Mee - 2 - Data of Macro(2013)-Class

8/9/2019 Mee - 2 - Data of Macro(2013)-Class

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MACROECONOMIC

ENVIRONMENT

2. THE DATA OFMACROECONOMICS


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Introduction• Why do we study the national income accounts?

1. National income accounting provides structure forour macroeconomic theory models.

2. Introduces statistics that characterize the economy.

• Output defined in two ways1. roduction side! output produced which also

involves payments to wor"ers in wages# capital ininterest and dividends# and profits.

2. $emand side! output % purchases &y differentsectors of the economy.

' (s per accounting# output measured via demand andproduction e)ual in e)uili&rium.


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Aggregate Output

• National income and product accounts are anaccounting system used to measure aggregateeconomic activity.

• *he measure of areate output in the nationalincome accounts is ross domestic product # or!D" .

• Output typically measured as +$ % value of allfinal goods and services produced within acountry over a particular period of time ,a year-.


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The Components Of

The Macroeconomy

*he circular #lo$diaram shows the

income received andpayments made &yeach sector of the

economy.


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The Components Of The Macroeconomy

veryone/se0penditure issomeone else/sreceipt. verytransaction must

have two sides.


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The Components Of

The Macroeconomy

• Trans#er pa%ments are payments made&y the government to people who do notsupply goods# services# or la&or ine0change for these payments.


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GDP : Meaning

+$ is the value of the final goods andservices produced in the economy during

a given period ,of one year-.• ( #inal ood is a good that is destined for final

consumption.

• (n intermediate ood is a good used in the

production of another good.


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Different Approaches For Calculating

GDP (at Maret Price!

1. 0penditure (pproach

2. roduction ,or alue (dded- (pproach

. Income (pproach

• The three methods yield the same resultbecause total expenditures on goods andservices is equal to the value of goods andservices produced which is equal to the totalincome paid to the factors that produced thegoods and services.


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GDP: "#penditure Approach

• There are three $ays of computing GDP 1. 0penditure (pproach 3 It measures +$ ,at mar"et prices- using final

sales approach

+$4 % 5 6 Ig 6 + 6 N7

5 % consumption spending of individuals Ig % investment spending &y &usiness + % government e0penditures N7% net e0ports ,e0ports 3 imports-


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Government

purchases of goods

and services.

Government

purchases of goodsand services.

GDP = C + Ig + G + NXGDP = C + Ig + G + NXGDP = C + Ig + G + NXGDP = C + Ig + G + NX

Total demand

for domesticoutput (GDP

Total demand

for domestic

output (GDP

is composed of

is composed

of

Consumption

spending !"

households.

Consumption

spending !"

households.

Investmentspending !"

!usinesses.

Investmentspending !"

!usinesses. Net e#ports

or net foreign

demand.

Net e#ports

or net foreign

demand.

This is the called the national income accounts identity.


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$ To compute the total value of different goods and

services% the national income accounts use mar&et prices

(GDP at mar&et prices.

' sed goods are not included in the calculation of

GDP.

) Change in inventories is added to GDP. If the goods

are stored% their value is added in GDP. If the" spoil%

GDP remains unchanged. *hen the goods are finall"

sold out of inventor"% the" are considered used goods and

are su!stracted from GDP (i.e the change in inventories

is added.


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Intermediate goods are not counted in GDP, onl"the value of final goods. -eason the value of

intermediate goods is alread" included in the mar&et

price.

/ 0ome goods are not sold in the mar&etplace and

therefore don1t have mar&et prices and are not counted

in GDP. 2or e#ample% a house3ife doing household

chores and not charging an"thing for it.


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%& GDP: 'alue Added Approach (Production

Approach!

%&%& GDP is the sum of alue added in the economyGDP is the sum of alue added in the economyduring a gien period&during a gien period&

alue (dded % alue of output 3 alue of Intermediateconsumption.

( is the e0tra value created at each stage of the

production process.

alue of Output % alue of the total sales of goods andservices 6 alue of changes in the inventories.

*he sum of alue (dded in various economicactivities is "nown as GDP at factor cost.

+$ at factor cost plus indirect ta0es less su&sidieson products is GDP at Maret Price&


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)& GDP: Income Approach

)&)& GDP is the sum of the incomes in the economy duringGDP is the sum of the incomes in the economy during

a gien period&a gien period&

*his method measures +$ &y adding incomes that firms payhouseholds for factors of production they hire.

4ore specifically# incomes can &e divided into five categories!Wages# salaries# and supplementary la&our income# 5orporate profits#Interest and miscellaneous investment income# 8armers/ income#Income from non'farm unincorporated &usinesses.

*hese five income components sum to net domestic income (*DP!

at factor cost&*wo ad9ustments must &e made to get +$ ,at mar"et price-!

1. Indirect ta0es minus su&sidies are added to get from factor costto mar"et prices.

2. $epreciation ,or 5apital 5onsumption (llowance- is added to

get from net domestic product to gross domestic product.


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Three +ays To Compute GDP

Consider a simple economy in $hich one good is producedand sold&1. :a9 finds a seed and plants it. ;ometimes later# an orange tree

appears.2. :a9 pays in wages to pic" and &o0 the oranges.. Ne0t# :a9 sells the oranges to ;uresh for :s.>.

@. ;uresh turns the oranges into orange 9uice and sells the orange 9uice to ;arita for :s.1>>. ;arita drin"s the 9uice.

+$ ,e0penditure approach- 3 ;arita is the final &uyer in this economy.+$ % :s. 1>>.

+$ ,income approach- 3 A :a9/s profit%:s>A;uresh/s profit%:s2>. +$ % =>6>62> % :s. 1>>.

+$ ,value added approach- 3 alue added &y :a9%:s>A valueadded &y ;uresh%:s2>. +$ % >62> % :s. 1>>.


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GDP, G*P, **P, *I

• +$ includes only that output which is produced within an

economy/s geographical &orders.

• +N consists of the output produced either inside or outsidethe country &y economic resources owned &y residents ofthat country.

• ( nationBs +$ is one of the ways of measuring the size ofits local economy whereas the +N measures the overalleconomic strength of a country.

• +N is greater than +$ when residents of that countryemploy their resources to produce more output outside thatcountry than what foreigners produce inside the country.

• NN e)uals +N less the allowance made for capital which

has worn out during the year.


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GDP, G*P, **P, *I

• +N4 % +$4 3 payments of factor incomes to rest of

the world 6 receipts of factor income from rest of the world.

• +N4 3 depreciation % NN4

• NN4 3 indirect ta0es 6 su&sidies % NN85 % NI &'()*

• NI 3 direct ta0es 6 transfers % -D ,disposa&le income-.

• C$ % 5 6 ;

• C$ is the amount of money that households have availa&lefor spending and saving after income ta0es have &eenaccounted for.


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There are ' main 3a"s

of vie3ing GDP

Total income of ever"one in the econom"

Total expenditure on the econom"1s

output of goods and services

4ouseholds 2irms

Income -s

5a!or

Goods

6#penditure -s

2or the econom" as a 3hole% income must equal expenditure.

GDP measures the flow of rupees in this econom".

Income, "#penditure And the Circular Flo$


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Income, "#penditure And the Circular

Flo$

(T$o sector model!

.ousehold

/ector

0usinesssector

Consumption spending (C!

.ousehold saing 1 Inestment spending

(I!

Compensation for serices

of economic resources

(**PFC!

i&e - (i&e **PFC! 1 C 2 I


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Income, "#penditure And the Circular

Flo$

(Three sector model!

.ouseholdsector

0usiness

sector Gotsector

Indirect ta#es

Got e#pen3diture (G!

Consumer spending(C!

.ousehold saing1inestment spending(I!

Compensation for serices of economicresources (**PFC!

Direct ta#eson income

- (ie **PMP! 1 **PFC 2 indirect ta#es 1 C 2 I 2 G


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GDP, G*P, **P, *I

• NI % payments made to factors ofproduction owned &y residents of thateconomy ,compensation of employees 6

rent 6 interest 6 profit-. (lso called NN" at#actor cost.

• In India, depreciation and ta#es gienational income as appro#imately 456

of GDP&


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Components of Demand

• *otal demand for domestic output is made upof four components!1. 5onsumption spending &y households ,5-

2. Investment spending &y firms ,I-. +overnment spending ,+-

@. 8oreign demand for our net e0ports ,N7-

' *he fundamental national income accounting identity is '

NX G I C Y +++=


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Consumption

• 5onsumption % purchases of goods and services &y thehousehold sector.

3 Includes spending on dura&le ,eg. 5ars-# non'dura&le,eg. 8ood-# and services ,eg. 4edical services-.

3 5onsumption is the primary component of demand.

• 5onsumption as a share of +$ varies &y country.

• In India, it comprises appro#imately 753786 of GDP&

• In China, it is 856 of GDP, in 9/A it is 486 of GDPappro#imately&


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Goernment

• Includes +overnment purchases of goods and servicessuch as national defence e0penditures# costs of roadpaving &y state and local governments# and salaries ofgovernment employees.

• +overnment also ma"es transfer payments % paymentsmade to people without their providing a current servicein e0change.

3 g. ;ocial security# unemployment &enefits.

3 *ransfer payments are NOT included in +$ sincethey are not a part of current production.

3 i.e total +overnment e0penditure % transfers 6purchases ,&ut transfers are not included in +$computation-.


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Inestment

• Investment % additions to the physical stoc" ofcapital ,i.e. &uilding machinery# construction offactories# additions to firms inventories-.

• In the national income accounts# investment isassociated with business sector’s adding to thephysical stoc" of capital# including inventories. 3


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*et "#ports

• (ccounts for domestic purchases of foreign goods,imports- and foreign purchases of domestic goods,e0ports- ! N7 % 0ports 3 Imports.

3 We su&tract imports from +$ since we are

accounting for total demand for domesticproduction.

• N7 can &e D# E# or % >

3 India N7 has always &een negative → trade deficit.Its 5(FG+$ was '>.@H in 2>>@'>=# '2.H in2>>'># '2.H in 2>>'1># '2.H in 2>1>'11#

'@.2H in 2>11'12# '@.JH in 2>12'1.


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"co surey, %5%3) : ey indicators


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*ominal and ;eal GDP

• Nominal !D" is the sum of the )uantities of final goodsproduced times their current price.

• Nominal +$ increases over time &ecause!

1. *he production of most goods increases over time.

2. *he prices of most goods also increase over time.

• Real !D" is constructed as the sum of the )uantities offinal goods times constant ,rather than current - prices.


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*ominal and ;eal GDP• Nominal +$ is also called rupee !D" or !D" in

current rupees.

• :eal +$ is also called !D" in terms o# oods# !D" inconstant rupees# !D" ad+usted #or in#lation# or !D"in 2,,-,/ rupees.

• *his conversion from nominal to real units allows us toeliminate the pro&lems created &y having a measuringstic" ,rupee value- that essentially changes length over

time# as the price level changes.• g! price inde0 of &ase year ,2>>@'>=- % 1>> price inde0 of current year ,2>>='>J- % 11> :eal +$,2>>='>J- % nominal +$ of 2>>='>J 0 1>>

11>


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5et1s see ho3 real GDP is calculated in a simple apple 7 orange

econom". 2or e#ample% if 3e 3anted to compare output in '88'and output in '88)% 3e 3ould o!tain base-year prices% such as

'88' prices.

Real GDP in 2002 would be:

('88' Price of 9pples × '88' :uantit" of 9pples +('88' Price of ;ranges × '88' :uantit" of ;ranges.


('88' Price of 9pples × '88) :uantit" of 9pples +

('88' Price of ;ranges × '88) :uantit" of ;ranges.


('88' Price of 9pples × '88 :uantit" of 9pples +

('88' Price of ;ranges × '88 :uantit" of ;ranges.

Calculating ;eal GDP


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GDP : "#pansions And ;ecessions

• !D" ro$t0 e)uals!

$

$(

−

−

−

t

t t

Y

Y Y

eriods of positive +$ growth are callederiods of positive +$ growth are callede1pansionse1pansions..

eriods of negative +$ growth are callederiods of negative +$ growth are calledrecessionsrecessions..

< 55


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The Othe Majo

Mac oeconomic Va iables

• +$ is o&viously the most importantmacroeconomic varia&le. Fut two

other varia&les tell us a&out otherimportant aspects of how an economyis performing!

1.Knemployment

2.Inflation


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9nemployment

• 9nemployment is a state in which a person does not have

a 9o& &ut is availa&le for wor"# willing to wor"# and has madesome effort to find wor" within the previous four wee"s ,ILOdefinition-.

• *he la=or force is the total num&er of people who are

employed and unemployed.

• *he unemployment rate is the percentage of the people inthe la&or force who are unemployed.

• ( discouraged $orer is a person who is availa&le forwor"# willing to wor"# &ut who has given up the effort to findwor".

•L force participation rate%L forceGpopulation of wor"ing age


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"CO /9;'"-, %53%

9nemployment rate (India!, %5% 1 4&86

/ource : CIA Fact=oo


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Types Of 9nemployment

a- 5yclical Knemployment ,O"un/s law-

&- ;tructural Knemployment

c- 5lassical Knemployment

• Total 9nemployment in a country1 a2=2c


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The 9nemployment ;ate

Oun)s la$ is a

relation &etween thechange inunemployment and+$ growth.


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Oun>s la$

• O"un found that a 1H cyclicalunemployment rate e0ists for each 2Hthat real +$ falls short of potential +$.

• otential +$ is the ma0imum productionthat can ta"e place in the domesticeconomy without putting upward pressureon the general level of prices.


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The GDP Deflator

• T0e !D" de#lator is what is called an inde1 num3er Mset e)ualto 1>> in the &ase year.

• *he rate of change in the +$ deflator e)uals the rate of inflation!

( P P

P

t t

t

− −

−

$

$

nominal GDPreal GDP

# 55Pt 1


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The Consumer Price Inde#

• *he +$ deflator measures the averageprice of output# while the consumer priceinde1 ,5I- measures the average priceof consumption# or e)uivalently# the costo# li4in .

• *he 5I and the +$ deflator movetogether most of the time.


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*he +$ deflator measures the prices of all goods

produced# whereas the 5I measures prices of only thegoods and services &ought &y consumers. *hus# anincrease in the price of goods &ought &y firms or thegovernment will show up in the +$ deflator &ut not in the5I.

(lso# another difference is that the +$ deflator includesonly those goods and services produced domestically.Imported goods are not a part of +$ and therefore don/tshow up in the +$ deflator.

*he final difference is the way the two aggregate the pricesin the economy. *he 5I assigns fi0ed weights to the pricesof different goods every year# whereas the +$ deflator

assigns changing weights.

CPI 'ersus The GDP Deflator


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Inflation and 9nemployment

*he "0illips cur4e is a

relation &etweenunemployment and inflation.


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P.I??IP/ C9;'"

When theunemployment rate islow ,&oom-# inflation

tends to increase.When the unemploy'ment rate is high,recession-# inflationtends to decrease.


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P.I??IP/ C9;'"

• *he inverse relationship &etweenunemployment rate and inflation rate asshown &y the hillips curve is reasona&le

since# in the a&sence of cost'pushinflation# increases in the price level ,andtherefore inflation- should occur as output

nears its full employment level ,i.e asunemployment rate drops-.

" h ; t


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"#change ;ate• ach country has its own currency in which prices are )uoted. In the K.;.# prices

are )uoted in K.;. dollars# in apan in yen# in most of urope prices are )uoted

in euro# in India in rupees.

• 0change rate % the price of one country/s currency in relation to anothercountry/s currency. It is needed for international trade# foreign travel etc. 3 In India 1 % J@:sA 1uro % =:sA 1ound%1>>.2:s ,;ept 2>1-.' *he pound is worth K.;. 1.=A 1 uro % 1.@2.

• 8loating ,or fle0i&le- e0change rate! when two countries agree to let international

mar"et forces of supply and demand determine their e0. rate. It fluctuatesdepending on e0ports and imports of a country.

• 4ost countries today use floating e0. rates within relatively fi0ed limits.

• 8i0ed e0change rate! when two countries agree to "eep their e0. rate fi0edthrough use of monetary policy. 3 5hinese currency yuan was fi0ed till uly 2>>=. ;ince 2>>=# 5hina claims to

have adopted the fle0i&le e0. rate system. >= ,1 % J.12 5NC# ;ept 2>1-.

3 Fermuda dollar fi0ed at 1K;$%1.2>> F4$ ,;ept 2>1-.

*ational Accounting /ystem In India


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• *he 5entral ;tatistical Organisation is responsi&le for coordination ofstatistical activities in the country# and evolving and maintainingstatistical standards.

• Its activities include National Income (ccountingA conduct of (nnual;urvey of Industries# conomic 5ensuses and its follow up surveys#compilation of Inde0 of Industrial roduction# as well as 5onsumerrice Indices for Kr&an Non'4anual mployees#


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•*ational /ample /urey Office (*//O! Sunder4inistry Of ;tatistics (nd rogramme ImplementationTconducts nationwide sample surveys on various socio'economic issues in successive rounds# each roundcovering su&9ects of current interest in a specific surveyperiod. *he organisation has four divisions !

(i! /urey Design and ;esearch Diision (/D;D!

(ii! Field Operations Diision (FOD!

(iii! Data Processing Diision (DPD! and

(i! Co3ordination and Pu=lication Diision (CPD!

• N;; JJth round ,2>>'1>-• Latest N;; Jth round ,2>11'12-.

Oth / Of I di D t


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Other /ources Of India Data

• :FI ! money supply# roi# FO data# e0change rates.

• 4inistry Of 8inance# $(A 5;OA :FIA lanningcommission ! +$ data.

• $ept Of Industrial olicy and romotion ! WI.• $ept Of Industrial olicy and romotion# La&our Fureau !

5I'IWA 5I'(L• 5;O ! 5I'KN4• N;;O# 4inistry Of La&our R mployment ! employment#

unemployment data• 4inistry of 8inance# lanning commission ! &udget

documents# economic survey.• $+5I;# Uol"ata ! e0ports# imports data ,directorategeneral of commercial intelligence R statistics-.

• Office of the :egistrar +eneral Of IndiaA 4inistry of


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Macroeconomic Policy Challenges

Fie $idely agreed policy challenges formacroeconomists are to:

1. Foost economic growth

2. Ueep inflation low. ;ta&ilize the &usiness cycle

@. :educe unemployment

=. :educe government deficits


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Macroeconomic Policy Tools

Goernment in the Macroeconomy

• *here are three "inds of policy that thegovernment has used to influence themacroeconomy!

3 8iscal policy

3 4onetary policy

3 +rowth or supply'side policies


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Macroeconomic Policy Tools

Goernment in the Macroeconomy

• Fiscal polic% refers to government policiesconcerning ta0es and spending.

• Monetar% polic% consists of tools used &y the5entral Fan" to control the )uantity of money inthe economy.

• !ro$t0 policies are government policies thatfocus on stimulating aggregate supply instead ofaggregate demand.


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0ercise 1

• Ksing the data given &elow relating to the components ofthe consumer price inde0 of a country# determine theannual rate of inflation for 2>>J as measured &y thechange in the consumer price inde0.

'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''Item Inde# $eight Price inde# on )st Dec, %558 Price inde# on )st Dec, %5578ood 2> 1@> 1@=

12J 1=

*ransport 1= 1=2 1@J

Other +oods 1= 1> 12=

'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''


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0ercise 2

5onsider an economy that consists only of those who&a"e &read and those who produce its ingredients.;uppose that this economy/s production is as follows! 1million loaves of &read ,sold at 2 each-A 1.2 millionpounds of flour ,sold at 1 per pound-A and 1>>#>>>pounds each of yeast# sugar# and salt ,all sold at 1 perpound-. *he flour# yeast# sugar# and salt are sold only to&a"ers# who use them e0clusively for the purpose ofma"ing &read.

a- What is the value of output in this economy ,i.e.

nominal +$-? &-


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0ercise

• Uong"ong is a small island nation. Its populationtotal is @>> and it has 1>> wage earners whoearn an average of => per year. ach wageearner spends @> per year &uying local goodsand services and per year &uying imports.

*he island e0ports a total of >> worth ofgoods. *he govt ta0 rate is 1>H and all govtmoney is spent on &uilding infrastructure andsupporting schools. *here is only on industry ,almining- on the island and it employs every wageearner. *he industry spends J>> each year onnew mining e)uipment.

• 5alculate +$ of the country.

Documents

Mee - 2 - Data of Macro(2013)-Class