Transcript GDP

MACROECONOMIC MEASURES
WHAT THEY ARE & HOW TO USE THEM
Chapter 21, 22, 26
Monetary policy affects financial markets.
Euro rate rise puts
heat on the Fed
Hang Seng slide continues
Hong Kong's stocks dropped for a fourth time
in five days after a US central banker said the
Federal Reserve may need to raise interest rates
further. 8/24/06
US rate pause
buoys Asia
Most Asian bourses gained
ground Wednesday in
reaction to the US Federal
Reserve's decision to keep
interest rates unchanged.
8/10/2006
… after the central banks of
the euro region and the
United Kingdom raised
interest rates to restrain
inflation after economic
growth accelerated. Stocks
and bonds fell as investors
bet borrowing costs are
headed higher. 8/4/2006
Fed rate hopes lift region
Asian markets rose Wednesday in anticipation
that the latest US economic data would
persuade the Federal Reserve to keep US
interest rates on hold. 8/17/2006
Outline
• Introduction
• GDP
• Comparing GDP Across Time
• Inflation
• Comparing GDP Across Countries
Gross Domestic Product
Quantity Aggregates
• To understand the macroeconomy, we need to
measure it.
Chief measure of economy is the level of production: GDP
• We need to combine the many goods produced or
consumed in an economy into one measure.
+
+
+
+
=?
All goods sold in an economy
share a common unit of
measure: the price at which
they are sold.
Sum up
the value
of goods
Gross Domestic Product (GDP)
• GDP is the sum of the value of new, final goods
produced within the domestic borders of an
economy.
Final goods are goods sold to their end-users
GDP does not include:
• Intermediate goods which are sold from one
firm to another for immediate transformation
into other goods.
• financial transactions like buying stocks.
• purchases of used goods which have been
sold before.
• goods produced overseas by domestic firms.
• Secondary Transfers
How do we measure value-added of nonmarket goods?
• Production of government bodies and non-
market institutions is measured at cost (sum of
labor payments plus capital consumption costs).
• Value of housing services of owner-occupied
housing valued at imputed rental value, i.e.
market rent of similar housing stock.
• Value of non-compensated household work
valued at zero.
How do we measure financial services?
• Banking industry output includes interest
income on loans minus interest payments on
deposits (plus fee income).
• Insurance industry output is measured as
premiums net of indemnity payments (w/ minor
adjustments).
GDP is a Gross Concept
• One cost of production is depreciation of
equipment and structures used for production.
• This cost, referred to as consumption of fixed
capital, is not subtracted from sales to construct
value added.
• Net Domestic Product = GDP – Consumption
of Fixed Capital
Three Methods for Calculating GDP
Expenditure Method - The sum of the
domestic spending on final goods (less
domestic demand satisfied by imports).
2. Production Method - The value added created
in all the sectors of the economy.
3. Income Method – The Wage, Rent, Interest
and Profit Income generated by the domestic
economy.
1.
Link
• Accounts are created by national statistical agencies
• UN System of National Accounts is the “internationally
agreed standard set of recommendations” used by most
countries.
• Annual data for many countries available at the UN
Link
Expenditure Method
C
+
I
+
G
+
Consumption
Consumer durables, nondurables, services
Investment
Structures (incl. Residential),
Equipment, and Inventory
Government Government Spending on
Consumption Goods, Services, and Salaries.
X EXports
Goods & Services Shipped
IM IMports
Abroad
=
A + NX = (C + I + G) + (X – IM)
GDP
Goods & Services from Abroad
Some Asian Expenditure Shares: 2008
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
Household
Government
Investment
PRC
Japan
Exports
Imports
Korea
Source: United Nations Main Aggregates Database
Production Method
• At the plant level,
Value added = Sales + Change in inventories
- materials, intermediate inputs and energy costs.
• Value added at the firm level is directly taxed in
the EU (VAT)
• GDP is the sum of VA across establishments.
• The value of a final good is equal to the value
added at each stage of production.
Production Approach
Sub-aggregates
• Divide production establishments into sectors
usually along the line of
• Primary: Natural Resources (Agriculture,
Forestry, Fishing, Mining, Quarrying)
• Secondary: Goods production (Manufacturing,
Construction, Utilities)
• Tertiary: Intangibles Production
Table 035
(GDP) by Economic Activity at Current Price
HK$ Mn
Economic Activity
2009 r
Agriculture, fishing, mining and quarrying
1,090
Manufacturing
28,227
Electricity, gas and water supply, and waste management
34,961
Construction
50,146
Services
1,436,427
Import/export, wholesale and retail trades
Import and export trade
365,880
305,458
Accommodation and food services
48,787
Transportation, storage, postal and courier services
99,048
Transportation and storage
Postal and courier services
Information and communications
93,936
5,112
46,808
Financing and insurance
235,581
Real estate, professional and business services
173,583
Real estate
Professional and business services
86,833
86,749
Public administration, social and personal services
279,453
Ownership of premises
187,286
GDP at basic prices
Taxes on products
GDP at current market prices
1,550,851
55,967
1,622,322
Hong Kong: Value Added by Sector
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
Hong Kong Census and Statistics
2006 #
1980
Landlord
Services
FIRE
Transport
Trade
Construction
Utilities
Manufacturing
Mining
Agriculture
0.00%
Dynamics of Industrial Structure
Earnings or Income Approach to Measuring
GDP
• Measuring overall economic activity by
adding the earnings or income generated
by selling the output produced in the
economy. (Not calculated for HK on an annual
basis.)
Gross Income = compensation of employees
+ net operating surplus
20
Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
Net Operating Surplus
Sum of
• Proprietors’ income: the income of unincorporated
businesses, such as medical practices, law firms, small
farms, and retail stores.
• Rental income : the income households receive from the
rental of their property.
• Corporate profits: the excess of revenues over costs for
the incorporated business sector of the economy.
• Net interest: the interest private businesses pay to
households for lending money to the firms minus the
interest businesses receive
21
Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
National Income vs. Domestic Income
GNI
Gross National Income
GDI
Gross Domestic Income
= income earned by
= income created within
national residents
domestic borders.
GNI = GDI +NFI
• Net Factor Income [NFI] is income earned on overseas
work or investments minus income generated
domestically but paid to foreigners.
Hong Kong NFI/GDP
4.00%
3.50%
3.00%
2.50%
2.00%
% 1.50%
1.00%
0.50%
0.00%
-0.50%
-1.00%
1993
1995
1997
Hong Kong Census and Statistics
1999
2001
2003
2005
2007#
Compare Macau and the Philippines GDP or
GNP
• Macau produces a lot of profits paid to overseas owners of
casinos.
• Philippines workers earn a lot of income overseas.
• Which is larger Philippines’ GDP or Philippines GNP?
• Does Macau have greater GDP or GNP?
Income=Expenditure=Value Added
• Value of final good expenditure is equal to
value added at each stage of production.
(Expenditure = Value Added)
• Value Added would be paid to workers,
creditors, or kept as profits.
(Income = Value Added)
Comparing GDP levels across time
• GDP measures the value of the goods produced by
an economy by using the market price of each
good to assign it a value.
• Problem: Prices of goods in terms of money are
changing overtime making comparisons in overall
value difficult.
• Bias: Money prices are growing over time as
money supply grows.
• Solution: Choose a Base Year’s prices as a fixed
yardstick of value for different goods.
Real GDP: Yt
• GDP aka Nominal GDP aka Current
Dollar GDP is the weighted sum of the
number of goods produced using their
current prices as the weight.
• Real GDP aka Constant Dollar GDP aka
GDP adjusted for inflation is the weighted
sum of the number of goods produces
using the Base Year prices as yardsticks.
Solved Problem
Real GDP: 2010 (2009 Base Year)
2010
P
Kitkat
M&Ms
Nominal GDP
Real GDP
Q
2009
P
Q
8
150
6
135
10
150
4
135
Calculating Real GDP
• Divide GDP into k categories.
• Survey dollar value of goods produced at time t for
each of k categories vtk
• Survey average prices of goods of type k relative P
to a base year.
• Divide value of each good by the relative price
t
k
P
Yt   k vtk  Base
Pt k
k
k
PBASE
Real GDP vs. Nominal GDP
St. Louis Federal Reserve
USA
16000.0
14000.0
10000.0
8000.0
6000.0
4000.0
2000.0
0.0
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
Billion US$
12000.0
Nominal GDP
Real GDP
Notes on Price Indices: Quality
• Some categories of goods (computers, cars) observe marked
changes in quality over time.
• Price growth rates for these components often reflect the price
growth for certain characteristics (e.g. MHz,GB HD, etc.). These
are referred to as hedonic price indices.
Inflation
Price Indices: Pt
• Two most commonly used price indices are GDP
Deflator and Consumer Price Index (CPI)
• The GDP deflator is the ratio of nominal GDP to Real
GDP (multiplied by 100).
Nominal GDP
P  GDP Deflator 
100
Real GDP
GDP
P
100
Y
Consumer Price Index
• The CPI is the price of a representative market
basket of goods relative to the price of that same
basket during a benchmark/base year (multiplied by
100).
Cost of Market Basket in year t
CPIt 
100
Cost of Market Basket in Base year
140.0
120.0
100.0
80.0
CPI
GDP Deflator
60.0
40.0
20.0
0.0
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005
Hong Kong’s History of Prices
Q: What is Inflation?
A: The Growth Rate of Price Level
Pt  Pt 1
 t  Inflation Rate 
x100%
Pt 1
•What is the CPI inflation rate in Candyland in
2010 using 2009 as the base year?
• Inflation: prices are growing
• Disinflation: inflation is slowing down but still positive
• Deflation: inflation is negative and prices are actually
dropping.
Hong Kong CPI
Inflation
14
Disinflation
12
10
8
4
Deflation
2
20
08
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
-4
19
86
-2
19
84
0
19
82
%
6
-6
http://www.imfstatistics.org/imf/
Adjusting for Inflation
•
•
•
•
•
We can use price indices to “adjust for inflation”
- converting values measured in money into
values measured in the prices of some
reference year, r.
Measured in $, observed at time t: Nt
Price level at time t: Pt
Price level in reference year: Pr
Measure adjusted for inflation – N r$
t
N
r$
t
Pr
 Nt 
Pt
Housing Price: Hong Kong Island
• Compare the price of housing in HK average
price of an apartment on HK Island with an area
between 100m2 and 160m2
• in September 2009 : HK$173,762 /m2
• in December 1982: HK$14,742/m2
• How much did an apartment cost back then
when expressed in today’s dollars?
Housing Price: Hong Kong Island
• The Hong Kong CPI (2000=100) was 35.5 in December
1982 and 109.2 in December 2009.
• Calculate:
N
r$
t
Pr
109.2
 Nt   $14,742 
 $45,347.2
Pt
35.5
• In real terms, luxury housing in 2009 is almost 4 times as
expensive as in 1982!
Comparing GDP across Countries
Two Methods
• Exchange Rate Method: divide national GDP by
the exchange rate.
• How many US$ needed to buy DCU$ needed
to purchase domestic GDP.
• PPP Method: divide national GDP by PPP
(Purchasing Power Parity).
• How much domestic GDP would cost if sold at
US prices.
Exchange Rate Method
• Exchange Rate Method can be a useful measure if you
are going to convert income in one area and spend it in
another.
• Ex. Your Swiss food company projects that it can at most get a
20% share of the market for Mexican processed foodstuffs.
Converting the size of Mexico’s processed food expenditures
from Pesos to Swiss Francs is useful info for estimating
profits. .
• But macro aggregates are often used to give an idea of
living standards, here exchange rates are not as useful
because they are highly variable and not so
representative..
Link
GDP per Capita (Current Prices) Exchange Rate Conversion
350000
330000
310000
290000
HK$
270000
250000
230000
210000
190000
170000
150000
2003
2004
2005
2006
Hong Kong
2007
Singapore
2008
2009
2010
Big Mac Index
• Economist magazine
reports big differences in
the x-rate converted
prices of McDonalds in
different countries.
• Big Mac is a bundle of
different goods and
services which can be a
reasonable sample.
Economist Magazine
PPP: Purchasing Power Parities
• PPP is the relative price of goods in one country
measured in its own currency compared to the
price of a reference country.
• Example: If Big Macs were only good and cost
HK$18.90 in HK and US$3.71 in USA, then
PPPHK =5.0943HK$/US$
• Problem: Many goods
Market Basket Index?
• Construct an international market basket of
goods produced and purchased around the
world.
• For a country, calculate PPP = Purchasing
Power Parity as the price of the market basket
(in DCU) relative to price of the market basket
in US (in US$).
PPP
Hong Kong SAR, China
China
Singapore
Korea, Rep.
Thailand
Japan
5.31
3.95
1.03
827.35
17.09
111.39
World Bank Data
S
7.77
6.77
1.44
1156.06
31.72
87.78
Convert sums into another economy’s currency
Exchange Rate Conversion
• Nj is a number measured
in country j’s currency &
you want to convert it
into the reference
country’s currency.
N
r$
j
Sr
 Nj 
Sj
PPP Conversion
PPPr
N  Nj 
PPPj
r$
j
Convert sums into another economy’s
currency
• Nj is a number measured in country j’s currency (e.g.
GDP) that you want to convert it into the reference
country’s currency.
Link
Exchange Rate Conversion
PPPr
N  Nj 
PPPj
r$
j
Singapore
Hong Kong
S$
HK$
S$
HKG
GDP
GDP per Capita
PPP
$59,812.91
1.03
$246,732.79 5.305734
 GDP
HK $
HKG HKG
PPPS $

PPPHK $
1.03
 HK $246, 732.79 
= $47,898.13
5.31
PPP vs. Exchange Rate Conversion
• Exchange rates are easily available so exchange rate is
a “quick and dirty” comparison.
• Measures how many US dollars someone could buy with
average income.
• However, money goes farther in some countries as
many types of goods are relatively cheap (especially in
developing countries).
• PPP conversion measures how much the goods purchased by
the average person would cost in the US. Better measure of
living standards.
GDP in US$ by Conversion Method
2005 GDP per Capita
$7,000
40000
$6,000
35000
$5,000
30000
25000
$4,000
US/Intl$
US/Intl$
2005 GDP per Capita
$3,000
20000
15000
$2,000
10000
$1,000
5000
$0
Low income
Lower middle
income
Middle income
Exchange Rate
PPP
Upper middle
income
0
High income: OECD
High income: nonOECD
Exchange Rate
PPP
GDP per Capita, PPP
Constant 2005 International $
60,000.00
50,000.00
40,000.00
30,000.00
20,000.00
10,000.00
0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Singapore
Hong Kong
Which exchange rate conversion to use?
• Depends on where the money will be spent.
• If you have a value of foreign currency that you
will want to spend at home, convert using
exchange rate because foreign prices are
irrelevant.
• If you want to spend the money in foreign
country, then using PPP conversion may be
more helpful.
Problem
• You are a Chinese multinational that wants to construct salaries
to be paid to employees in Canada that will provide same living
standard as salary of RMB20,000.
• Canada PPP in 2005 is 1.21.
Learning Outcomes
Students should be able to:
• Explain the different methods of calculating GDP
• Calculate simple real aggregates like real GDP.
• Use price indices to calculate inflation rates.
• Adjust nominal series for inflation.
• Compare values measured in different currencies using the PPP
and exchange rate method.