Transcript Measurement of Output, Employment & Prices

Measurement of Output,
Employment & Prices
Why Measurement Matters
• Before we get into models of economic
behaviour we need to look some definitions
and some issues in measurement
• Measurement economic quantities may seem
boring…
– But it can give crucial insight even without a
model of behaviour
– Example: we will look at include the current crisis
MACROECONOMIC MEASUREMENT
• Need to Look at three sets of measurements
1. Here we will look at the National Income and
Expenditure Accounts (NIE)
2. Also the measurement of external transactions:
Balance of Payments
3. Prices
4. Employment
NIE Identity
• We measure macroeconomic activity primarily by looking at annual
(or quarterly) flows of Output (O), Income (Y) and Expenditure (E).
• These are different ways of measuring the same thing, so they sum to
identical totals
– Basic Identity:
YO E
• Think of why this is the case
– Income and Product are identical: Product is Value-Added in Production, i.e sales
minus purchases from other firms, which = payment of incomes to Factors (Wages,
Interest…)
– Expenditure equals Income, because any production not sold is counted as
Inventory Investment, and is thus part of Expenditure (the firm purchases its own
output from itself)
• Note this is an identity not an equilibrium condition
– An identity holds for all values
– An eqm condition holds only for some values i.e. in eqm
– Distinction important later
NIE: GDP vs GNP
• Open economy: GNP v GDP
– GNP  GDP + NFIA
– (NFIA is net factor inc from R.O.W., i.e. inflows minus
outflows)
– GNY  GNP + EUtrasfers – EUtaxes
– GNDY  GNP + NTA (NTA is all net Transfers from R.O.W. incl
EU)
– GDP + NFIA + NTA  GNDY
– Note: Irish GNP was approx 85% of GDP (2007)
– For many other countries the distinction is not relevant
– Can lead to lots of debate of which is best measure in
Ireland
NIE: SAVINGS & INVESTMENT IDENTITY
•
The Income Identity
– YC+S+T
– Accounting rule: Income is either spent saved or taxed
•
The Expenditure Identity
– E= C + I + G + NX
– Accounting rule: add up the components of expenditure
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Combine the two
– C + I + G + NX  C + S + T
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Thus:
– or:
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(G – T)  (S – I) – NX
(G – T) + NX  (S – I) etc.
clearly, adding in net foreign factor and transfer income, including them in
the totals for T and S etc as appropriate, and changing signs we get:
(T - G) + (S - I)  NX  BOP Current A/C
Note: the 2 left hand expressions are National Savings
Note: we could also add in NFIA & For Trans
NIE: SAVINGS & INVESTMENT IDENTITY
• This is often known as the twin deficits identity
• Even though it doesn’t involve any model or description of economic
behaviour it can be informative
• Implication: a current account surplus can only occur if there is an excess
of national savings
• Application 1: The US
– The US has trade deficit (esp with China)
– This is inescapable given it has insufficient savings
– China surplus equates to surplus Chinese savings
• Application 2: Ireland’s Bubble
– We had a bubble (high investment)
– Insufficient savings
– So high current account deficit
Savings
35.00%
30.00%
Personal
25.00%
Corporate
Gov
20.00%
Inv
CA
15.00%
10.00%
5.00%
0.00%
1995
-5.00%
-10.00%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
EMPLOYMENT AND UNEMPLOYMENT
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The labour force (L) = employed (E) + unemployed (U)
The unemployment rate u% = U/L or U/(E + U)
Letting the population of Labour-force Age = P, we also have:
The Labour force participation rate: LFPR% = L/P
Measuring Employment and Unemployment
– Surveys: household QNHS in Ireland, quarterly household survey (CPS in USA);
business surveys for employment.
– Administrative: “Live Register” (Ireland); related to benefit claimants
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The precise details of how surveys and other measures are constructed will
differ from country to country. Survey methods are generally more
comparable.
Key Issue: have to “want” to work to be unemployed as distinct from not
working
Surveys try to capture this: “active search”
– Issue of how active
– Discouraged worker effects
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Claimant counts do not – may include people NILF
Prices
• (See Gordon: Appendix to Ch 2)
• Some components of GDP have well-known measures of inflation: the
CPI for household consumption
• For a more comprehensive measure the implicit price deflator for GDP is
used: this relates to all items in the GDP
• A price index is a weighted average measure of price changes
• Two questions arise: (i) what is included (ii) what kind of weighting
system to use
• For Consumption the Irish CPI includes a measure of housing costs, the
Eurozone HIPC does not (why?)
• Generally if an index uses base-year weights (Laspeyre), the resulting
inflation is higher than if current year weights are used (Paasche)
• Nearly all Consumer Price indices are Laspeyre.
LASPEYRE AND PAASCHE INDICES
• A Laspeyre index of prices uses the quantities prevailing in some base
(e.g. survey) year to weight prices. The index takes the form:
• (p1q0 / p0q0)x100
• Note: base-year quantities (q0) are used to compare prices in the two
years (p1 and p0 )
• A Paasche index of prices uses the quantities prevailing in the terminal
year to weight prices. The index takes the form:
• (p1q1/ p0q1)x100
• Note: current-year quantities (q1) are used to compare prices in the two
years (p1 and p0)
• As relatively cheaper are substituted for dearer goods, the Laspeyre
index of prices has an upward substitution bias.
THE IMPLICIT GDP DEFLATOR
• Instead of constructing an index directly, we take the ratio of nominal to
real GDP.
• For simplicity let real GDP be this year’s output at last year’s (base year)
prices
• So the index is: (p1q1 / p0q1)
• Note that this is similar in form to a Paasche index of prices.
• In some cases the calculation is refined and the implicit deflator is an
average (geometric mean) of a Laspeyre and Paasche indices.
• As the real to nominal GDP ratio is re-calculated each year, the weighting
of the quantities is updated and the resulting implicit deflators are
chained together to give a cumulative index over time.
• The result is a lesser degree of substitution bias