BE_PPT_Chp_3_NI

8/7/2019 BE_PPT_Chp_3_NI

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Veena Keshav Pailwar 1

Business Environment

Veena K. Pailwar

IMT

Nagpur


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National Income and Environment Scanning

Uses of National Income Estimates

Measure of Economic Growth

Indicator of Success or Failure of Planning

Indicator of Structural Change

Measure of Income Inequalities

Indicator of the Pattern of Consumption and

Investment International and Spatial Comparisons

Measurement of Business Cycles


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Measure of Economic Growth

National Incomeat

Constant Prices

Indicates economic growth

of a country in

real terms


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Indicator of Success or Failure of Planning

National Incomeat

Constant Prices

Achievements Vis a Vis the Targets

indicates the Success of Planning


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Case UIE 1.1 5

Planning in IndiaAchievement of Planning in India

Plan Period Growth Rate

Target ActualFirst (1951-56) 2.1 3.60

Second (1956-61) 4.5 4.21

Third (1961-66) 5.6 2.72

Fourth (1969-74) 5.7 2.05Fifth (1974-79) 4.4 4.83

Sixth (1980-85) 5.2 5.54

Seventh (1985-90) 5.0 6.02

Eighth (1992-97) 5.6 6.02Ninth (1997-02) 6.5 5.35

Tenth (2002-07) 8.0 7.2

Eleventh (2007-12) 9.0 -


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Indicator of Structural Changes

Sectors Activities Covered

Classification I

Primary Agriculture (cultivation of crops, livestock and animal

husbandry); forestry, logging & fishing; mining & quarrying

Secondary Manufacturing; electricity, gas & water supply; construction

Tertiary Trade, transport & communication; Financial, real estate and

business services; Community, social and personal services

Classification II

Agriculture Agriculture and allied (forestry, logging and fishing)

Industry Manufacturing; mining & quarrying; electricity, gas & water

supply; construction

Services Trade, transport & communication; Financial, real estate and

business services; Community, social and personal services


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Indicator of Structural Changes

Sectors Characteristics

Primary These products are provided by the nature

Many of the products of this sector are used as inputs inthe secondary sector

Wealth creating sectors

Secondary Natural products are changed into other forms through

manufacturing or industrial activityMost of the products are finished products consumed

by the households or other business organizations

Wealth creating sectors

Tertiary

Consists of commodities which are intangibles- Consumer services: Tourism, health care and education

- Producer services: Transport and Finance

These activities help in the development of the primary

and secondary sectors

Wealth consuming sector


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Indicator of Structural ChangesDominant Sector/Stage of Development

Characteristics

Primary/AgricultureEarly Stage ofDevelopment

Value addition low: low growth rateLow level of income restricts the demandpattern: Major proportion of the income is spenton agriculture products

Secondary/

IndustrySecond (Middle)Stage of Development

Significant transfer of resources from

agriculture to industrial sectorValue addition higher than the first stage ofdevelopmentDemand pattern becomes more diversified:Demand for industrial products increases

Countries more open to trade & competitionTertiary/ServicesHighest level ofdevelopment

Value addition highest in servicesDisplaces unskilled labour: More employmentopportunities for the skilled labour


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Indicator of Structural Change

Surpassing the Middle Stage of GrowthMoving Directly from the Agrarian Economy

to the Service Oriented Economy

Underdeveloped Physical Infrastructureand Industrial Sector

may constraint the sustainable growth

Phenomenon of

Leapfrogging inGrowth Process


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Measure of Income Inequalities

Relationship between income

inequalities and growth

Non-Linear

Higher Inequalities: Growth retarding in poor countries

Growth encouraging in advanced developed

regions

High inequalities and high egalitarianism slows downthe growth process

f i i


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Measures of Income Inequalities

50

100

80

0

ab

c

Cumulative Percentage of Population

Cumulative

Percentage

of Income

A

B

Lorenz Curve

Line ofabsolute

equality

LorenzCurve

Lorenze Curve Gives a broad picture of inequality

The closer the curve is to the 45 degree line the more equal thedistribution of income is.


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Indicator of Pattern of Consumption and Investment

GDP measured using expenditure approach revealsConsumption Pattern

Changes in expenditure pattern reflects the changesin Demand Pattern

Business organization can use this information toavoid the mismatch between Demand and Supply

Demand

Productive

CapacityInvestment

Expenditure

Consumption

Expenditure

Supply

in the long run


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International and Spatial Comparisons

Problems in Inter Spatial Comparison

NI of different countries expressed in different currencies

Different Countries experience different degrees of price levels

Countries vary in terms of population size

Accounting for the Difference

Population Variation: Per Capita Income

Currency Variation: Use of Common Currency

Price Level Variation: Purchasing Power Parity

Case UWE 3.2 Richest Nations in the World


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I i l d S i l C i


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International and Spatial ComparisonsPer Capita Income using PPP

An Illustration

Price Units Expenditure Price

Ratio

Expenditure in Us $

A B A B A B $/Rs B

Food $ 50 Rs 300 80 100 $ 4000 Rs 30000 50/300 Rs30000 x

($50/Rs300)= $ 5000

Cloth $ 100 Rs 500 60 40 $ 6000 Rs 20000 100/500 Rs20000 x

($100/Rs500) = $

4000

$10000 Rs 50000 = $ 9000

Comparing the expenditure in the two countries using US $ indicates thatincome in country A is 10 times more than income in country B

Expenditure in terms of PPP however indicates that expenditure incountry B is 90% of the expenditure in country A


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Measurement of Business Cycles

Need high frequency data

Need data on the variables which represent overallpicture of the economy

In the absence of high frequency data on national

income movements in sectoral output data are taken asrepresentative

For the countries dependent on industrial activities IIP

can be taken as the representative For primarily agrarian economies data on agriculture

GDP can be used for measuring business cycles


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copyright@Veena Keshav Pailwar 17

Business Fluctuations Cycles and Economic Environment

Business

Fluctuations

Recurrent

No fixed periodicity

Much larger duration than theseasonal fluctuations

Approaches to the Analysis

Conventional Business Cycles

Growth Cycles

Growth Rate Cycles


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Phases in Conventional Business Cycles

No. of

Years

Level of

Economic

Activity /

Level of

National

Income

A

Trough

Peak

D

Peak

B

C

Trough

ETrough

One Business Cycle

Contraction Expansion


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Conventional

Business

Cycles

Traditional measurement of business fluctuations

Consist of two phases: Expansion and Contraction

Useful for the Industrial Countries with

Low average growth rate

Short expansionary and contractionary phase Not useful for Developing and Emerging Economies with

Continuous expansion over a very long period of time


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Growth

Cycles

Useful for Developing and Emerging Economies with

Very high growth rate with few or no recessions

Consists of four phases

Recovery, Expansion, Slowdown and Recession

Requires estimation of trend or full employment line

Useful for historical analysis

Not useful for real time analysis

Ph i G h C l


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Phases in Growth Cycles

No. of Years

Rate of

growth of

nationalincome

Expansion Slowdown

RecoveryRecession

Recovery

DepressionA

B

D

E

C

Trend

Line

Ph f G th C l


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Phases of Growth Cycles

Phase Growth Rate Growth Rate Vis a Vis

Full Employment

Growth Rate

High Growth Phase

Recovery Positive/ negative Below (but above

trough growth rate)

Expansion Positive Above

Low Growth Phase

Slowdown Positive Above (but below peakgrowth rate)

Recession Positive/ Negative Below


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Growth Rate

Cycles

Sustained periods of upward or downward movements

in the growth rate

Estimated by plotting the growth rates at each point in time Consists of Expansion and Recession

Expansion: Positive Growth Rate

Recession: Negative Growth Rate

Does not require estimation of trend line

Actual growth rate is compared with zero growth rate line

Useful for real time monitoring and forecasting

th R t C l Vi Vi C ti l B i C l


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rowth Rate Cycles Vis a Vis Conventional Business Cycles

Peak

A

B

JTrough

PeakH

D

Growth Rate Cycles

Growth

Rate ofEconomic

Activities

Level ofEconomic

Activities

TroughC

F

I

Business Cycles

0

G

ContractionExpansion

Growth Rate

DownturnRecession Growth Rate

upturnExpansion

E

No. of Years

No. of Years

Empirical Estimation of Growth Rate Recession/


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Empirical Estimation of Growth Rate Recession/Slowdown

Rule of Thumb

Negative Growth Rate in

Two Subsequent Quarters in a Year

Slowdown

Recession

Slow Down in Growth Rate inTwo Subsequent Quarters in a Year

But the Growth Rate is positive

Depression GDP declines by more than 10%

Cl ifi ti f E i I di t


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Classification of Economic Indicators

Criteria for Classification

Relation of the indicators with cycles/

Direction of the movement of the

indicators with cycles

Data Frequency

Timing


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Criteria: Relation of the indicators with cycles

Pro-cyclical Indicators

Countercyclical Indicators

Acyclical Indicators

P li l I di t


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Pro-cyclical Indicators

Value of the pro-cyclical indicator moves in

the same direction as the economy

Ex: GDP

* In an expansionary economy

value of this indicator usually increases

* In a recession value of this indicator declines


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A li l I di t


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Acyclical Indicators

Value of acyclical indicator has no relation tothe health of the economy

Ex: Exports

Cl ifi ti f E i I di t


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Criteria: Frequency of the Data

Quarterly Frequency: in most countries GDP figures

are released quarterly

Monthly Frequency: Unemployment rate is releasedmonthly

Weekly Frequency: inflation rate estimated weekly

Daily Frequency: Dow Jones Index are available

immediately and change every minute



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Criteria: Timing: relates to the timing of

the change in peak/ trough value of theindicator relative to the changes in the

peak / trough in the economic activities as

a whole

Leading Indicators

Coincident Indicators Lagging Indicators

di C i id d i di


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Leading, Coincident and Lagging Indicator

Leading Indicators

Coincident Indicators

Lagging IndicatorsWageRate

IIP

Money Supply

Or Stock Prices

Indicator

No. of Years

Leading Indicators


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Leading Indicators

Indicates the health of the economy 12

to 15 months from now

Examples Index of Overtime Hours Applications for

Unemployment

Compensation

New Orders

Stock Prices

Money Supply

Aggregate Deposits

Raw Material Prices

Exports Consumer Expectations



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Peak/ trough in the Values of these indicators change

at the same time as the aggregate economic activity

Examples Real GDP

Real Non Agriculture GDP

Index of Industrial Production

Economic series of these indicators have the peaks

and troughs that roughly coincides with the peak andtroughs in the Business Cycles

Lagging Indicators


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Lagging Indicators

Peak/ trough in the Values of these indicators lag

behind the turning points in the aggregateeconomic activity

Examples

Interest Rate Spread Change in CPI for Services

Commercial and Industrial Loans outstanding

Change in Labour Cost Per Unit of Output

Economic series of these indicators experience the peaks

and troughs after those of the aggregate economy

Composite Index of Leading Indicators


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Composite Index of Leading Indicators

Composite is calculated because

It is excepted that an aggregate of the

indicators will predict turning points more

effectively than any one indicator alone

This reduces the risk of false signals

It provides a leading indicator with better

forecasting and tracking qualities

Classification of Indicators


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Indicator Relation with the Cycle Timing

OutputGDP Pro-cyclical Coincident

Consumption Pro-cyclical Coincident

Employment

Employment level Pro-cyclical Coincident

Unemployment rate Counter-Cyclical Lagging

Production

Business Inventories Pro-cyclical Leading

New Construction Pro-cyclical Leading



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Indicator Relation withthe Cycle

Timing

Prices

Producer prices Pro-cyclical Coincident

Consumer prices Pro-cyclical Coincident

GDP Deflator Pro-cyclical CoincidentStock Prices Pro-cyclical Leading

Industrial Materials PriceIndex

Pro-cyclical Leading

Price to Unit Labour Cost Pro-cyclical Leading

% change in Unit Labour Cost Pro-cyclical Lagging



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Money & Credit

Money Supply Pro-cyclical Leading

Outstanding Credit Pro-cyclical Lagging

Nominal i.r. Pro-cyclical CoincidentGovernment Finance

Govt. Revenue Pro-cyclical Coincident

Govt. Expenditure Counter-cyclical Coincident

Govt. Debt Counter-cyclical Coincident



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International Trade

Import Pro-cyclical Coincident

Export Acyclical Coincident

Balance of Trade Counter-cyclical Coincident


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Uses of Economic Indicators

Identification of the phase of business cycle

Monitoring of the current business activity

Forecasting the future economic scenario

Identifying & predicting economic crisis

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BE_PPT_Chp_3_NI