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The Data of Macroeconomics ac oeco o cs

MACROECONOMICS
Macroeconomics Prof. Rudra Sensarma N. Gregory Mankiw Indian Institute of Management Kozhikode

PowerPoint Slides by Ron Cronovich

2013 Worth Publishers, all rights reserved

www rudrasensarma info www.rudrasensarma.info

Learning objectives & outcomes

themeaningandmeasurementofthe mostimportantmacroeconomicstatistics measuringeconomicactivityusing:gross domesticproduct(GDP) measuringinflationusing:theGDPdeflator, th wholesale the h l l price i index i d (WPI)&the th consumerpriceindex(CPI) theunemploymentrate

 Itisacapitalmistaketotheorizebeforeone hasdata.Insensiblyonebeginstotwistfacts tosuittheories theories,insteadoftheoriestofitfacts facts.

GDP
Gross Domestic Product ( (GDP) ) is the most important p measure of how the economy is performing; we get it from: National Accounts Statistics produced by the Central Statistics Office of the Ministry of Statistics & Programme Implementation (http://mospi.nic.in) GDP is a measure of aggregate output = P1xQ1+P2xQ2+P3xQ3+..

PerformanceoftheIndianEconomy
12 10 8 6 4 2 0 2 4 6

GDP_GROWTH

GDP_GROWTH_TREND

Note:ThisplotsthegrowthrateofGDPi.e.percentagechangeoverpreviousyear

GDP:ProductionandIncome
There are three ways of defining GDP:

1. GDPisthevalue ofthefinal goodsandservices, producedintheeconomy, duringagivenperiod.

Afinalgood isdestinedforfinalconsumption. Anintermediategood isusedintheproductionofanothergood good. Duringagivenperiod=GDPisaflow andnotastock variable.

Steelcompany Carcompany Revenue 100200 Wages 8070 Otherexpense 0100(steelpurchases) Profit 2030 WhatistheGDPofthistwofirmeconomy? 200
Note:donotdoublecount; donotincludesaleofsecondhandgoods (Note:Carisfinalgoodwhile steelisintermediategood)

GDP:ProductionandIncome
There are three ways of defining GDP:

2. GDPisthesumofvalueaddedintheeconomyduring agivenperiod.
Valueadded equalsthevalueofafirms firm sproductionminusthe valueoftheintermediategoodsitusesinproduction.

Steelcompany Carcompany Revenue 100200 Wages 8070 Otherexpense 0100(steelpurchases) Profit 2030 WhatistheGDPofthistwofirmeconomy? 200
(note:V.A.1is100+V.A.2is100)

GDP:ProductionandIncome
There are three ways of defining GDP:

3.GDPisthesumoftheincomesintheeconomyduringa givenperiod.
Sumoflabour incomeandcapitalincome

Steelcompany p y Carcompany p y Revenue 100200 Wages 8070 Otherexpense 0100(steelpurchases) Profit 2030 WhatistheGDPofthistwofirmeconomy? 200
(note:80+20+70+30)

GDPcanbemeasuredinthreedifferentbut equivalentways
Productionside
Valueoffinalgoods&services Sumofvalueadded

Incomeside
Sumofincomes

ApplicationofProductionmethodin measuringIndiasGDP
Sumofvalue addedinindustry, agricultureand servicesectors Example: E l
(AllfiguresinRs.billion)
Sector Agri & allied Industry S i Services GDP fc Net IDT GDP mp 1950-51 1990-91 2012-13

51 99 51.99 11.54 36.04 100.36 3.65 104 01 104.01

1543 50 1543.50 1112.39 2645.90 5318.13 543.99 5862 12 5862.12

16448 34 16448.34 16691.14 61470.64 94610.13 5596.07 100206 20 100206.20

Sh loutput(GDPf ) Sharesi intotal fc)

70 60 50 40 30 20 10 0 195051 199091 201213 Agri&allied Industry Services

GDPvs.GNP
Grossdomesticproduct (GDP): Totalincomeearnedbydomesticallylocated f t of factors fproduction, d ti regardless dl of fnationality ti lit Grossnational product (GNP): Totalincomeearnedbythenationsfactorsof production,regardlessofwherelocated GNP GDP=factorincomefromabroad minusfactorincometoabroad Examplesoffactorincome:wages,profits, rent interest&dividends rent,

NOWYOUTRY

DiscussionQuestion
Whichwouldyou wanttobebigger, GDPorGNP? Why?

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GNP vs. GDP in select countries, 2010

Country Bangladesh g Japan China UnitedStates India Canada G Greece Iraq Ireland GNP 109,695 , 5,601,557 5 957 012 5,957,012 14,635,600 1 712 645 1,712,645 1,549,652 292 874 292,874 77,842 171,260 GDP 100,357 , 5,458,837 5 926 612 5,926,612 14,586,736 1 727 111 1,727,111 1,577,040 301 083 301,083 82,150 206,612 GNP GDP(% ofGDP) 9.3 2.6 05 0.5 0.3 0.8 08 1.7 2.7 27 5.2 17.1

GNP and GDP in millions of current U.S. dollars

Limitationsoftraditionalmethodsof outputmeasurement
Problems:
Informaleconomy(blackmarkets,householdwork) Ignoresqualityoflife(happiness,pollution) Lowfrequency q yofthedata:GDPisq quarterly y

Solutions:
Difficulttocapturemissinginformation GrossNationalHappiness,GreenGDP;Human DevelopmentIndex:
Longevity(lifeexpectancy) Education(yearsofschooling) Standardofliving(NationalincomepercapitameasuredinPPP)

IndexofIndustrialProduction(IIP):availablemonthly

Realvs.nominalGDP
GDPisthevalue ofthefinalgoodsand servicesproduced. P1xQ1+P2xQ2+P3xQ3+.. P1xQ1+P2xQ2+P3xQ3+ NominalGDP measuresthesevaluesusing currentprices i . RealGDP measurethesevaluesusingthe pricesinabaseyear(constantprices).

NOWYOUTRY

RealandNominalGDP
Year 2003 04 2003-04 2004-05 2005 06 2005-06 Quantity of Cars 10 12 13 Price of cars 20 000 20,000 24,000 26 000 26,000 Nominal GDP Real R l GDP (in 2004-05 prices)

ComputenominalGDPineachyear year. ComputerealGDPineachyearusing200405asthe

b year. base
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NOWYOUTRY

Answers
nominalGDP multiplyP&Qfromsameyear
Year 2003-04 2004-05 2005-06 Quantity of Cars 10 12 13 Price of cars 20 000 20,000 24,000 26,000 Nominal GDP Real GDP (in 2004-05 prices)

200,000 200 000 288,000 338,000

realGDP multiplyeachyearsQby200405sP
Year 2003-04 2004-05 2005-06 Quantity of Cars 10 12 13 Price of cars 20,000 24,000 , 26,000 Nominal GDP 200,000 288,000 , 338,000 Real GDP (in 2004-05 ( prices)

240,000 288,000 312,000

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RealGDPcontrolsforinflation
ChangesinnominalGDPcanbedueto:
changesinprices changesinquantitiesofoutputproduced

ChangesinrealGDPcanonlybedueto changes h in i quantities, titi because b real lGDPis i constructedusingconstantbaseyearprices.

(billions)
120000.00 100000.00 40000.00 60000.00 80000.00 20000.00

0.00 195051 195455 195859 196263 196667 197071 197475 197879 198283 198687 199091 199495 199899 200203 200607 201011 NominalGDP RealGDP(in200405 i ) prices)

NominalandRealGDP, ,19512013

GDPDeflator&Inflationrate
Inflationrate:thepercentageincreaseinthe overalllevelofprices Onemeasureofthepricelevel:GDPdeflator Definition:
Nominal GDP GDP deflator = 100 Real GDP

Therefore,thepercentagechangeinGDP deflator isameasureofinflationrate

NOWYOUTRY

GDPdeflatorandInflationrate
Nominal GDP 2010 2011 2012 46,200 51,400 58,300 R l GDP Real 46,200 50,000 52,000 GDP deflator Inflation rate n.a.

Compute the GDP deflator in each year. Use GDP deflator to compute the inflation rate
from 2010 to 2011, and from 2011 to 2012.
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NOWYOUTRY

Answers
Nominal GDP 2010 2011 2012 46,200 51,400 58,300 R l GDP Real 46,200 50,000 52,000 GDP deflator 100.0 102.8 112.1 Inflation rate n.a. 2.8% 9.1%

Compute the GDP deflator in each year. Use GDP deflator to compute the inflation rate
from 2010 to 2011, and from 2011 to 2012.
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GrowthrateofGDP&Inflationrate
Alternatively Alternatively,youcanarriveatthesame Inflationratefrom: GrowthrateofNominalGDP minus Growth rateofRealGDP Can C yousaywhy? h ?

Twoarithmetictricksfor working ki with ithpercentage t changes h

1. For any y variables X and Y, percentage change in (X Y ) percentage change in X + percentage change in Y

EX:

Ifyoursales(Q)rise5% andthepriceofyourproduct(P)rises7%, thenyourrevenue(P*Q)rises approximately12%. 12%

Twoarithmetictricksfor working ki with ithpercentage t changes h

2. p percentage g change g in (X/Y ) percentage change in X percentage change in Y

EX GDPdeflator EX: d fl t =100 NGDP/RGDP. NGDP/RGDP IfNGDPrises9%andRGDPrises4%, , thentheinflationrateisapproximately5%.

ConsumerPriceIndex(CPI)&Inflationrate CPIisameasureoftheoveralllevelofp prices facedbyconsumers Uses: trackschangesinthetypicalhouseholds cost tof fli living i adjustsmanycontractsforinflatione.g.D.A.

HowtheCPIiscompiled
Consumerssurveyedtodetermine compositionoftheaverageconsumers consumer s basketofgoods 2. Everymonth, h field f ldinvestigatorscollect ll d data onpricesofallitemsinthebasket;compute costof fb basket k 3. CPIinanymonthequals
1.

Cost of basket in that month 100 Cost of basket in base period

BaseyearforCPIis2010

AnnualvariationofCPI
Percentage Variation Industrial Workers- Agriculture Food Labourers 8.4 12.3 15.2 9.9 6.3 11.9 7.5 10.2 13.9 10.0 8.2 10.0 10.1 10.4 10.2 CPI (RURAL + URBAN)

Year 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

Industrial Workers 6.2 9.1 12.2 10.5 8.4 10.4

CPI RURAL CPI URBAN

NOWYOUTRY

ComputetheCPI
Basketfixedinthebasey year:20oranges, g ,10apples pp prices: 2012 2013 2014 2015 oranges 10 11 12 13 apples 15 15 16 15 Foreachyear,compute thecostofthebasket theCPI(use2012asthe baseyear) theinflationratefromthe precedingyear

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NOWYOUTRY

Answers
Costof basket 2012 2013 2014 2015 350 370 400 410 CPI 100 0 100.0 105.7 114.3 117 1 117.1 Inflation rate na n.a. 5.7% 8.1% 2 5% 2.5%

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ThecompositionoftheCPI CPIs sbasket basket

WholesalePriceIndex(WPI)&Inflationrate Ameasureoftheoveralllevelofmarketprices p Uses: tracks t k changes h i inwholesale h l l prices i usedbyRBItodecidemonetarypolicy stance

HowtheWPIiscompiled
Wholesalepricesof676itemsaretracked everyweek 2. Compositionofthebasketdependsonthe contributionofeachitemtovalueof economicoutput 3. WPIinanymonthequals
1.

Cost of basket in that month orweek 100 Cost of basket in base p period
BaseyearforWPIis200405

AnnualvariationofWPI
Percentage Variation Year 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 ALL 4.4 6.6 4.7 8.1 3.8 9.6 8.9 7.4 PRIMARY 4.3 9.6 8.3 11.0 12.7 17.7 9.8 9.8 FOOD 5.4 9.6 7.0 9.1 15.3 15.6 7.3 9.9 NONFOOD -3.3 5.8 11.9 12.9 5.5 22.3 9.6 10.5 FUEL & MANUFACTU POWER RED 13.5 6.5 0.0 11.6 -2.1 12.3 14.0 10.3 2.4 5.7 4.8 6.2 2.2 5.7 7.3 5.4

ThecompositionoftheWPIsbasket

CPI/WPIvs.GDPDeflator
Pricesofcapitalgoods:
includedinGDPdeflator(ifproduceddomestically)&WPI excludedfromCPI

Pricesofservices:
includedinCPI,GDPdeflator(ifproduceddomestically) excludedfromWPI

Pricesofimportedconsumergoods:
includedinCPI&WPI excludedfromGDPdeflator

Thebasketofgoods:
CPI/ /WPI:fixedatthebaseyearoranyotherasdecided bygovt. GDPdeflator:changeseveryyear

Perc centage c change from 12 months s earlier

10.0 12.0 14.0 16.0 0.0 Ap pr10 Ju un10 Au ug10 Oct10 ec10 De Fe eb11 Ap pr11 Ju un11 Au ug11 Oct11 De ec11 Fe eb12 Ap pr12 Ju un12 Au ug12 Oct12 ec12 De Fe eb13 Ap pr13 Ju un13 WPI CPIIW 4.0 6.0 8.0

Acomparisonof2measuresofinflation

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Categoriesofthepopulation
employed workingatapaidjob unemployed notemployedbutlookingforajob laborforce theamountoflaboravailableforproducing goodsandservices;allemployedplus unemployedpersons notinthelaborforce notemployed,notlookingforwork

Twoimportantlaborforceconcepts
unemploymentrate percentageofthelaborforcethatis unemployed laborforceparticipationrate thefractionofthepopulationthat participatesinthelaborforce,i.e. isworking orlookingforwork

NOWYOUTRY

Computinglaborstatistics
Populationbygroup,2001
Numberemployed Numberunemployed Population = = = 337million 27million 1025million

Usetheabovedatatocalculate thelaborforce thenumberofpeoplenotinthelaborforce thelaborforceparticipationrate the th unemployment l trate t

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NOWYOUTRY

Answers
data:E =337,U =27,POP =1025 laborforce L =E +U =337+27=364 notinlaborforce NILF =POP L =1025 364=661 unemploymentrate U/L x100%=(27/364)x100%=7.4% 7 4% laborforceparticipationrate L/POP x100%=(364/1025)x100%=35.5% 35 5%
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Next
2sessions TheGoodMarket:KeynesianCrossModel
Consumption C ti F Function, ti A Average&Marginal M i l PropensitiestoConsume Equilibrium&IncomeDetermination AutonomousSpendingMultiplier&TaxMultiplier