Gross private domestic investment.
This seemingly complex term refers to all investment expenditures of American business firms. What is included in the concept of "investment expenses"? Mainly three components: (1) all final purchases of machinery, equipment and machinery by entrepreneurs; (2) all construction and (3) inventory changes. Obviously, this definition is broader than the meaning that we have put into the concept of “investment” so far. Therefore, we must explain why these three components are combined into the single concept of gross private domestic investment.
The reason for including the first group of elements is obvious. This is simply a repetition of our original definition of investment expenditure as the expenditure on the purchase of plant, machinery and equipment. The next component, construction, deserves some explanation. It is clear that building a new factory, warehouse or elevator is a form of investment. But why include housing construction into the category of investment rather than consumption? The reason is: apartment buildings residential buildings are investment goods because, like factories and grain elevators, they are income-generating assets. Other residential rental units are investment goods for the same reason. In addition, owner-occupied residential buildings are considered investment goods even if the owner does not rent them out (because they can be rented out to generate cash income). Due to these circumstances, all housing construction is considered as an investment. Finally, why do investments include changes in inventories? Because the increase in inventories is in reality "unconsumed product", and this is nothing more than an investment.
Changes in stocks as investments. Given that GNP is intended to measure current output, we must, of course, try to include in GNP all products that are produced but not sold in a given year. In other words, if GNP is an accurate measure of total output, then it must include the market value of all additions to inventories during the year. If we excluded the increase in inventories, we would underestimate annual production. In the case when enterprises accumulated more goods on their shelves and warehouses by the end of the year compared to what they had at the beginning of the year, then the economy produced more than consumed during a given year. This increase in inventories must be added to GNP as a measure of current production.
How to deal with inventory reduction? It must be subtracted from GNP because in this case the volume of output sold in the economy exceeds current production, and the difference between these values is reflected in a decrease in inventories. The portion of GNP that is sold on the market in a given year reflects not so much the current production of a given year as a decrease in the inventories available at the beginning of the year. And the inventories on hand at the beginning of a given year represent products produced in previous years. As a result, a decrease in inventories in any given year means that the economy sold more than was produced during the year, that is, that society consumed all the product created in a given year plus some stocks left over from previous years. Given that GNP is a measure of the volume of products manufactured in a given year, when determining it, we should not take into account the consumption of products produced in previous years, that is, any reduction in inventories.
Non-investment transactions. We looked at what investments are. However, it is equally important to define what is not an investment. To be more specific, investments do not include transfers from hand to hand valuable papers. Purchases of stocks and bonds are excluded from economic definition investments, because such transactions simply mean a transfer of ownership of existing assets. The same applies to the resale of existing assets. Investment is the construction or creation of new capital assets. The creation of similar income-generating assets, rather than exchanging claims on existing capital goods, provides the impetus for expanding income and employment.
Gross and net investments. We have expanded our concept of investments and investment goods to include purchases of machinery and equipment, all construction and changes in inventories. Now let's focus on three concepts - gross, -private and domestic investment, which are used in the compilation of national accounts. The second and third terms tell us that we are talking about, respectively, the expenses of private companies, as opposed to government (public) bodies, and that the companies making the investments are American, not foreign.
The term "gross", however, cannot be defined with the same ease.) Gross private domestic investment includes the production of all capital goods intended to replace the machinery, equipment and structures consumed in production in the current year, plus any net additions to volume of capital in the economy. In fact, gross investment include both the amount of compensation and the increase in investment. On the other hand, the term "net private domestic investment" is intended only to describe additional investment that took place during the current year. A simple example will help define the difference more clearly. In 1988 our economy produced investment goods (means of production) worth $765 billion. However, in the process of producing GNP in 1988, the economy consumed machinery and equipment worth about $505 billion. As a result, our economy added $260 billion. (765 minus 505) to the value of capital accumulated in 1988. Gross investments amounted to $765 billion. in 1988, while net investment was only $260 billion. The difference between the two indicators. represents the cost of capital employed or subject to depreciation in the production of the 1988 GNP volume.
Net investment and the economic growth. The ratio between gross investment and depreciation—the amount of a country's capital consumed in a given year's production—is good indicator whether the economy is booming, stagnating, or declining. Figure E-1 illustrates each of these three cases.
1. GROWING ECONOMY. When gross investment exceeds depreciation, as shown in Figure 9-1, the economy is booming in the sense that its productive capacity is increasing. In short, in a growing economy, net investment is positive. For example, as noted above, in 1988 gross investment was $765 billion, and the volume of investment goods consumed in the production of GNP for that year was $505 billion. This meant that at the end of 1988 there was $260 billion in the economy. more investment goods than were available at the beginning of the year. Thus, in 1988, we actually created a $260 billion addition to our “national factory.” Increasing the supply of investment goods, as you remember, is the main means of increasing production capacity economy.
2. STATIC ECONOMY. A stagnant, or static, economy reflects a situation in which gross investment and depreciation are equal. This means that the economy is at rest; it produces just enough capital to replace what is consumed in the production of GNP for a given year—no more and no less. This was the state of the economy in 1942, during the Second World War. The state deliberately limited private investment in order to free up resources for military production. Thus, in 1942, gross private investment and depreciation (investment replacing the disposal of fixed assets) was approximately $10 billion. This meant that the amount of capital at the end of 1942 was almost the same as at the beginning of the same year. In other words, net investment was approximately zero. Our economy was stagnant in the sense that its production capacity was not expanding. Figure 9-16 shows the case of a static economy.
3. ECONOMY WITH DECLINING BUSINESS ACTIVITY. An unfavorable situation of economic stagnation occurs when gross investment is less than depreciation, that is, when the economy consumes more capital per year than it produces. Under these conditions, net investment will have a minus sign, and disinvestment will occur in the economy, that is, a reduction in investment. Depression favors the occurrence of such circumstances. In bad times, when production and employment are in decline, a country has more production capacity than it uses in current production. As a result, incentives to replace worn-out capital, and even more so to create additional capital, are either very small or practically absent. Depreciation begins to exceed gross investment, resulting in capital at the end of the year being less than it was at the beginning of the year. This was the situation during the peak of the Great Depression. For example, in 1933 gross investment was only $1.6 billion, while capital consumed during the year was $7.6 billion. Thus, the net reduction in investment, that is, disinvestment, amounted to $6 billion. Consequently, net investment was minus $6 billion, which meant that the size of our "national factory" was reduced during this year. Figure 9-1c shows the case of an economy in a state of disinvestment, or recession.
We will use the symbol I to denote domestic investment expenditure, and we will also use the symbol g in relation to gross, n in relation to net investment.
To net private domestic investment, subtracting from the first the amount of replacement investment, which is equal to the consumption of fixed capital. Thus, in 1994, as a result of subtracting from gross investments amounting to 1038 billion dollars, depreciation charges in the amount of 716 billion dollars. we get net private domestic investment equal to $322 billion, and, therefore, NDP equal to $6021 billion.
Net private domestic investment...................................................33
Net private domestic investment...................................52.1
PRIVATE DOMESTIC INVESTMENT NET - see NET PRIVATE DOMESTIC INVESTMENT
NET PRIVATE DOMESTIC INVESTMENT is the gross volume of private domestic investment minus depreciation charges.
Net domestic investment in the private sector (% of GDP) 232.7 (4.8) 216.8 (4.2) 169.3 (3.1)
In Fig. Figure 21-3 shows why this happens. An increase in real government spending from gQ to gt keeps prices for goods and services at the same level PO (Figure 2 -ZA). Graph /51 shifts to the right by the amount of increase in spending multiplied by the government spending multiplier, 1/(1 - MPC). As real income increases, the demand for money also increases, thereby increasing the nominal equilibrium interest rate. In response, expected real investment decreases. There is no complete crowding out of private spending, and net real income increases from yz to yg
The main source of growth for any economy, be it capitalist, socialist or feudal, is investment or, in other words, capital investment in production. The reforms sharply reduced the volume of centralized investments, this legacy of socialism. This means that the investment activity of the enterprises themselves had to expand using their own and borrowed funds. Previously, when the ministry decided that a new workshop should be built at such and such an enterprise, it allocated money, and the managers of the enterprise gladly accepted this freebie, and then reported, we supposedly doubled the volume of production, that’s how great we are. And now, as the authors write books, the choice of investment decisions began to be determined by purely economic factors and the financial capabilities of business entities. Moreover, this applies both to state-owned (although not all) and, naturally, to private enterprises.
Gross and net investments. Our definition of investments and capital goods covers the purchase of plant and equipment, all construction, and changes in inventory levels. Now let's focus on three concepts - gross, private and domestic investment. The second and third terms emphasize that we are talking about spending by private companies as opposed to government (public) bodies and that investments are made within the country, not outside its borders.
Economic Stagnation In a stagnant, or static, economy, gross investment and depreciation are equal (Figure 7-26). The economy is at rest; it produces just enough capital to replace what is consumed in the production of a given year's GDP - no more and no less. For example, during World War II, the federal government deliberately limited private investment in order to free up resources for military production. Thus, in 1942, both gross private investment and depreciation (investment replacing the disposal of fixed assets) remained at the same level - approximately $10 billion. Thus, net investment was close to zero. By the end of 1942, the volume of accumulated capital in the economy remained approximately the same
In this chapter, we are going to analyze consumption and investment, which are components of aggregate expenditure, and construct a model of equilibrium GDP and employment for the private sector. Chapter 10 examines changes in real GDP and adds net exports and government spending (along with taxes) to our model.
Let us now turn to investment, the second component of private spending. Let us remember that investments are expenses for the construction of new factories, capital equipment, machine tools, etc. The investment decision is made depending on the ratio of marginal benefit and marginal cost (Chapters 1 and 2). The marginal benefit of an investment is the expected rate of net profit that firms hope to earn. Marginal cost is the interest rate, that is, the cost of borrowing money. We will see that firms invest in all projects where the expected net profit exceeds the interest rate. Therefore, expected net income and interest rate are the two main factors determining investment costs.
In-depth analysis. Let us assume that the consumption curve in a private open economy has the form C = 50 + 0.8 K. We also assume that investment and net exports are autonomous (and are denoted by /, net exports do not depend on the level of real GDP at a value of Ig = / = 30 and X - X,L - = 10. Let us also remember that under equilibrium conditions the volume of output (Y) is equal to total expenses (C + /, + X), or Y = C + 1 + X.
A task of increased complexity. We can add the public sector to the private economy from question 12 as follows. Suppose that G = GQ = 28 and Г = Г0 = 30. Due to taxes, the consumption curve C = 50 + 0.8 Y should take the form Ca = 50 + 0.8 (Y - T), where (G - T ) represents disposable (after-tax) income. Based on the fact that only the income of individuals is taxed, investment will remain at the level Ig = / = 30. Net exports do not depend on the amount of income, that is, X - Xm - 10. Using the equilibrium formula Y = a + Ig + X + G , determine the equilibrium level of income. Explain why including a government budget with a small excess of revenue over expenditure results in an increase in equilibrium income.
Monetarists belittle the importance of fiscal policy as a means of stabilization or even completely reject it in this capacity. They consider fiscal policy weak and ineffective and explain this by the crowding out effect (see Chapter 12). Suppose the government creates a budget deficit by selling bonds, that is, borrowing money from the population. But by resorting to borrowing, the state enters into competition for financial resources with private business. Government borrowing increases the demand for money, causing interest rates to rise, and thus crowding out a significant amount of private investment that might otherwise be profitable. Consequently, the net impact of a budget deficit on aggregate spending is unpredictable or, at best, very small.
The lack of capital investment would not pose such a problem if the share of the SME sector in the Polish economy was small. Unfortunately, unlike former communist countries such as Hungary and Czechoslovakia, the private sector accounts for a significant portion of Poland's economy. The share of SMEs in the economy from 1991 to 1992 increased from 26% to 31%. In just one year, the number of people employed in this sector increased from 24.1% to 58.5% (in 1992). Even if we exclude agriculture, this share will remain very high - 44% (see, ,). Therefore, it is necessary to change the unfavorable credit situation for SMEs and guarantee their access to investment. Ideally, the assessment procedure should take into account the characteristics of this sector of the economy, the emphasis on providing collateral should be eliminated, the terms of loans should be extended and measures should be taken to encourage young enterprises. Purely quantitative methods when deciding on the allocation of loans are not entirely suitable here due to the lack of historical data and non-standard methods of accounting in existing databases. One possible approach to working with qualitative and missing data is neural networks.
The main types of national expenditures include personal consumption expenditures of households (C) (Iq) government purchases of goods and services (G) net exports (Xn).
I, - private net investment in economic sectors in time period t
In recent years, it has become a general consensus that the effectiveness of the economic development of modern states depends to a great extent on how much it invests in its people. Without this, it is impossible to ensure its progressive development. Thus, in the United States, according to some estimates, the share of investment in human capital is more than 15% of GDP, which exceeds the net gross investment of private capital in factories, equipment and warehouses. And even if special research on this issue has not been carried out, it is possible with
Key question. Use the categories of gross and net investment to show the difference between growth, stagnation, and recession in an economy. In 1933, the value of net private domestic investment was minus $6 billion. This means that in that particular year the economy produced no investment goods at all. Do you agree with this statement? Explain the meaning of this statement. While net investment can be positive, negative, or zero, gross investment can never be less than zero.
A growing (expanding) economy (expanding e onomy) is an economy in which net private domestic investment is greater than zero (that is, the gross volume of private domestic investment is greater than the amount of depreciation charges).
Net private domestic investment - gross private domestic investment minus depreciation and amortization of the country's fixed capital during the year.
In table Table 5-1 shows empirical data on the size of various types of investments in the private sector of the US economy for 1988-1990. The total amount of private investment fluctuated between 13.7 and 15.4% of GDP2. In particular, from 2/3 to 3/4 of the invested funds were depreciation charges, but this part is not a net increase in fixed capital. Net investment in 1990 was only 3.7% of GDP
The existence of taxes and subsidies modifies the investment decision. Income taxes reduce net (private) investment returns, while tax breaks and accelerated depreciation increase private investment returns. In the United States, investment tax incentives have been used sporadically since the early 1960s to encourage investment spending by businesses. The impact of tax incentives on investment depends crucially on the expectation of whether the measure will be temporary or permanent. The temporary introduction of tax benefits stimulates firms to increase investment expenditures; they strive to use the opportunities provided as soon as possible while these benefits are in effect.
Based on various types and schemes of project financing, numerous investment programs and projects have been implemented in developed, newly industrialized and developing countries. One of the classic examples of “pure” project financing is the Eurotunnel project, which in 1993 connected Great Britain with the European continent under the English Channel. This large-scale infrastructure project was implemented for the first time with investments from the private sector without the participation of states and renowned international and regional
Net investment is a specific amount of increase in the capital of an enterprise. It is customary to calculate net investment by presenting it as the difference between investment in depreciation and gross financing. At the same time, the exact volume of net investment is quite difficult to measure when compared with gross investment. This is due to the fact that depreciation of capital is analyzed in accordance with the loss of capital value in the market, with physical and moral wear and tear of fixed capital.
The role of net investment in the economy
Financing production is necessary for any enterprise to ensure sustainable development.
Let's look at a simple example. The company is going to expand production. A block of shares is issued in order to then purchase equipment and construct facilities. Shares are starting to sell. In this case, the income received will be considered investment income only after the end of the auction. Private investments are funds received from the sale of shares. Sometimes investment is provided by individuals, banks, and investment companies.
Nowadays they are increasingly relying on foreign capital. In this case, private investments are investments made by foreign companies. But attracting foreign capital is not so easy. Everything here will depend on the direction of activity, the demand for products on the world market.
There is another way to obtain financing. In this case, private investment is an investment own capital founders of companies. Unfortunately, it is not always possible to realize this opportunity. This is due to economic risk: it is advisable to invest money in different projects, wanting to reduce the level of risk.
A few nuances of investing
Let's consider several situations.
- Most economists believe that the key indicator of a company's development is net investment activity. This is quite objective. In this case, net investment is a fairly serious indicator of the success of the company’s work and development. When companies develop well, they begin to inspire confidence among investors. And there is a flow of private investment. As a result, non-current assets are also growing.
- If the investment indicator tends to zero, we can conclude that there are problems in the work: growth has stopped. In this case, there will certainly be negative consequences.
- A critical situation is a drop in net investments, their negative value. This is already followed by bankruptcy. To save the company, you will need to make accurate calculations and be sure to attract financing.
When this financing is carried out on a state scale, investment necessarily has a positive effect on the volume of national income. Investment becomes especially important due to rising inflation. Funding must cover this indicator.
What is important for investors?
It is necessary to understand that attracting investments is not so easy. Investors have a lot of choice. They take the utmost care in identifying the most promising objects for financing. They take into account volumes net profit, be sure to monitor the movement of funds. All financial flows must be objectively reflected in accounting statements. The size of the investment is of great importance here.
Let’s draw the main conclusion: net investment is a serious objective indicator of the company’s condition, production level, and operational efficiency. It is net financing that becomes a clear indication of the pace of development of the company. When it works effectively, investors will definitely start investing their capital there.
Determination of net investment, types of investments using the financial accounting method
Net investment is the difference between depreciation and gross investment.
Let us dwell on the types of investments in accordance with the method of accounting for funds.
Investments can be classified into net and gross.
- Net investment represents the entire amount of gross investment from which depreciation deductions are subtracted.
- Gross investment is the entire volume of financing. It includes costs for the purchase of equipment, the construction of new facilities to replace outdated ones, and investments in the increase of intellectual values.
It is impossible to separate the concepts of net and gross investments, since net investments become an integral part of gross financing. At the same time, it is net investments that have a special purpose: they are needed specifically for the growth of the company’s total capital. First of all, these investments are aimed at increasing production volumes, expanding and optimizing production as a whole.
Let us dwell on the exact definition of depreciation investments. When depreciation charges are subtracted from the total volume of gross investments, net financing is obtained and their exact size is calculated. At the same time, depreciation charges are an indicator of the degree of depreciation of the company's assets. They are used to replace worn-out vehicles and equipment, and to renovate production facilities in need of repair and restoration.
Profit is pure investment. Gross investment refers to the total income of a business. This is a major difference between the two types of financing. The source of capital growth is net investment, not gross.
Net Financing Value
Net investments are always additional financing, which has a positive effect on the growth of the company's capital. The key role of such financing is to be the basis for optimization, expansion of production, growth of its capacity, and increase in the volume of output. Such financing can be an investment in real estate, as well as in working and fixed capital.
Such real capital is extremely important for the creation of new equipment, the construction of new production buildings, and the expansion of space. Consequently, financing for the growth of real capital is a process of accumulation of funds.
Types of net investments
Types of net investments:
- zero: depreciation investments and gross financing turned out to be equal in volume, which led to a zero level of net investment, when they already talk about “zero growth” when the enterprise does not develop;
- positive: depreciation investments are less than gross financing, therefore there is an increase in investments and an increase in real production volume, an increase in net profit;
- negative ones arise in a critical situation, when gross investments are less than depreciation ones, as a result of which even lost capital is not reimbursed and the enterprise is on the verge of bankruptcy.
It is important to do everything to ensure a positive net investment. This is how the liquidity of the enterprise, the stability, the success of its development, and the stability of the company as a whole are confirmed.
The same criteria can be used to judge the economic situation in the country. These investments are constantly carefully analyzed, and detailed reports are provided to economists and the government. They are used to judge the level of economic development. Then certain measures are taken to ensure the growth of net investment.
Sources of financing
It is customary to divide sources of net investment into external and internal.
External sources:
- profit from the issue of securities;
- investment by private investors;
- bank loans;
- financing of foreign investors.
Internal sources:
- income from the sale of property;
- depreciation financing;
- authorized capital;
- net profit.
When an enterprise operates successfully, has a stable position, demonstrates good economic indicators, a balance of financing from external and internal sources is achieved. First of all, this can be associated with the presence of good profits and worthy investments. The company is performing well: achieving profit growth and increasing attractiveness for investors. Even successful companies willingly use external sources, since in this way they reduce the burden on the enterprise’s capital and reduce the risk of their own investments.
Efficiency
To assess the level of economic development of any state, enterprise, or company, it is enough to determine the growth dynamics of net financing. They, as the most objective indicator, reflect the effectiveness of work. As soon as investment growth begins to decline, we can talk about a recession in the economy. If there is no growth, this is an indicator of a crisis.
Increasing such investments makes a huge difference. It immediately provokes an increase in the well-being of the population, an increase in employment, and an increase in the level of production. Net investments are growing in individual enterprises – the country’s economy is growing as a whole. When investments increase, related industries also begin to produce more consumer goods, products, materials, and build more housing.
What influences the amount of funding?
Let us briefly look at factors that can significantly affect the volume of capital investments.
- First of all, economic and political instability in the country is of great importance. As a result of such an imbalance, enterprises lose profits.
- Technological progress has a significant impact on investment.
- Legislative measures and all kinds of changes are also of significant importance.
Net investment has a huge impact on the overall economic situation of the country.
Why is investing profitable?
Investors invest their finances in the company's capital. And they begin to grow together and make a profit. It is important to give an accurate forecast of the growth of the company’s liquidity so that the investment is justified. Short-term investments are the fastest to pay off, but long-term, medium-term deposits also have great prospects.
Formula
There is also a formula for private net investment. It is necessary for an objective analysis of the economic state: the formula is used in the process of determining key indicators of gross investment in various areas of the state and economy.
This is how net investment is defined:
HIt = BIt – At.
Let's decipher the formula:
- Аt – depreciation charges in year t;
- NIT – net investment in year t;
- VIt is the entire volume of gross investment in year t.
If we specify the formula, it will become clear that in this case the volume of gross investments is just net investments. They retain value. However, the statistics include gross investment, which also includes working capital financing. Working capital and fixed capital are growing. Of course, it’s easier to calculate the amount of net investment this way.
Such financing includes investments in real estate, working capital and fixed capital.
Private domestic investment
Let us dwell on the definition of such investments. Net private domestic investment represents gross private domestic financing, but excluding the amount of investment that was spent on the purchase of new equipment and construction of structures. This refers to those cases when equipment and objects are already worn out and need to be replaced for objective reasons
The online calculator is designed to calculate GNP based on the flow of income and expenses using the following formulas:
- GNP based on total income
GNP = Z + R + K + P + A + Nb
Where Z is remuneration for the work of employees, including contributions for social needs; R – income received by owners of land, buildings and structures; K – interest income received by firms and households for the loan provided; A - depreciation; P - corporate profit; Nb - indirect taxes.
- GNP based on the sum of all expenses
GNP = C + I + G + Xn
Where C is personal consumer spending; I – gross private domestic investment; G – government procurement of goods and services; X - net exports (difference between exports and imports)
Instructions. Fill in the information, click Next.
Relationship between GDP and GNP indicators:
GNP = GDP + net factor income from abroad
GNP by expenditure
Consumer spending(C) = household expenditure on current consumption + expenditure on durable goods (excluding household expenditure on housing) + expenditure on services
Investment costs(I) are the costs of firms and the purchase of investment goods. Investment goods are understood as goods that increase the stock of capital:
- investments in fixed capital, which consist of the costs of firms: a) for the purchase of equipment; b) for industrial construction (industrial buildings and structures);
- investment in housing construction (household spending on housing);
- investments in inventories (inventories include: a) stocks of raw materials and materials necessary to ensure the continuity of the production process; b) work in progress, which is related to technology production process; c) inventories of finished (produced by the company) but not yet sold products.
Fixed investments= Investments in fixed assets + investments in housing construction
Investments in inventories= Inventories at the end of the year - Inventories at the beginning of the year = Δ
If the amount of reserves increases, then GDP increases by a corresponding amount. If the value of inventories has decreased, which means that in a given year the products produced and replenished in the previous year were sold, therefore, the GDP of that year should be reduced by the amount of the decrease in inventories. Thus, investment in inventories can be either positive or negative.
Gross Domestic Private Investment= net investment + depreciation (cost of capital consumed, replacement investment)
Net Investment= net investment in fixed assets + net investment in housing construction + investment in inventories
Investment expenditures in the system of national accounts include only private investments, i.e. investments by private firms (private sector), and are not included public investment, which are part of government procurement of goods and services. This component of total expenditure takes into account only domestic investment, i.e. investments of resident firms in the economy of a given country. Foreign investments by resident firms and investments by foreign firms in the economy of a given country are included in net exports.
Government procurement of goods and services(G):
- public consumption (expenses for the maintenance of government institutions and organizations that ensure economic regulation, security and law and order, political administration, social and production infrastructure, as well as payment for services (salaries) of public sector employees);
- public investment (investment expenditures of state-owned enterprises)
Government spending= transfer payments + interest payments on government bonds
Interest payments on government bonds are not included in GDP because government bonds are not issued for production purposes (they are neither a good nor a service), but for the purpose of financing a deficit state budget.
Net exports= export revenues - import costs
GNP by income
Wages and salaries of employees= main wage+ bonuses + all types of material incentives + overtime paySalaries of civil servants are not included in this indicator, since they are paid from the state budget (budget revenues) and are part of government procurement, and not factor income.
Rent or Rent- income from real estate (land, residential and non-residential premises)
Interest payments or interest- income from capital (interest paid on bonds of private firms)
Interest payments on government bonds are not included in GDP.
Profit:
- profit of the non-corporate sector of the economy, including sole proprietorships and partnerships (this type of profit is called “income of owners”;
- profit of the corporate sector of the economy:
- corporate income tax (paid to the government);
- dividends (distributable portion of profits) that a corporation pays to shareholders;
- retained earnings of corporations, remaining after the company’s settlements with the state and shareholders and serving as one of the internal sources of financing net investment, which is the basis for the corporation for the expansion of production, and for the economy as a whole - economic growth.
Indirect taxes= Taxes - Direct taxes
Gross (domestic, private) investment (Ig) represents the total amount of expenses of firms in a given country aimed during a given year at replacing and increasing fixed capital and increasing inventories.
The main difference between macroeconomics is that while microeconomics studies the characteristics of equilibrium in individual markets, macroeconomics studies the economy as a whole, that is, it is the science of aggregate behavior in the economy.
National economy: structure and measurement of results
1. Structure national economy and macroeconomics.
2. Problems of the national economy.
3. Main macroeconomic indicators.
1. Macroeconomics is a branch economic science, studying the functioning of the economy generally from the point of view of ensuring conditions, sustainable economic growth, full employment of resources and minimizing the level of inflation .
The above definition emphasizes, firstly, the difference between the subject of macroeconomics and microeconomics ( generally!), secondly, it outlines the range of main problems that this science studies. Let us dwell in more detail on the differences between micro- and macroeconomics.
...Microeconomics, as is known, studies the behavior of individual economic entities in individual markets. The result of microanalysis is the statement that the market mechanism, which is the interaction of supply and demand based on competition, provides efficient use resources. Microeconomics provides answers to the questions: how is the price of a product determined, what is the volume of production of this product, how (and what) resources are allocated to the production of the product, who will receive the product?
This means, first of all, that macroeconomics examines all markets for goods as one market, as if the entire economy consists of one firm (producer) and one household (consumer). All labor markets are considered as one market. The same applies to capital markets, financial markets. Of course, aggregation distorts and simplifies reality, but it makes it possible to study patterns of the economy as a whole. As a result of aggregation, the national economy appears as the interaction of four macroeconomic entities:
1. household sector;
2. business sector;
3. public sector;
4. "rest of the world" sector.
The nature of behavior is also subject to aggregation: in macroeconomics we are not dealing with “demand”, but with “aggregate demand”; not with “supply”, but with “aggregate supply”.
Macroeconomics uses specific indicators - units. Aggregates (or aggregates) characterize the total volume of production, the general price level, and the total labor force.
At the same time, it should be emphasized that aggregation is not reduced to simple summation: the properties of the whole are not reduced to the sum of the properties of its parts.
2. The above definition identifies the three most important problems that form the subject of macroeconomics: employment, inflation, and economic growth. Many economists believe that the range of problems of macroeconomic analysis is much wider (some bring their number to thirty). Indeed, the specificity of macroeconomics is that its object is constantly being transformed. In addition, one of the specific features is the direct connection of macroeconomics with economic policy(therefore, in macroeconomics positive and normative analysis are especially closely intertwined). And finally, nowadays, in the era of globalization, national economies are increasingly intertwined with each other. Therefore, it seems legitimate to highlight the following problems as the subject of macroeconomics:
· unemployment (employment);
· inflation;
· the economic growth;
· national product;
· macroeconomic policy;
· external interaction of national economies.
However, despite all the differences between macroeconomics and microeconomics, it should be emphasized that these are sections of a single science with a single subject - the economic behavior of people. This similarity is reflected in the similarity of the method: both micro- and macroeconomics use equilibrium approach in the analysis of economic processes.
3. National accounting is based on the use of a system of general indicators (aggregates) reflecting the results of the functioning of the national economy as a whole for a certain period of time (usually 1 year). The initial indicator in the system of national accounts since 1992 is the indicator gross domestic product (GDP ). Until 1992, this indicator was gross national product (GNP).
GDP is the total value of all final goods and services produced at market prices. inside the country for a certain period of time (usually 1 year).
Because GDP measures the volume of national annual production, it serves as a source of growth national wealth of the country, which represents the total value of property (assets) owned by private individuals, legal entities, as well as the state.
All products produced during a given period of time are divided into intermediate And final. Dividing products into intermediate and final is necessary in order to avoid when calculating GDP re-count.
Intermediate products are products that are produced in a given period, and in a given period are sent for further processing or resale(for example, potatoes grown in a given year and sold to a starch producing company in a given year).
Final products are products that are produced and purchased during a given period for final consumption (personal or productive), that is, it is not used as an intermediate product.(For example, potatoes grown in a given year and sold to the population for personal consumption, or equipment for the production of starch produced in a given year and sold to an enterprise). Exactly And only this product is included in GDP. It should be emphasized that the increase in inventories is also considered as a final product, which, accordingly, is included in GDP. (For example, an increase in potato stocks or equipment produced but remaining unsold in the warehouse).
In order to exclude intermediate products from the total volume of produced products, the calculation method is used "at added value".
A firm's value added is the firm's sales volume (total revenue) minus the cost of raw materials and supplies purchased from other firms to produce the product.
(Firm value added = depreciation + factor income.)
To obtain GDP it is necessary to add up the value added of all firms.
Although GDP measures the volume of all final products and services produced; in practice, it is impossible to take into account all final goods and services, since some of them do not pass through the market (for example, housewives’ services). In addition, in all countries there is a shadow economy: goods and services produced in it pass through the market, but cannot be taken into account in GDP, since shadow businesses do not pay taxes.
It should be emphasized that GDP takes into account only goods and services produced in this period. Transactions with previously created assets are not included in GDP of this period. For example, the price of a house purchased in a given year, but built last year, will not be included in GDP of this year, but payment for the services of an intermediary will be included. For the same reason, in GDP purchases of used goods are not taken into account.
IN GDP transfer payments are not included (since these are gratuitous payments to the population).
GDP measures the output of products created on the territory of a given country, regardless of who owns the resources. However, a country may have property abroad; citizens of this country go to work in other countries. On the other hand, foreign enterprises can operate in a given country and operate Foreign citizens. To measure the volume of goods and services produced using a country's own resources, the indicator is used gross national product (GNP) . Until 1992 exactly GNP served as the initial indicator of the system of national accounts. GNP – is the total value, calculated at market prices, of all final goods and services produced using own resources countries over a certain period of time(regardless of the territory in which production took place).
GNP = GDP + net receipts from abroad
For most large countries GDP»GNP. (This does not apply to Russia, where capital flight is very high). Therefore, in further analysis we will not take into account the difference between them.
Calculus GDP (GNP) By market prices means that the composition GDP And GNP included net indirect taxes. (Net indirect taxes are the difference between the total amount of indirect taxes and the amount of subsidies to firms).
Index GDP often used to compare the well-being of people in different countries. However, for these purposes, the GDP indicator is usually supplemented by a system of social indicators for assessing individual well-being. These indicators are grouped into the following blocks:
1. education;
2. health;
3. work and quality of working conditions;
There are two ways to measure GDP(And GNP).
First way related to measurement expense flow necessary to buy back the produced goods and services included in the GDP(or GNP). It's called calculation GDP(or GNP) by expenses.
Second way related to measurement income stream received by the owners of factors of production used to produce the same goods and services, and is called calculation GDP(or GNP) by income.
The relationship between the two measurement methods is obvious GDP (GNP): expenses of buyers of goods and services form the income of sellers of factors of production, therefore
GDP by expenditure = GDP by income.
GNP by expenditure = GNP by income.
GDP by expenditure. Gross and net investments.
1. households buy consumer goods and services, i.e. carry out personal consumption expenses(WITH);
2. business sector(firms) buys (and produces) investment goods, and goods to replenish inventories - carry out investmente expenses (Ig). (This includes all construction, including housing.)
Net investment is gross investment minus depreciation (cost of capital consumption):
3. government sector(state) buys various goods and services (weapons, buildings for authorities government controlled, government educational institutions, services of civil servants, etc.), that is, carries out government spending for the purchase of goods and services (G).
4. the rest of the world. Part GDP (GNP) countries are bought by foreign consumers, firms and states, that is, they carry out export costs (X). At the same time, consumers, firms and the state implement expenses for import (M) goods from other countries. The difference between them is called expenses on net exports:
X – M = Xn.
Summarize.
GDP by expenses consists of the sum of expenses (four macroeconomic entities) necessary to buy back the entire volume of production in the country GDP:
GDP by expenditure = C+Ig+G+Xn
(GNP in terms of expenses consists of the same parts: the difference between GDP And GNP(net receipts from abroad) will only affect the value Xn.)
VD can be obtained in another way:
GDP – depreciation = NVP (net domestic product);
PVP - CHKN(net indirect taxes) = VD (internal income).
Therefore, if to internal income add net indirect taxes, we will get net domestic product. If we add to it depreciation, then we get GDP by income, which obviously includes two non-income values: depreciation (this is not income, but part of production costs) and net indirect taxes (state income, not factor income).
Domestic income is net domestic product measured at factor prices (excluding indirect taxes).
In a similar way you can get GNP by income:
GNP - depreciation = NNP (net national product).
ChNP - ChKN = ND(national income).
Thus, we have obtained one of the most important macroeconomic categories - national income (ND).