Summary of Lecture: Introduction To Accounting and Economics

Topic 4 – Income and Output of Nations Introduction to Accounting and Economics
Introduction to Accounting
and Economics
Topic 4: Income and Output of Nations
V2.0 © NCC Education Limited
Income and Output of Nations Topic 4 - 4.‹#›
Summary of Lecture
• Words you must know
• Macroeconomics
• The Circular Flow
• Measures of Economic Output
• Economic Growth
• What causes growth?
• Business Cycles
• Review of the topic
V2.0 Visuals Handout – Page 1

Words you must know

Microeconomics: The study of markets.
Macroeconomics: The study of the economy
as a whole.
Circular Flow of Income: A simplified description of
macroeconomic forces.
Business Cycle: Short-term fluctuation of
output around its trend path.
Words you must know

Gross domestic product The measure of the output
(GDP): of an economy.
Gross national product The total income of citizens
(GNP): wherever it is earned.
Depreciation: The fall in value of the
capital stock during the
period.
Net national product GNP minus depreciation.
(NNP) or national
income:

Words you must know

Aggregate demand: The total desired spending
at each level of income.
Fiscal policy: Government decisions
about its own spending, and
taxes.
The trade balance: The value of net exports i.e.
exports minus imports.
Personal disposable Household income available
income: for spending or saving.
Macroeconomics
• Macroeconomics is the study of the
economy as a whole
• This is to say the economy of a country
• It can also be used to describe the study of

the international or global economies

The Circular Flow

• This is a simplified description of the
behaviour of the economy of a country. It
describes the flow of resources between
households and firms
• Here is a simple diagram of the circular

flow:
The Circular Flow

Spending on goods and services
Goods and services
Households Firms
Labour
Wages
Households provide labour and customers to

firms, who provide wages and goods and
services.

The Circular Flow

The circular flow can be made more complex
when we add the effects of savings and
investments.
Goods and services
Households Firms
Labour
Wages
Savings Investments
Savings and Investment

• Savings can be described as a leakage from the
circular flow
- Households are not spending or buying the output of
firms. They are saving.
• Investment can be described as an injection into

the circular flow
• Becomes more complicated when we add the

effect of government expenditure, and imports and
exports

The Circular Flow

• The model is now:
Goods and services
Households Firms
Labour
Imports Wages Exports
Savings Investments
Taxes Taxes
Government Transfers Government Expenditure
Imports, Exports and Government

Expenditure
• Imports are goods and services bought from other countries
and these represent a leakage from the circular flow
• Exports are domestically produced goods sold abroad. These

represent an injection into the circular flow
• Government expenditure on buying the output of firms and

making transfer payments to households represent an
injection into the circular flow
• Taxes payable to the government represent a leakage from

the circular flow

Measures of Economic Output

• Gross Domestic Product (GDP) is a measure
of the output of an economy
• It is the value of goods produced during a

period of one year
Gross Domestic Product
It can be calculated as:

Consumption by households and firms
+ Investment by firms
+ Government spending
+ Exports
- Imports

Gross National Product

Gross National Product (GNP) is:
GDP
+ Income earned by the citizens of a country
abroad
- Income earned by foreigners in a country
• GDP can be seen as the output of an economy,

whereas GNP can be seen as the output of the
citizens of a country
Net National Product

• Machinery and buildings are used to produce
wealth in a country
• These items are called capital goods
• These goods depreciate in value as they are used
• If we calculate the depreciation of the capital goods

in an economy and deduct this from GDP, we get
Net National Product (NNP)

Measures of Economic Output

Which method should be used?
• Use a number of methods, depending upon what you wanted
to measure
• NNP appears to be a comprehensive definition of output, but

if you want to make meaningful comparisons with other
countries, it might be better to use GDP. This is because
each country calculates depreciation differently
• Even with GDP there are some problems because in all

economies there are individuals and firms that trade without
reporting their activities
• This hidden economy can account for quite a large

percentage of GDP
Economic Growth
• Economies can grow by producing more
output. The effect of economic growth is
that people (on average) become wealthier
• The following table shows the growth in real

GDP (GDP adjusted for the effects of
inflation) between 1870 and 2000

Long Run Growth 1870 – 2000
Real GDP Real GDP per person

Ratio of 2000 Annual Ratio of 2000 Annual
to 1870 Growth % to 1870 Growth %
Japan 100 3.7 27 2.7

USA 66 3.4 10 1.8
Australia 45 3.1 14 1.3
France 15 2.2 10 1.9
UK 10 1.9 5 1.3
(Source: Begg 2009:182)
Economic Growth
• This table shows the change between 1870 and 2000 for
economies at different stages of growth
• The UK for example was richer than Japan in 1870 and has
grown 10 times between 1870 and 2000
• The phenomenal growth rate of Japan partly reflects the fact

that it was poorer than the UK in 1870 and thus grew from a
lower base
• In terms of GDP, Japan is only about 60% richer than the UK

(2007)

What Causes Growth?

• Economic growth occurs because people get better at
producing goods and services
• New machinery can make production processes faster
• Improvements in transport infrastructures and better

management of distribution channels can result in products
getting to customers quicker
• New technologies emerge from time to time that allow

productivity to increase
Business Cycles
• Growth does not happen in a regular fashion
• There are periods of rapid growth followed by

periods of less rapid growth
• In some circumstances, growth can fall to zero
• In the worst case, growth can be negative causing

the economy of the country to shrink

Business Cycles
• In the modern world we have become used
to seeing steady growth punctuated by
short periods of zero or negative growth
• A business cycle can be defined as a short-

term fluctuation of output around a long-
term trend
The Business Cycle

Business Cycles
There are a number of stages to a business
cycle:
• A. Slump
- This is the lowest point in the business cycle where
growth is at its lowest level. This point is also known as
the floor of the business cycle
• B. Recovery
- This is the point where the economy starts growing again
Business Cycles
• C. Boom
- This is the highest point or ceiling of the
business cycle. This is the point where the
economy overstretches itself
• D. Recession
- The pace of growth slows as the economy
moves towards a slump. The cycle then
continues again

Aggregate Demand
•Total desired spending at each level of

income i.e.
•The sum of consumption demand and
investment demand within the economy.
Consumption Demand
•The desire to consume, moderated by

•Personal disposable income
•The affect of additional money is
influenced by the complimentary
concepts of the marginal propensity to
consume and the marginal propensity
to save

Equilibrium Output
•The point at which aggregate demand

and actual output are equal.
•Firms may not be able to sell all they
would like but can sell all they produce.
•This may therefore be below the level of
potential output.
Government & Other Countries

• The previous slides considered aggregate
demand in terms of consumption and
investment but it may also be affected by the
actions of government and foreign trade.
• We touched on this in earlier slides and you
will read more on this in private study but we
shall briefly address two key points:

Fiscal Policy
•Aggregate demand is affected by

government’s own spending, and the
level of taxes.
•Government policies on these issues are
an economic control mechanism known
as fiscal policy.
The Trade Balance
•The value of exports minus imports

•When exports exceed imports there is a
trade surplus
•When imports exceed exports there is a
trade deficit

Review of the Topic

• This topic has introduced the main concepts
in macroeconomics and has described in
simple terms the economy of a country
using the circular flow model
• We also looked at economic growth and the

business cycle
Topic 4
Any questions?

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Topic 4 – Income and Output of Nations Introduction to Accounting and Economics

V2.0 © NCC Education Limited

Income and Output of Nations Topic 4 - 4.‹#›

V2.0 © NCC Education Limited

V2.0 Visuals Handout – Page 1

Income and Output of Nations Topic 4 - 4.‹#›

Words you must know

V2.0 © NCC Education Limited

Income and Output of Nations Topic 4 - 4.‹#›

Words you must know

V2.0 © NCC Education Limited

V2.0 Visuals Handout – Page 2

Income and Output of Nations Topic 4 - 4.‹#›

Words you must know

V2.0 © NCC Education Limited

Income and Output of Nations Topic 4 - 4.‹#›

• This is to say the economy of a country

• It can also be used to describe the study of

V2.0 © NCC Education Limited

V2.0 Visuals Handout – Page 3

Income and Output of Nations Topic 4 - 4.‹#›

The Circular Flow

• Here is a simple diagram of the circular

V2.0 © NCC Education Limited

Income and Output of Nations Topic 4 - 4.‹#›

The Circular Flow

Goods and services

Households provide labour and customers to

V2.0 © NCC Education Limited

V2.0 Visuals Handout – Page 4

Income and Output of Nations Topic 4 - 4.‹#›

The Circular Flow

Goods and services

V2.0 © NCC Education Limited

Income and Output of Nations Topic 4 - 4.‹#›

Savings and Investment

• Investment can be described as an injection into

• Becomes more complicated when we add the

V2.0 © NCC Education Limited

V2.0 Visuals Handout – Page 5

Income and Output of Nations Topic 4 - 4.‹#›

The Circular Flow

Goods and services

Imports Wages Exports

Government Transfers Government Expenditure

V2.0 © NCC Education Limited

Income and Output of Nations Topic 4 - 4.‹#›

Imports, Exports and Government

• Exports are domestically produced goods sold abroad. These

• Government expenditure on buying the output of firms and

• Taxes payable to the government represent a leakage from

V2.0 © NCC Education Limited

V2.0 Visuals Handout – Page 6

Income and Output of Nations Topic 4 - 4.‹#›

Measures of Economic Output

• It is the value of goods produced during a

V2.0 © NCC Education Limited

Income and Output of Nations Topic 4 - 4.‹#›

Gross Domestic Product

It can be calculated as:

V2.0 © NCC Education Limited

V2.0 Visuals Handout – Page 7

Income and Output of Nations Topic 4 - 4.‹#›