Download Understanding National Income Measures and Real vs. Nominal GDP and more Lecture notes Economic policy in PDF only on Docsity! Interpreting national income measures ยฃbn GDP C I G X IM 2008 1518.6 973.5 274.2 315.9 420.9 456.8 2009 1482.1 958.3 221.9 330.0 400.3 428.4 2010 1558.4 1004.7 254.7 336.6 447.1 484.1 2011 1617.7 1039.1 265.1 337.3 499.5 523.3 โ So far we have written the national income or GDP (Y) identity as the sum of consumption, investment, government spending and net exports: i.e. Ya = Ca + Ia + Ga + Xa โ IMa where the superscripts aโs denote that these are respectively the ex post measured values.This identity can be re-arranged to identify the various sectors in the national economy. โ To so this define private savings (S) as the residual household income remaining after income taxes (T) and consumption expenditures(C), that is: Sa = Ya โ Ta โ Ca โ Substituting for Ya into the saving equation gives: Sa = Ca + Ia + Ga + Xa โ IMa โTa โ Ca โ Noting that the two terms in Ca cancel out gives: Sa = Ia + Ga + Xa โ IMa โTa โ Then rearranging the remaining elements gives: (Sa โ Ia) = (Ga โ Ta) + (Xa โ IMa) non-bank private = public sector + overseas sector sector surplus deficit deficit These are the sector balances and they must always sum to zero due to the fact they are accounting identities derived from a closed form system โ If Sa = Ia and Ta = Ga then, by definition, Xa = IMa and each sector would be in balance with no sector borrowing or lending to the others. โ The identity can also be rearranged to explicitly show that the sector balances must sum to zero: (Ia โ Sa) + (Ga โ Ta ) + (Xa โ IMa) = 0 โ Note also if Sa = Ia then the budget deficit equals the current balance deficit. But importantly this is NOT a causal relation because this an identity โ Deficit sectors must borrow from and surplus sectors lend to the financial system โ theres a lot more saving than investment then banks may issue loans Real and nomial values โ GDP (market prices) is a nominal value; i.e. it is measured in money terms. The same is true for Consumption (Ca), Investment (Ia) etc. โ This is the only way different goods can be aggregated together, but macroeconomists need to be able to distinguish between money values and real values since what matters for say, the rate of unemployment, are real values of GDP โ To be able to do this suitable deflators must be computed