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Measuring macroeconomic activity

Gross Domestic Product (GDP)

The Australian Bureau of Statistics collects statistics on economic activity on a daily basis.  GDP is its key statistic providing information about the level and movement in economic activity over time.  In particular, GDP was designed to determine the level and growth in the production of goods and services in Australia.

Given that production = expenditure = income, then

GDP = C + I + G1 + G2 + X - M

GDP is defined as the final market value of all goods and services produced in the Australian economy over a given period of time. Alternatively, it is the total 'value added' during each stage of the production process.  GDP figures are released quarterly for the March, June, Sept and December quarters.

Given that economic activity is made up of the identical flows for production, income and expenditure, the ABS uses three approaches to providing estimates of the level of GDP over time.

• The income approach (I) - based on estimates of all incomes earned in the economy;
• The expenditure approach (E);  based on estimates of total expenditure that has occurred;  and
• The production approach (P) based on estimates of total output produced.

Each 'estimate' of production is compiled from different sets of statistics and they typically arrive at estimates that are slightly different.  The ABS overcomes this problem by calculating an average of all three estimates, GDP(A).

The Chain Volume Measure of GDP - real GDP

When GDP increases for a particular period it is referred to as an increase in 'Nominal GDP'. This means that the 'value' of production has increased.  However, the value may have risen because of higher prices and/or increased volume of production.  Given that the ABS is concerned about economic activity (i.e. movement in total volume of production) it devised ways to remove the 'price' effect so that any increase in GDP was 'real' in the sense that it represents an increase in the volume (or 'real value') of production.   The chain volume measure of GDP is used by the ABS to provide an estimate of 'real GDP' in the economy.  In simple terms, it involves using prices from the previous period and applying them to current period volumes.  So any increase in the 'value' must have occurred because of rising activity or volumes.  It is this that provides the most accurate measure of economic activity in our economy, which in turn provides an indication of how well the economy is performing in terms of income/wealth generation and improvements in (material) living standards.  For example, an increase in GDP from \$1 trillion to \$1.1 trillion over a given year would represent zero growth in real GDP if inflation was 10%.  If inflation was greater than 10% then the value of real GDP would have fallen despite a reported increase in nominal GDP.

Gross National Expenditure (GNE)

This represents the total expenditure by Australians on goods and services produced anywhere. Note that this is different to GDP in that GDP is equivalent to expenditure on Australian goods and services.  Accordingly, when determining levels of GNE we do not need to deduct those components of C, I, G1 or G2 that are imported.  In addition, we do not add exports like before because they do not represent expenditure by Australians, but rather expenditure by overseas residents.

GNE = C + I + G1 + G2

Whilst it is true that production = expenditure = income, this is only true when the 'expenditure' is defined as expenditure on Australian goods and services.  Accordingly, it is possible for expenditure to be different to production and income if we define expenditure as Australians' expenditure on any goods and services (i.e. GNE).

This has generally been the case in Australia over the past few decades, where we have been spending more than we earn (or produce):

GNE > GDP, which means M > X

This has implications for the external sector which we will explore later.

Gross National Income (GNI)

Formally called 'Gross National Product', a measure of all incomes received in the economy.

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