FEATURE ARTICLE: COMPLEMENTING GDP ANALYSIS WITH A HOUSEHOLD PERSPECTIVE


INTRODUCTION

Growth in GDP is a high profile statistic that is frequently quoted as a summary measure of the health of an economy. GDP measures production of goods and services by the domestic economy, with growth in GDP measuring the increase in the production of the economy. Given the high correlation between economic growth and employment, access to food, shelter and health care and stability in institutions, it is often used as a proxy measure for well-being. However using a single macroeconomic aggregate as an indicator to measure economic performance and improvements in the well-being of its citizens can be misleading and has been a subject of considerable debate in recent time.

This debate was progressed by the 2010 report Measurement of Economic Performance and Social Progress(footnote 1) . This report recommended that to achieve better metrics of material living standards, GDP must be supplemented by other statistical measures. The Australian National Accounts regularly provide a range of other indicators that can be used in conjunction with GDP to better understand aspects of well-being in addition to production-focused GDP.

This article analyses the broader ABS national accounts data to underline the importance of indicators that emphasise how recent economic events have impacted household economic welfare. The article compares growth in Australia's GDP, Real gross domestic income (RGDI) and household income flows (from the annual household income account) over the last two decades. This is designed to highlight the importance of analysing a range of measures when measuring welfare implications of changes in GDP.


GDP AND REAL GROSS DOMESTIC INCOME

The most commonly used measure of aggregate economic activity is the chain volume measure of GDP(footnote 2) , hereafter referred to as GDP, unless otherwise specified. GDP measures the domestic production of goods and services adjusted for domestic and external inflation. However, the national accounts contain a wealth of data beyond GDP. Among these are income flows within and external to the economy. These are quantified in the income accounts and in Real Gross Domestic Income (RGDI). RGDI measures the purchasing power of total incomes generated by domestic production by including the impact of the Terms of trade on GDP.

Table 1 below shows average annual growth rates of GDP and RGDI alongside the average annual growth in the Terms of trade. These figures are based on annual data from the 2012-13 release of Australian System of National Accounts (cat. no. 5204.0):

Table 1
	1989-90 to 2001-02	2001-02 to 2012-13
Gross domestic product	3.3%	3.1%
Real gross domestic income	3.3%	4.0%
Terms of trade	-0.3%	4.9%

Over the last 20 years the Australian economy has experienced GDP growth averaging 3.2% each year. This is a period in which the Australian economy was characterised by two distinctively different economic environments. Figure 1 covers the period from 1989-90 to 2001-02 and shows the recovery of the Australian economy after the recession in the early 1990s followed by a slowdown towards the end of the period. During this period, GDP averaged 3.3% growth per year compared to 3.3% average growth in real gross disposable income. Figure 1 shows that the growth rates of GDP and real gross disposable income track closely over this period. This is because the terms of trade impact was relatively insignificant during this period.

In contrast, Figure 2 shows the period from 2001-02 to 2012-13. This period is largely defined by a prolonged mining boom(footnote 3) , which was one of the factors driving an appreciation of the dollar. Australia enjoyed a significant increase in its Terms of trade during this period.

From 2001-02 to 2012-13 GDP in volume terms grew by 3.1% per year while RGDI grew more rapidly at 4.0% per year. Figure 2 shows the large gap in growth between RGDI and GDP in the last decade indicating that the purchasing power of domestic income has grown significantly faster than the production of goods and services. This is due to the income gains arising predominantly from the Terms of trade.

The above analysis shows that information published regularly as part of the quarterly National Accounts can add significantly to our understanding of the health of the economy. RGDI, however, does not explain how much of the growth in Australia's real income has flowed to households. The following sections look at real income growth from a household perspective.


HOUSEHOLD INCOME ACCOUNT

The ABS publishes an annual household income account in the Australian System of National Accounts (cat. no. 5204.0). One of the aggregates in the household income account is gross disposable income. Gross disposable income measures the difference between total income receivable and total income payable by the household sector and reflects the economic resources available to households for consumption or saving.

The ABS publishes gross disposable income in current price terms. To allow for a meaningful comparison with chain volume measures, gross disposable income needs to be adjusted to remove the effects of price inflation.

The best price index to do this is the Household Final Consumption Expenditure (HFCE) Implicit price deflator (IPD). The HFCE IPD measures the price change of household consumption. It is a weighted set of consumer prices based on consumer spending patterns and is used below to deflate the components of the household income account. The HFCE IPD is broadly similar to CPI, with the main difference being more regular reweighting and scope. For more information on HFCE, see "Measuring Price change in the Australian Economy" March Quarter 2004 Australian National Accounts: National income, Expenditure and Product (cat. no. 5206.0).


Real household income

Real household income grew 4.0% each year during the period from 2001-02 to 2012-13, compared to a 2.9% growth each year between 1989-90 and 2001-02. The most marked difference in growth between the two timeframes is a stronger Terms of trade effect during the second period. A positive Terms of trade effect increases the income earned by Australia. For Australian households, domestic consumers are most likely to have benefited from cheaper imports and indirectly through higher demand for labour as well as higher earnings received on financial assets such as superannuation and equities.


Analysis of real household income components

The household income account presents the sources of household income against the uses of household income. As described above, gross disposable income is the difference between total incomes received and total income paid.

Table 2 shows a decomposition of the household income account including the main contributors to gross disposable income. Each component below has been deflated with the HFCE IPD and expressed in terms of average annual growth rates for each period. The analysis below focuses on the period from 2001-02 to 2012-13.

Table 2, Average annual percentage growth of main components of Household Income Account
			1989-90 to 2001-02	2001-02 to 2012-13
Sources of Income
	Gross operating surplus-dwellings owned by persons		3.2	4.7
	Compensation of employees(a)		2.9	3.8
	Total property income receivable		0.8	5.6
Total gross income			2.7	4.1
Uses of Income
	Interest payable on
		Dwellings	3.1	8.8
		Consumer debt	0.2	2.7
	Income tax payable		2.4	3.4
Total income payable			2.2	4.4
Gross disposable income			2.9	4.0
HFCE Deflator			2.8	2.6
(a) There is a minor definitional difference between compensation of employees as a component of GDP and as an item in the household income account. In the gross domestic product account and the national income account, compensation of employees includes amounts paid by resident producers to non-residents. To obtain compensation of employees as recorded in the household income account it is necessary to deduct labour income to overseas from the value shown in the gross domestic product account and the national.

Sources of Income

Total gross income grew by 4.1% per year during the period 2001-02 to 2012-13. This was driven by growth across most components; with the largest being gross operating surplus on dwellings, compensation of employees and property income.

Gross operating surplus- dwellings owned by persons

Gross operating surplus measures the return to households from owning dwellings. The increase is mostly due to rental income increases (actual and imputed) over the last decade, supported by the growth in dwelling rents which increased by 5.3% per year, a higher average annual increase than during the previous decade(footnote 4) .

Compensation of employees

One of the main sources of income receivable by households is Compensation of employees, which accounts for more than half the value of total income receivable by households. Compensation of employees is comprised of wages and salaries (in cash and in kind) as well as social contributions received from employers, such as superannuation and workers' compensation contributions. Compensation of employees grew 2.9% per year over the period 1989-90 to 2001-02 increasing to 3.8% per year over the period 2001-02 to 2012-13.

Total property income receivable

Total property income receivable includes interest and dividend income received as a result of ownership of financial assets. Growth in property income received by households increased significantly during the last decade across all components, with the biggest driver being in growth in superannuation fund earnings. Legislative changes in superannuation policy and increases in investment income of superannuation funds have largely generated this growth.


Uses of Income

Overall, household use of income grew by 4.4% per year over the period from 2001-02 to 2012-13. This stronger growth in use of income means that growth in gross disposable income was weaker than growth in sources of income: gross disposable income grew by 4.1% per year. Part of the reason for this is interest payable on dwellings grew much more quickly than total income received, but was offset by consumer debt interest, which grew slower.

Interest payable on dwellings

Interest payable on dwellings grew 8.8% per year between 2001-02 and 2012-13. This represents a significant increase compared to the previous period despite a significant fall in interest rates that commenced around 2007 and remains at low levels.

The rise in interest payable on dwellings indicates that despite historically low interest rates, households have taken on more financing per year for dwelling purchases, which has increased the amount of interest payable.

Consumer debt

Consumer debt interest grew 2.7% per year between 2001-02 and 2012-13 compared to 0.2% per year between 1989-90 and 2001-02. This is a relatively stronger growth than the previous decade but when compared to the growth in income received, growth in consumer debt interest is still relatively slower.

Income tax payable

Income tax payable represents taxes on the income of households and accounts for more than half of total income payable by households. This item grew 3.4% per year between 2001-02 and 2012-13. This is less than growth in total income received on which the taxation is levied, suggesting that households have benefited from taxation changes over this period.


CONCLUSION

The average household over the last decade has benefited from growth in Australia's production, measured by GDP, however this is only part of the story. RGDI supplements the GDP analysis by adjusting for the Terms of trade. The use of the household income account delves even further to show that growth in real household income has been driven by growth in Compensation of employees, higher returns on financial and dwelling assets, relatively cheaper imported consumer goods, as well as more complex distributional effects such as income tax changes.

This analysis supports the recommendations from Stiglitz et al and shows the benefits of examining GDP in conjunction with other economic indicators to better reflect the health of an economy. The analysis also highlights the challenges of using a single indicator to measure economic performance and social progress in a complex economy. The indicators in this article are only a part of the range of indicators produced in the national accounts framework used to understand the Australian economy and the material well-being of its households.

1 Stiglitz, J. Sen, A and Fitoussi, J. (2010) Report by the Commission on the Measurement of Economic Performance and Social Progress, The Commission of the Measurement of Economic Performance and Social Progress (CMEPSP). <back
2 Australian Bureau of Statistics (ABS) 2004, Feature article – The terms of trade and the National Accounts (cat. no. 5206.0), ABS, Canberra (accessed at www.abs.gov.au) <back
3 Connolly, E. Orsmond, D. 2011 The Mining Industry: From bust to boom, Research Discussion paper, Reserve Bank of Australia, Sydney, December. <back
4 Consumer Price Index (cat. no. 6401.0) Percentage change from corresponding quarter of previous year, Rents; Australia. <back