean for your cost of borrowing?

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Why Should Managers Study Macroeconomics?

Understand the impact of government policy
The MPC last month raised the monetary policy rate to 25%,
what does this mean for your cost of borrowing?

Impact of exchange rate movements

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Why Should Managers Study Macroeconomics?

Understand the impact of government policy
The MPC last month raised the monetary policy rate to 25%,
what does this mean for your cost of borrowing?

Impact of exchange rate movements

Interest rate uctuations and cost of borrowing

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Why Should Managers Study Macroeconomics?

Understand the impact of government policy
The MPC last month raised the monetary policy rate to 25%,
what does this mean for your cost of borrowing?

Impact of exchange rate movements

Interest rate uctuations and cost of borrowing
Financial markets and investors responds to macroeconomic
news

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Two main issues in Macro

Long-run economics Growth:

1

What determines long-term per capita income?

Why are some countries rich and some poor?

Business Cycle:
1

These are the short-term uctuations in output

What causes recessions? Are they all alike? Can they be

avoided?

How can monetary and scal policy minimize the eects of

economic uctuations?

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Big Themes
1

Growth: What determines long-term growth? Why are some

countries rich and some poor?
Business Cycle: What causes recessions? Are they all alike?
Can they be avoided? Is there an economy's speed limit?
Ination: What causes ination (hyperination)? Why do we
care?
Monetary and scal policy: Can monetary and scal policy
stabilize the economy? How? Why does the BoG targets
ination ? When do budget decits become a concern?
Financial Markets: Why do nancial markets respond to
macroeconomic news?
Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Some Basic Concepts (1)

GDP: It is the market value of nal goods and services
newly produced within a xed period of time, within the
geographic boundaries of a country

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Some Basic Concepts (1)

GDP: It is the market value of nal goods and services
newly produced within a xed period of time, within the
geographic boundaries of a country
Unemployment is the number of people who are available for
work and actively looking for work but cannot nd jobs
the unemployment rate is the fraction of the labour force that
without employment

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Some Basic Concepts (1)

GDP: It is the market value of nal goods and services
newly produced within a xed period of time, within the
geographic boundaries of a country
Unemployment is the number of people who are available for
work and actively looking for work but cannot nd jobs
the unemployment rate is the fraction of the labour force that
without employment

Ination: it is the rate at which the general/average level of

prices in an economy increases
Deation refers to decreases in the general level of prices in an
economy

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Some Basic Concepts (2)

Business cycles: refer to the short-run contractions and
expansions in economic activity in an economy
It refers to the cycles of recessions and recoveries that
characterizes economies in the short run

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Some Basic Concepts (2)

Business cycles: refer to the short-run contractions and
expansions in economic activity in an economy
It refers to the cycles of recessions and recoveries that
characterizes economies in the short run

Macroeconomic policies: these are the two main sets of policy

tools available to the government (central bank) for aecting
short-term economy activity
Fiscal policy refers to the use of government spending and
taxes to aect economic activity
Monetary policy refers to changes in money supply that are
used to aect the level of economic activity and/or control the
rate of ination

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Classicals vs Keynesian Approaches

Most of the disagreements in positive macroeconomics have
their roots in the disagreements between the Classical and
Keynesian schools of thought

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Classicals vs Keynesian Approaches

Most of the disagreements in positive macroeconomics have
their roots in the disagreements between the Classical and
Keynesian schools of thought
At the heart of this disagreement is the speed of adjustment of
prices in various markets

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Classicals vs Keynesian Approaches

Most of the disagreements in positive macroeconomics have
their roots in the disagreements between the Classical and
Keynesian schools of thought
At the heart of this disagreement is the speed of adjustment of
prices in various markets
Classicals, following Adam Smith's Invisible Hand, believe that
markets adjusts almost instantly so all markets are always in
equilibrium
this gives no room for scal and monetary policy

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Classicals vs Keynesian Approaches

Most of the disagreements in positive macroeconomics have
their roots in the disagreements between the Classical and
Keynesian schools of thought
At the heart of this disagreement is the speed of adjustment of
prices in various markets
Classicals, following Adam Smith's Invisible Hand, believe that
markets adjusts almost instantly so all markets are always in
equilibrium
this gives no room for scal and monetary policy

Keynesians believe that adjustments can take a long time, the

economy can be in disequilibrium for a while
in the long run, we are all dead
Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Outline

Overview of Macroeconomics

National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

What is National Income Accounting?

National income accounting refers to the framework for
measuring the current level of economic activity
By current level of economic activity we mean GDP

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

What is National Income Accounting?

National income accounting refers to the framework for
measuring the current level of economic activity
By current level of economic activity we mean GDP

In Ghana the calculation is done by the Ghana Statistical

Service

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

What is National Income Accounting?

National income accounting refers to the framework for
measuring the current level of economic activity
By current level of economic activity we mean GDP

In Ghana the calculation is done by the Ghana Statistical

Service
Three main approaches to the calculation
amount of output produced, excluding output used up in
intermediate stages
incomes received by the producers of output
amount of spending by the ultimate puchases of output

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Measuring GDP
We dened GDP as the market value of nal goods and
services newly produced within a xed period of time, within
the geographic boundaries of a country

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Measuring GDP
We dened GDP as the market value of nal goods and
services newly produced within a xed period of time, within
the geographic boundaries of a country
We are interested in market value so we value each good at
the price at which they are sold
we cannot add oranges to taxi services
we convert physical quantities into cedi value

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Measuring GDP
We dened GDP as the market value of nal goods and
services newly produced within a xed period of time, within
the geographic boundaries of a country
We are interested in market value so we value each good at
the price at which they are sold
we cannot add oranges to taxi services
we convert physical quantities into cedi value

We are also interested in nal goods only

we exclude intermediate goods and services

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Measuring GDP
We dened GDP as the market value of nal goods and
services newly produced within a xed period of time, within
the geographic boundaries of a country
We are interested in market value so we value each good at
the price at which they are sold
we cannot add oranges to taxi services
we convert physical quantities into cedi value

We are also interested in nal goods only

we exclude intermediate goods and services

Finally, we are interested only newly produced goods and

services in that period
purchases of goods and services produced in the previous
periods are excluded.
Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Three approaches to calculating GDP

Product approach/value-added approach
measures economic activity by adding up the market value of
all newly produced goods and services, excludes intermediate
inputs to avoid double counting
also computes economic activity by summing up value-added
at each stage of production

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Three approaches to calculating GDP

Product approach/value-added approach
measures economic activity by adding up the market value of
all newly produced goods and services, excludes intermediate
inputs to avoid double counting
also computes economic activity by summing up value-added
at each stage of production

Income approach
measures GDP by summing up all incomes received by factors
of production
wages/salaries of workers, rents paid to xed assets, prots
received by business owners, interest accruing to capital

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Three approaches to calculating GDP

Product approach/value-added approach
measures economic activity by adding up the market value of
all newly produced goods and services, excludes intermediate
inputs to avoid double counting
also computes economic activity by summing up value-added
at each stage of production

Income approach
measures GDP by summing up all incomes received by factors
of production
wages/salaries of workers, rents paid to xed assets, prots
received by business owners, interest accruing to capital

Expenditure approach
measures GDP by adding all spending by ultimate users of nal
output: households, rms, gov't and foreigners
Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

All Three approaches are Equivalent

The Fundamental Identity
total income=total production=total expenditures

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

All Three approaches are Equivalent

The Fundamental Identity
total income=total production=total expenditures

Income=expenditures: what sellers of the total output receive

must be equal to what buyers spend

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

All Three approaches are Equivalent

The Fundamental Identity
total income=total production=total expenditures

Income=expenditures: what sellers of the total output receive

must be equal to what buyers spend
Production=expenditures: the market value of total
production equals the amount spent on it

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

All Three approaches are Equivalent

The Fundamental Identity
total income=total production=total expenditures

Income=expenditures: what sellers of the total output receive

must be equal to what buyers spend
Production=expenditures: the market value of total
production equals the amount spent on it
Income=production: Market value of production should equal
what is paid to factors of production

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

All Three approaches are Equivalent

The Fundamental Identity
total income=total production=total expenditures

Income=expenditures: what sellers of the total output receive

must be equal to what buyers spend
Production=expenditures: the market value of total
production equals the amount spent on it
Income=production: Market value of production should equal
what is paid to factors of production
This identity means that the all the three approaches to
measuring GDP are equivalent
Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Computation of GDP (expenditure approach)

The expenditure approach is the most common (most
important) approach used in computing GDP

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Computation of GDP (expenditure approach)

The expenditure approach is the most common (most
important) approach used in computing GDP
sums up four main sources of expenditure on GDP:

Y = C + I + G + NX

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Computation of GDP (expenditure approach)

The expenditure approach is the most common (most
important) approach used in computing GDP
sums up four main sources of expenditure on GDP:

Y = C + I + G + NX
C: consumption expenditures:
durables, non-durables, services

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Computation of GDP (expenditure approach)

The expenditure approach is the most common (most
important) approach used in computing GDP
sums up four main sources of expenditure on GDP:

Y = C + I + G + NX
C: consumption expenditures:
durables, non-durables, services

I: Gross domestic private investment:

business xed investment
residential investment (houses)
inventories (produced but not sold)

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Computation of GDP (expenditure approach)

sums up four main sources of expenditure on GDP:

Y = C + I + G + NX

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Computation of GDP (expenditure approach)

sums up four main sources of expenditure on GDP:

Y = C + I + G + NX
Government expenditures on goods and services
expenditures on law enforcement, defense, salaries of govt
workers etc
capital expenditures on roads and other infrastructure
Excludes transfer payments eg SSNIT pensions, interest
payments on debts

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Computation of GDP (expenditure approach)

sums up four main sources of expenditure on GDP:

Y = C + I + G + NX
Government expenditures on goods and services
expenditures on law enforcement, defense, salaries of govt
workers etc
capital expenditures on roads and other infrastructure
Excludes transfer payments eg SSNIT pensions, interest
payments on debts

NX: net exports

total exports minus total imports

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

GDP vs GNP
Gross National Product (GNP) is the market value of nal
goods and services newly produced by domestic factors of
production during the current period
This is the total nal output produced by the
nationals/citizens of a country

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

GDP vs GNP
Gross National Product (GNP) is the market value of nal
goods and services newly produced by domestic factors of
production during the current period
This is the total nal output produced by the
nationals/citizens of a country

The dierence between GDP and GNP is called the Net Factor
payments from abroad (NFP)

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

GDP vs GNP
Gross National Product (GNP) is the market value of nal
goods and services newly produced by domestic factors of
production during the current period
This is the total nal output produced by the
nationals/citizens of a country

The dierence between GDP and GNP is called the Net Factor
payments from abroad (NFP)
NFP is incomes/earnings paid to domestic factors of
production by the rest of the world less income paid to
foreign-owned factors of production by the domestic economy

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

GDP vs GNP
Gross National Product (GNP) is the market value of nal
goods and services newly produced by domestic factors of
production during the current period
This is the total nal output produced by the
nationals/citizens of a country

The dierence between GDP and GNP is called the Net Factor
payments from abroad (NFP)
NFP is incomes/earnings paid to domestic factors of
production by the rest of the world less income paid to
foreign-owned factors of production by the domestic economy
GDP=GNP-NFP
Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

From GDP to Disposable Income

(private) Disposable income is the amount of income available
to the private sector to spend (and save)

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

From GDP to Disposable Income

(private) Disposable income is the amount of income available
to the private sector to spend (and save)
This is income after deductions (taxes, SSNIT, etc) plus
transfer payments

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

From GDP to Disposable Income

(private) Disposable income is the amount of income available
to the private sector to spend (and save)
This is income after deductions (taxes, SSNIT, etc) plus
transfer payments
NFP is incomes/earnings paid to domestic factors of
production by the rest of the world less income paid to
foreign-owned factors of production by the domestic economy

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

From GDP to Disposable Income

(private) Disposable income is the amount of income available
to the private sector to spend (and save)
This is income after deductions (taxes, SSNIT, etc) plus
transfer payments
NFP is incomes/earnings paid to domestic factors of
production by the rest of the world less income paid to
foreign-owned factors of production by the domestic economy
For the economy as a whole, total private disposable income is:
Disposableincome = Y + NFP + TR + INT T
TR is transfer payments from government, INT is interest
payments T is taxes

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Outline

Overview of Macroeconomics

National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Aggregate Savings
Total savings in an economy is the sum of private and
government savings

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Aggregate Savings
Total savings in an economy is the sum of private and
government savings
Private savings is disposable income less consumption
Spriv = Disposableincome C = Y + NFP + TR + INT T C

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Aggregate Savings
Total savings in an economy is the sum of private and
government savings
Private savings is disposable income less consumption
Spriv = Disposableincome C = Y + NFP + TR + INT T C

Government savings is the government net income less

government purchases
Sgovt = (T TR INT ) G

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Aggregate Savings
Total savings in an economy is the sum of private and
government savings
Private savings is disposable income less consumption
Spriv = Disposableincome C = Y + NFP + TR + INT T C

Government savings is the government net income less

government purchases
Sgovt = (T TR INT ) G

national (aggregate savings) is the sum of the two

S = Spriv + Sgovt = Y + NFP C G

Dr. Patrick Asuming

UGBS 603: National Income

(1)

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Uses of Private Savings

Starting with the equation for national savings (1) we can
substitute the expression for Y
S = Y + NFP C G = C + I + G + NX + NFP C G

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Uses of Private Savings

Starting with the equation for national savings (1) we can
substitute the expression for Y
S = Y + NFP C G = C + I + G + NX + NFP C G

We can simplify this expression to obtain:

S = I + (NX + NFP)

Dr. Patrick Asuming

UGBS 603: National Income

(2)

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Uses of Private Savings

Starting with the equation for national savings (1) we can
substitute the expression for Y
S = Y + NFP C G = C + I + G + NX + NFP C G

We can simplify this expression to obtain:

S = I + (NX + NFP)

(2)

The sum of NX and NFP is called the Current Account

balance from the balance of payments accounts
S = I + CA
This equation states that national savings are used to nance
national investment and the current account balance
It also means that the CA balance is the excess of national
savings over investment
Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

The Twin Decits

The national income accounting identities can also be used to

illustrate the so-called twin decits

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

The Twin Decits

The national income accounting identities can also be used to

illustrate the so-called twin decits
This is the relationship between the government budget decit
and current account decit

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

The Twin Decits

The national income accounting identities can also be used to

illustrate the so-called twin decits
This is the relationship between the government budget decit
and current account decit
From our previous denitions, GNP is given by
Y = C + I + G + NX + NFP => Y C I = G + CA

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

The Twin Decits

The national income accounting identities can also be used to

illustrate the so-called twin decits
This is the relationship between the government budget decit
and current account decit
From our previous denitions, GNP is given by
Y = C + I + G + NX + NFP => Y C I = G + CA

If we subtract taxes from both sides, we have

Y C I T = G + CA T => S I = CA (T G )

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

The Twin Decit (2)

S I = CA (T G )

This equation states that the excess of private savings over

private investment nances the current account and the
government budget decit.

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

The Twin Decit (2)

S I = CA (T G )

This equation states that the excess of private savings over

private investment nances the current account and the
government budget decit.
If private savings equal private investment, then the CA equals
government budget decit.
T G = CA

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

The Twin Decit (2)

S I = CA (T G )

This equation states that the excess of private savings over

private investment nances the current account and the
government budget decit.
If private savings equal private investment, then the CA equals
government budget decit.
T G = CA

The last expression suggests that if the government runs a

budget decit, in the absence of excess savings from the
private sector, this translates into current account decit

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Outline

Overview of Macroeconomics

National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Economic Performance Over Time

Typically, we calculate GDP per capita (per capita income)

GDP
population

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Economic Performance Over Time

Typically, we calculate GDP per capita (per capita income)

GDP
population

How well is the Ghanaian economy doing today compared with

three years ago?

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Economic Performance Over Time

Typically, we calculate GDP per capita (per capita income)

GDP
population

How well is the Ghanaian economy doing today compared with

three years ago?
Ghana is now a lower middle income country! Really??

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Economic Activity or Economic Wellbeing?

GDP calculates the level of economic activity within an

economy

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Economic Activity or Economic Wellbeing?

GDP calculates the level of economic activity within an

economy
Some use GDP as a measure of economic wellbeing
higher GDP per capita means higher income; ability to meet
basic needs and more

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Economic Activity or Economic Wellbeing?

Several limitations to using GDP (GDP per capita) as a
measure of economic wellbeing

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Economic Activity or Economic Wellbeing?

Several limitations to using GDP (GDP per capita) as a
measure of economic wellbeing
Distributional issues
Does not matter if only the president owns/uses all the
economic resources and the rest of us starve

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Economic Activity or Economic Wellbeing?

Several limitations to using GDP (GDP per capita) as a
measure of economic wellbeing
Distributional issues
Does not matter if only the president owns/uses all the
economic resources and the rest of us starve

Non-welfare elements add to GDP:

high military spending does not mean our standard of living is
improving

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Economic Activity or Economic Wellbeing?

Several limitations to using GDP (GDP per capita) as a
measure of economic wellbeing
Distributional issues
Does not matter if only the president owns/uses all the
economic resources and the rest of us starve

Non-welfare elements add to GDP:

high military spending does not mean our standard of living is
improving

Non-market production: Not every good/service is counted

Baby-sitting is not counted but the employing a nanny to do
the same is counted

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Outline

Overview of Macroeconomics

National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Real vs Nominal GDP?

Real GDP measures measures actual physical volumes of
economic activity
GDP at constant prices
excludes changes in prices

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Real vs Nominal GDP?

Real GDP measures measures actual physical volumes of
economic activity
GDP at constant prices
excludes changes in prices

Nominal GDP is the cedi value of the all economic activity

measures value of GDP in current cedis
includes changes in both physical quantities and prices

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Real vs Nominal GDP?

Real GDP measures measures actual physical volumes of
economic activity
GDP at constant prices
excludes changes in prices

Nominal GDP is the cedi value of the all economic activity

measures value of GDP in current cedis
includes changes in both physical quantities and prices

The dierence between growth of nominal and real GDP is

solely due to changes in prices

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Real vs Nominal GDP: example

Assume the economy of Ghana produces only Kelewele and

Pure water

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Real vs Nominal GDP: example

Assume the economy of Ghana produces only Kelewele and

Pure water
Our goal is to compare GDP between 2010 and 2014

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Real vs Nominal GDP: example

Assume the economy of Ghana produces only Kelewele and

Pure water
Our goal is to compare GDP between 2010 and 2014
Kelewele
Pure water
Total

Nominal GDP 2010

Nominal GDP 2014

Real GDP 2014

15 @ GHC 10
50 @ GHC 2
GHC 250

20 @ GHC 15
60 @ GHC 2.50
GHC 450

20 @ GHC10
60 @ GHC 2
320

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Real vs Nominal GDP: example

In the example above, what is the growth rate of nominal GDP
between 2010 and 2014?
450250
250

100% = 80%

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Real vs Nominal GDP: example

In the example above, what is the growth rate of nominal GDP
between 2010 and 2014?
450250
250

100% = 80%

In the example above, what is the growth rate of real GDP

between 2010 and 2014?
320250
250

100% = 28%

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Real vs Nominal GDP: example

In the example above, what is the growth rate of nominal GDP
between 2010 and 2014?
450250
250

100% = 80%

In the example above, what is the growth rate of real GDP

between 2010 and 2014?
320250
250

100% = 28%

In this example, we call 2010 the base year, as the prices from
this year are used for calculating changes in real GDP

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Real vs Nominal GDP: example

In the example above, what is the growth rate of nominal GDP
between 2010 and 2014?
450250
250

100% = 80%

In the example above, what is the growth rate of real GDP

between 2010 and 2014?
320250
250

100% = 28%

In this example, we call 2010 the base year, as the prices from
this year are used for calculating changes in real GDP
In Ghana, the real GDP is now calculated using 2006 as the
base year
Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Price indexes: GDP deator

A price index is a measure of the average level of prices for a

specied set of goods and services relative to the prices in a
specied base year

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Price indexes: GDP deator

A price index is a measure of the average level of prices for a

specied set of goods and services relative to the prices in a
specied base year
The GDP deator is a price index that measures the overall
level of prices goods and services included in the GDP

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Price indexes: GDP deator

A price index is a measure of the average level of prices for a

specied set of goods and services relative to the prices in a
specied base year
The GDP deator is a price index that measures the overall
level of prices goods and services included in the GDP
nominal
GDPdeflator = GDP
GDPreal 100

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Price indexes: GDP deator

A price index is a measure of the average level of prices for a

specied set of goods and services relative to the prices in a
specied base year
The GDP deator is a price index that measures the overall
level of prices goods and services included in the GDP
nominal
GDPdeflator = GDP
GDPreal 100
In our example, the GDP deator is
450
320

100 = 140.63

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Consumer Price Index and Ination

The GDP deator can be used to measure the rate of ination

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Consumer Price Index and Ination

The GDP deator can be used to measure the rate of ination

The Consumer Price Index (CPI) is a more common measure
of ination

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Consumer Price Index and Ination

The GDP deator can be used to measure the rate of ination

The Consumer Price Index (CPI) is a more common measure
of ination
The CPI is a price index of consumer goods
it contains a xed typical market basket of goods and services
but may be revised as needed

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Consumer Price Index and Ination

The GDP deator can be used to measure the rate of ination

The Consumer Price Index (CPI) is a more common measure
of ination
The CPI is a price index of consumer goods
it contains a xed typical market basket of goods and services
but may be revised as needed

We use the CPI to calculate ination rate as follows:

t +1 =

Pt+1 Pt
Pt

100%

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Real vs Nominal Interest rates

The interest rate, generically, is the rate of return promised by
a borrower to a lender

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Real vs Nominal Interest rates

The interest rate, generically, is the rate of return promised by
a borrower to a lender
The real interest rate on an asset is the rate at which the real
value (purchasing power) of the asset increases over time

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Real vs Nominal Interest rates

The interest rate, generically, is the rate of return promised by
a borrower to a lender
The real interest rate on an asset is the rate at which the real
value (purchasing power) of the asset increases over time
The nominal interest rate is the rate at which the nominal
value of the asset increases over time

Dr. Patrick Asuming

UGBS 603: National Income

Overview of Macroeconomics
National Income Accounting

Measuring GDP
National Income Accounting Identities
Uses (Misuses) of GDP
Real versus Nominal

Real vs Nominal Interest rates

The interest rate, generically, is the rate of return promised by
a borrower to a lender
The real interest rate on an asset is the rate at which the real
value (purchasing power) of the asset increases over time
The nominal interest rate is the rate at which the nominal
value of the asset increases over time
We derive the real interest rate from the nominal by
adjustment for the rate of ination:
r = i
where r is the real interest rate, i is the nominal interest rate
and is the ination rate

Dr. Patrick Asuming

UGBS 603: National Income