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Official Economic Statistics by Tarun Das

Lectures on
Official Economic Statistics

Part-2
Monetary and Financial Statistics
Productivity Measures
Answers to Workout Sessions

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Professor Tarun Das1

UN Statistical Institute for Asia and Pacific


Chiba, Japan
20-24 August 2007
1
Professor Tarun Das teaches Public Policy and Research Methodology to the MBA students at
the Institute for Integrated Learning in Management (IILM), New Delhi. Presently, he is working at
Ulaanbaatar, Mongolia as Glocom Inc. (USA) Expert on Strategic Planning under an ADB Project
on Governance Reforms in the Ministry of Finance, Government of Mongolia. Earlier he worked
as Economic Adviser in the Ministry of Finance and Planning Commission, Government of India.
For any clarification, contact das.tarun@hotmail.com/ das5delhi@yahoo.co.in

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Official Economic Statistics by Tarun Das

ACKNOWLEDGEMENTS

Professor Tarun Das teaches Public Policy and Research Methodology to the MBA students at
the Institute for Integrated Learning in Management (IILM), New Delhi. Presently, he is working at
Ulaanbaatar, Mongolia as Glocom Inc. (USA) Expert on Strategic Planning under an ADB Project
on Governance Reforms in the Ministry of Finance, Government of Mongolia. Earlier he worked
as Economic Adviser in the Ministry of Finance and Planning Commission, Government of India.

These lectures were prepared by the author at the IILM, New Delhi for the training of the Indian
Statistical Service and Indian Economic Service. The lectures have been modified to some extent
to suit the needs of statistical officers from various countries participating the training program at
the UN Statistical Institute of Statistics for Asia and Pacific (SIAP), Chiba, Japan.

The lectures are broadly based on various IMF publications and manuals on these topics. It is
needless to indicate that these lectures express personal views of the author which may not
necessarily reflect the views of the organisations he is associated with. The author is fully
responsible for any omissions or errors in these lecture notes.

Author would like to express his deepest gratitude to Ms. Davaasuren Chultemjamts, Director,
UNSIAP and Dr. Kulshreshtha, Professor (Statistics), UNSIAP for providing an opportunity to
deliver these lectures to the participants of the Third Group Training Course in Analysis,
Interpretation and Dissemination of Official Economic Statistics during 20-24 August 2007 at
UNSIAP, Chiba, Japan.

Author is also grateful to the Ministry of Finance, Government of Mongolia, particularly to Mr.
Batjargal, Director General, Fiscal Policy and Co-ordination Department for granting necessary
permission to deliver these lectures.

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Official Economic Statistics by Tarun Das

Contents

1. Brief profile of the resource person (page-5 and 75)

2. Course outline, scope, objectives and pedagogy (page-6 and 76)

PART-1

3. Government Finance Statistics (GFS) (pages 7-44)

3.1 Flows and Stocks


3.2 Other economic flows
3.3 GFS 1986 and Components of Govt Operations
3.4 Accounting rules and Accrual Accounting
3.5 Data Coverage and Sub-Sectors
3.6 Analytical Frameworks for GFSM 2001
3.7 GFSM 2001 Implementation
3.8 Valuation
3.9 Differences between GFS 1986 and GFS 2001
3.10 Derived measures
3.11 Classification of Outlays by Function of Government (COFOG)
3.12 Case Study- Indian GFS
3.13 GFS Workout Session on Mongolian GFS
3.14 GFS Workout Session on Australian GFS

4. Balance of Payments (BOP) Statistics (pages 45-70)

4.1 Analytical framework


4.2 BOP Accounting Principals
4.3 Flows and Positions
4.4 Accounting System
4.5 Current and Capital Account
4.6 Time of Recording of Flows
4.7 Accrual Accounting
4.8 Valuation
4.9 Aggregation and Netting
4.10 Symmetry of Reporting
4.11 Derived Measures
4.12 Major Classifications of BOP
4.13 Balance of Payments: Standard Components
4.14 BOP Workout Session on Three Gap Model
4.15 BOP Workout Session on Indian BOP

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PART-2

5. Monetary and Financial Statistics (MFS) (pages 77-92)

5.1 Basic concepts


5.2 Sectorization and classifications
5.3 Valuation
5.4 Time of recording
5.5 Aggregation, consolidation and netting
5.6 Analytical Framework
5.7 SNA 1993 and the Structure of Accounts
5.8 Relation between macro-economy and financial sectors
5.9 Domestic economy and rest of the world
5.10 Balance Sheets
5.11 Broad Money Supply
5.12 Money Supply- A Case Study for India
5.13 Workout Session on Money Supply and Demand

6. Productivity Analysis (pages 93-108)

6.1 Production Function


6.2 Equilibrium of the Firm
6.3 Cobb-Douglas Production Function
6.4 Total factor productivity
6.5 Growth accounting
6.6 Solow residual
6.7 Regression analysis and the Solow residual
6.8 Critique of the measurement in rapidly developing economies
6.9 Multifactor Productivity
6.10 Application of Index methods
6.11 Workout Session on Productivity in Japan

7. Answrs to Workout Sessions (pages 109-127)

Selected References

Lecture notes have been prepared mainly on the basis of the following IMF Publications
and Manuals:
Government Finance Statistics (GFS) 1986
Government Finance Statistics Manual (GFSM) 2001
Government Finance Statistics (GFS) Yearbook 2006
Monetary and Financial Statistics Manual (MFSM) 2007
Monetary and Financial Statistics (MFS): Compilation Guide 2007
International Financial Statistics (IFS)
Balance of Payments Manual 2005
Balance of Payments Statistics Yearbook 2006

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Official Economic Statistics by Tarun Das

Profile of the Resource Person Prof. Tarun Das

• Professor Tarun Das teaches Public Policy and Research Methodology to


the MBA students at the Institute of Integrated Learning in Management
(IILM), 3 Lodhi Institutional Area, New Delhi-110003, India.

• Presently, he is working at Ulaanbaatar, Mongolia as Glocom Inc. (USA)


Expert on Strategic Planning under an ADB Project on Governance
Reforms in the Ministry of Finance, Government of Mongolia. Earlier he
worked as Economic Adviser in the Ministry of Finance and Planning
Commission, Government of India.

• Work Experience: 35 yrs as Development Economist in the government


of India: Last assignments: Economic Advisor, Planning Commission
(1986-1988) and Economic Adviser, Min of finance (1986-2006)

• Country Co-coordinator for the IMF Govt Finance Statistics, Special


Data Dissemination Standards, World Bank Global Development
Finance (1990-2003), the Commonwealth Secretariat Debt Recording
and Management System for India (1998-2003).

• Worked as Consultant to the World Bank (Washington), ADB (Manila),


UNDP (New York), UNESCAP (Bangkok), ILO (Geneva), UNCTAD
(Geneva), UNITAR (Geneva), Global Development Network (GDN)
(Washington), UN Commission for Africa (Addis Ababa).

• Worked on Fiscal Management for the governments of Cambodia,


Indonesia, Lao PDR, Mongolia, Nepal, Philippines and Samoa.

• Member of Govt. Delegate to World Bank, ADB, IMF, UNCSD, WTO.

• Research/Teaching Interest: Macro Econometric Modeling and Policy


Planning, Research Methodology, Public Policy, Economic Reforms,
Poverty, Inequality, Transport Modeling, Public Debt and External Debt.

• Dr. Das is a widely traveled person and possesses diversity in skills in


teaching, training, research, policy planning and modeling. He has
published a number of books and papers on economic statistics, structural
reforms, fiscal policies, management of public debt and external debt,
transport modeling, poverty and inequality, foreign investment, technology
transfer and privatisation strategy.

• Qualifications: MA in Econ. (Gold Medalist), Calcutta University, 1969.


Ph. D. in Econ, as Commonwealth Scholar, East Anglia Univ., England, 1977.

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Official Economic Statistics by Tarun Das

Course Outline, Scope, Objectives and Pedagogy

Background

The consultant, an expert in the field of Economic, Financial and Government Statistics will cover select
topics in Economic Statistics, namely: Government Finance Statistics (6 sessions), Monetary and Financial
Statistics (4 sessions), BOP/Rest of the World Sector(6 sessions), and Productivity analysis (4 sessions) by
conducting lecture and workshop sessions during 20-24 August 2007. These lectures form part of the wider
Third Group Training Course in Analysis, Interpretation and Dissemination of Official Statistics, 2007 at
U.N. Statistical Institute for Asia and the Pacific, Chiba.

Objectives

The course aims to strengthen the capability of the national statistical services to take part in the process of
improving their economic statistics and quality of analysis, interpretation and dissemination of official
statistics. The consultant is expected to impart training to help participants understand select topics of the
systems of economic accounts, specifically the system of Government Finance Statistics, Monetary and
Financial Statistics, Balance of Payment Statistics, and Productivity analysis for their countries

Learning Outcome
1. Develop a comprehensive understanding of the basic concepts, analytical framework, database,
methodology, uses, applications and limitations of economic statistics.
2. Develop skills and capabilities for analytical presentation, networking and teamwork through
group workout sessions.
3. More emphasis will be laid on understanding basic concepts, methodology, techniques, and their
uses and limitations for various situations, rather than formal proofs and derivation of formula.

Pedagogy

1. Teaching techniques will consist of formal lectures, case studies, practical and workout sessions,
and preparation and presentation of group project reports.
2. Selected case studies would be given so as to facilitate participants to relate to theoretical concepts
with real life situations in economic analysis, policy formulation and planning. The students would
present and discuss these case studies in the class.
3. Participants will be provided with complete course material well in advance. To make classroom
presentations by the resource person more meaningful and effective, participants are required to
come prepared and collect related information and data from journals, newspapers and websites,
and participate actively in classroom sessions.
4. In order to develop teamwork and networking capabilities, students are encouraged to participate
actively in group discussions and workout sessions.

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Official Economic Statistics by Tarun Das

Monetary and Financial Statistics- Basic Concepts

Professor Tarun Das

1. INTRODUCTION

Monetary statistics consist of a comprehensive set of stock and flow data on the financial and
nonfinancial assets and liabilities of an economy’s financial corporations sector. Financial
statistics consist of a comprehensive set of stock and flow data on the financial assets and
liabilities of all sectors of an economy. The financial statistics are generally organized and
presented in formats designed to show financial flows among the sectors of an economy and
corresponding financial asset and liability positions.

Concepts described here are identical to those in the 1993 SNA and the fifth edition of the
Balance of Payments Manual (BPM5). Economic territory may not be identical with boundaries
recognized for political purposes. A country’s economic territory consists of a geographic
territory administered by a government; within this geographic territory, persons, goods, and
capital circulate freely.

An institutional unit has a center of economic interest and is a resident of a country when, from
some location (dwelling, place of production, or other premises) within the economic territory of
the country, the unit engages and intends to continue engaging (indefinitely or for a finite period)
in economic activities and transactions on a significant scale. Entities that do not satisfy the above
requirements are referred to as nonresidents.

SECTORIZATION

In defining monetary and credit aggregates it is necessary to identify the money (credit) issuing
and holding sectors. Sectorization is also crucial to constructing the financial statistics and, in
particular, the flow of funds which deal with intersectoral financial stocks and flows. Institutional
units differ with respect to their economic objectives, functions, and behavior and are grouped
into sectors that include units with similar characteristics. The resident units of the economy are
grouped into the following mutually exclusive institutional sectors:

1) Financial corporations.
2) General government.
3) Nonfinancial corporations
4) Households.
5) Nonprofit institutions serving households (NPISH).

For monetary and financial statistics, the IMF manual divides the nonfinancial corporations sector
into only two subsectors—public nonfinancial corporations and other nonfinancial corporations.
Thus, unlike the 1993 SNA, the revived IMF Manual does not divide nonfinancial corporations
into separate subsectors based on the residency of the units that own and control them.

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The 1993 SNA makes extensive use of separate data categories for the household and nonprofit
institutions serving households (NPISH) sectors but, in some instances, combines these sectors
into a single sector referred to as other resident sectors.

Financial corporations sector

Box-1 Main Sectors and Subsectors


Financial corporations
Central bank
Other depository corporations
Other financial corporations
Insurance corporations and pension funds
Other financial intermediaries, except insurance corporations and pension funds
Financial auxiliaries
Nonfinancial corporations
Public nonfinancial corporations
Other nonfinancial corporations
General government
Central government
State government
Local government
Social security funds*
Households
Nonprofit institutions serving households
*Alternatively, social security funds can be allocated to the other subsectors of general government on the
basis of the level at which they are organized.

The financial corporations sector contains five subsectors:

(1) The central bank;


(2) Other depository corporations
(3) Other financial intermediaries, except insurance corporations and pension funds;
(4) Insurance corporations and pension funds; and
(5) Financial auxiliaries.

The central bank subsector includes the following:


1) Central banks, which in most countries are separately identifiable institutions that, across
countries, are subject to varying degrees of government control, engage in differing sets
of activities, and are designated by various names (e.g., central bank, reserve bank,
national bank, or state bank).
2) Currency boards or independent currency authorities that issue national currency that is
fully backed by foreign exchange reserves.
3) Government-affiliated agencies that are separate institutional units and primarily perform
central bank activities.

Other Depository Corporations

The other depository corporations subsector consists of all resident financial corporations
(except the central bank) and quasi-corporations that are mainly engaged in financial
intermediation and that issue liabilities included in the national definition of broad money.

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Examples of the designations given to institutional units in the other depository corporations
subsector are:

1) commercial banks,
2) merchant banks,
3) savings banks, savings and loan associations,
4) building societies, and mortgage banks,
5) credit unions and credit cooperatives,
6) rural and agricultural banks,
7) offshore banks and
8) Travelers’ check companies that mainly engaged in financial corporation activities.

Other Financial Intermediaries

The subsector of other financial intermediaries covers a diverse group of units constituting all
financial corporations other than depository corporations, insurance corporations, pension
funds, and financial auxiliaries. Units in the other financial intermediaries subsector generally
raise funds by accepting long-term or specialized types of deposits and by issuing securities and
equity. These intermediaries often specialize in lending to particular types of borrowers and in
using specialized financial arrangements such as financial leasing, securitized lending and
financial derivative operations. A few examples are as follows:

•Finance companies are institutional units primarily engaged in the extension of credit to
nonfinancial corporations and households.

•Financial leasing companies engage in financing the purchase of tangible assets. The leasing
company is the legal owner of the goods, but ownership is effectively conveyed to the lessee,
who incurs all benefits, costs, and risks associated with ownership of the assets.

•Investment pools are institutional units that are organized financial arrangements, excluding
pension funds that consolidate investor funds for the purpose of acquiring financial assets.
Examples are mutual funds, investment trusts, unit trusts, and other collective investment units.

Securities underwriters and dealers include individuals or firms that specialize in security market
transactions by (1) assisting firms in issuing new securities through the underwriting and market
placement of new security issues and (2) trading in new or outstanding securities.

• Vehicle companies are financial entities created to be holders of securitized assets or assets that
are removed from the balance sheets of corporations or government units as part of the
restructuring of these units.

•Financial derivative intermediaries consist of units that engage primarily in issuing or taking
positions in financial derivatives recognized as financial assets.

• Specialized financial intermediaries include holding corporations, companies that provide


short-term financing for corporate mergers and takeovers, export/import finance firms, factors or
factoring companies, venture capital and development capital firms, and pawnshops that
predominantly engage in lending rather than retailing.

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Financial Auxiliaries

The financial auxiliaries subsector includes financial corporations that engage in activities closely
related to financial intermediation but do not act as intermediaries. The most common
designations for financial corporations classified as financial auxiliaries are as follows:

• Public exchanges and securities markets


• Brokers and agents
• Foreign exchange companies
• Financial guarantee corporations
• Other financial auxiliaries comprise all other auxiliaries not classified elsewhere.

CLASSIFICATION
The assets and liabilities of the financial corporations sector are classified in the following broad
categories:

1) Monetary gold and SDRs.


2) Currency and deposits.
3) Securities other than shares.
4) Loans.
5) Shares and other equity.
6) Insurance technical reserves.
7) Financial derivatives.
8) Other accounts receivable/payable.
9) Nonfinancial assets.

The secondary level of classification disaggregates currency and deposits into separate categories
for currency, transferable deposits, and other deposits; it also disaggregates insurance technical
reserves and other accounts payable. Shares and other equity on the liability side of the balance
sheets of financial corporations are disaggregated into the following categories;

(1) Funds contributed by owners;


(2) Retained earnings;
(3) General and special reserves;
(4) SDR allocations (applicable to the central bank); and
(5) Valuation adjustments.

Data for these categories are necessary for a detailed analysis of the shares and other equity of
financial corporations in the context of the monetary statistics.

VALUATION
Market price is used as the primary concept of valuation of transactions, other financial flows,
and stocks (i.e., balance sheet amounts). It recognizes that market price quotations are not
available for financial assets not traded in secondary markets or traded on an infrequent basis.
Therefore, it is necessary to estimate market-equivalent values for such financial assets. This
manual refers to estimates of market-equivalent values as fair values.

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The appropriate exchange rate is used for conversion from a transaction currency into the national
currency is the market exchange rate prevailing on the transaction date. For conversion of stocks
of foreign-currency-denominated assets and liabilities, the market exchange rate prevailing on the
balance sheet date should be used. The midpoint between the buying and selling rates should be
used in converting both flow and stock data.

TIME OF RECORDING

IMF manual (like the 1993 SNA) recommends recording transactions on an accrual, rather than
cash, basis. Thus, the recording should coincide with the change in ownership of the asset rather
than with the time of payment.

AGGREGATION, CONSOLIDATION, AND NETTING

Aggregation refers to the summing of stock and flow data across all institutional units within a
sector or subsector, or of all assets or liabilities within a particular category. IMF manual
recommends reporting and organizing of the underlying data for the monetary and financial
statistics on an aggregated basis.

Consolidation refers to the elimination of stocks and flows that occur between institutional units
that are grouped together. For analytical purposes, the reported data are consolidated to obtain the
surveys of the financial corporations sector and its subsectors.

2. Analytical Framework

For compiling the monetary and financial statistics, the financial corporations sector is divided
into the central bank subsector (CBS), the other depository corporations subsector (ODCS), and
the other financial corporations subsector (OFCS). Taken together, the central bank and other
depository corporations constitute the depository corporations subsector (DCS).

Broad-money liabilities (BML) equal the sum of net foreign assets (NFA), domestic credit (DC),
and other items (net) (OIN). The opening or closing stock positions in the DCS can be shown as:

BML = NFA + DC – OIN

DC comprises net claims on central government and claims on other sectors.

DC = NCG + CORS

Where NCG = net claims on central government


CORS = claims on other sectors

OIN denotes a residual category for other liabilities less other assets, when other liabilities
include all liabilities not included in broad money. Total flows (closing stocks less opening
stocks) are shown as:

∆ BML = ∆ NFA + ∆ DC – ∆ OIN, where ∆ stands for a total flow (period-to-period change).

Financial assets and liabilities are classified by instrument and by creditor/debtor sector as shown
in Table-1. Supplementary data as shown in Table-2 are also collected and disseminated.

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Table-1 Broad Classifications of Assets and Liabilities

Assets Liabilities
Deposits Deposits
Other deposits by maturity (short- and long-term or Other deposits by maturity (short- and long-term or
other maturity breakdown) other maturity breakdown)
Deposits with nonresidents by country of issuance Deposits with nonresidents by country of issuance
Securities other than shares Securities other than shares
By maturity (short- and long-term or other maturity By maturity (short- and long-term or other maturity
breakdown) breakdown)
By type (certificates of deposit, commercial paper, By type (certificates of deposit, commercial paper,
bankers’ acceptances, bills, bonds, etc.) bankers’ acceptances, bills, bonds, etc.)
Securities under repurchase agreement Securities under repurchase agreement
Nonresident securities by debtor country Nonresident securities by debtor country

Loans Loans
By maturity (short- and long-term or other maturity By maturity (short- and long-term or other maturity
breakdown) breakdown)
Loans arising from repurchase agreements, by Loans arising from repurchase agreements, by
debtor sector/subsector debtor sector/subsector
Nonresident loans by (1) debtor country and (2) Nonresident loans by (1) debtor country and (2) type
type of debtor (IMF, other international of debtor (IMF, other international organization,
organization, Central bank, foreign government, etc.)
Central bank, foreign government, etc.)
Financial derivatives
Financial derivatives By major category (i.e., futures contract, other
By major category (i.e., futures contract, other forward contract, or options contract) and
forward contract, or options contract) and subcaterogy.
subcaterogy.

Table-2 Supplementary Data on Financial Sector


Assets Liabilities Contingent Items

Financial derivatives: Notional Financial derivatives: Guarantees by category of


values Notional values guaranteed
By category of underlying asset By category of underlying Obligation (deposits, loans,
(deposits, asset (deposits, securities, etc.)
loans, securities, etc.) loans, securities, etc.) Commitments by category
By risk type (interest rate risk, By risk type (interest rate (credit line,
exchange risk, exchange Loan commitment,
rate risk, etc.) rate risk, etc.) underwriting contract, etc.)

3. THE ACCOUNTS OF THE 1993 SNA: THE STRUCTURE OF THE ACCOUNTS

The 1993 SNA contains a consistent and integrated set of economic accounts that cover all
institutional sectors and subsectors of the economy and the economic relationships of an economy
with the rest of the world (ROW). This comprehensive accounting framework is designed for a
broad range of analyses covering production, generation, and distribution of income, uses of
income, capital formation, and financial activities. The SNA contains a full set of interrelated
accounts for transactions and other flows, as well as balance sheets that show the stocks of
nonfinancial assets, financial assets, and liabilities.

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The accounts constitute two interconnected closed sets of accounts, as indicated in Box 8.1. The
first set is the sequence of accounts that records economic flows arising from transactions, while
the second set represents the balance sheets and the accumulation accounts. These two sets are
interconnected through the capital and financial accounts that are common to both.

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The current accounts, shown in Box 8.2, comprise the production account, the distribution of
income account, and the use of income account. These are described below:

• Production account. Value added and GDP represent the income or economic value created
through the production process, that is, by converting intermediate consumption into output of
goods and services (equation 1).

• Primary distribution of income account. These accounts show how the value generated through
production is distributed to labor and capital and to government in the form of wages and salaries,
operating surplus/mixed incomes, and taxes on production (equation 2). They also show how
these primary incomes are distributed to residents and the ROW (equation 3). GNI measures the
total primary income accruing to residents. It is defined as the sum of GDP, net compensation of
employees receivable from abroad and net property income receivable from abroad.

• Secondary distribution of income account. GNDI measures the income that can be used for
final consumption or saving and is the sum of GNI and net current transfers from abroad
(equation 4).

• Use of income account. The use of income account measures gross saving as the balance
remaining after the deduction of final consumption expenditure from GNDI, and net saving as
gross saving minus consumption of fixed capital (equation 5).

The accumulation accounts consist of the capital account, the financial account, and the other
changes in assets account. The other changes in assets account comprise two sub accounts—the
revaluation account and the OCVA account.

• Capital account. This account records acquisitions and disposals of nonfinancial assets (own
account capital formation, changes in inventories, and consumption of fixed capital), and
measures the changes in net worth as a result of saving and capital transfers receivable from
abroad. The balancing item is net lending or net borrowing, depending on whether saving plus
capital transfers is less than the net acquisition of nonfinancial assets (equation 6).

• Financial account. This account records the acquisition and disposal of financial assets and
abilities, and shows how net lending or net borrowing from the capital account is reflected in
transactions in these financial items (equation 7). The financial account is the last account in the
sequence of accounts recording transactions.

• Revaluation account. This account (equation 8) shows changes in net worth arising from
holding gains and losses on nonfinancial assets, financial assets, and liabilities resulting from
changes in the prices of the various assets and liabilities.

• OCVA account. This account (equation 9) shows changes in net worth arising from all factors
other than transactions as recorded in the capital and financial accounts and holding gains/losses
as recorded in the revaluation account.

The balance sheets show stocks of nonfinancial and financial assets and liabilities on the date for
which the balance sheet is compiled.

The goods and services account shows how total supply of goods and services (products) from
domestic production and imports is used for intermediate and final use (equation 11a).

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In Box 8.3, equations 1 through 6 show the key macroeconomic relationships among saving,
capital formation, and the ROW, stated in terms of SNA components and balancing items.
Equation 1 restates the expenditure approach to calculating GDP. Equation 2 shows the external
current account balance.. Equation 3a defines GNDI. Equation 3b expands the terms of 3a; 3c
simplifies this equation to identify the external current account balance. Equation 4 rearranges the
elements of equation 3c to show that saving, as derived in the use of income account, is equal to
the sum of investment and the external account balance. Equation 5 shows the equality between
the saving-capital formation gap and the external current account balance. Equation 6a is a
statement of the capital account for the total economy, and 6b relates the capital account to the
external current account balance in calculating net lending/net borrowing to the rest of the world.

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4. Balance Sheets
A balance sheet is a statement, drawn up at a particular point in time, of the value of the stocks of
nonfinancial assets and financial assets and liabilities of a subsector, a sector, or the entire
economy. The balancing item in the balance sheet—the total value of assets less total liabilities—
is net worth. The net worth of the economy, often referred to as national wealth, equals the sum
of a country's nonfinancial assets and its net financial claims on the rest of the world.

The broad components of balance sheet data are as follows:

• Nonfinancial assets—Entities over which ownership rights are enforced by institutional units,
and from which economic benefits may be derived by their owners by holding them, or using
them over a period of time. Nonfinancial assets consist of tangible assets, both produced and
nonproduced, and intangible assets for which no corresponding liabilities are recorded.

• Financial assets—Entities over which ownership rights are enforced by institutional units and
from which economic benefits may be derived in the form of holding gains or property income.
Financial assets differ from other assets in the SNA in that, other than for monetary gold and
SDRs, there is a counterpart liability of another institutional unit.

• Financial liabilities—Financial obligations of institutional units that are the counterparts to


financial assets of other units.

• Net worth—The balancing item in the balance sheet, equal to the value of all assets less the
value of all liabilities.

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The Capital Account

The capital account records (1) the value of nonfinancial assets acquired less nonfinancial assets
disposed of during the year and (2) capital transfers receivable less capital transfers payable.

• Saving is the final balancing item of the current accounts—the part of disposable income that is
not spent on final consumption of goods and services and therefore is available for acquisition of
nonfinancial or financial assets or repayment of liabilities.

• Current external balance represents the balance with the rest of the world on exports and
imports of goods and services, net primary income from abroad, and net current transfers from
abroad. The current external balance is equal in magnitude, but opposite in sign, to the domestic
economy’s net lending/net borrowing, and thus equal to the difference between an economy’s
saving plus net capital transfers and capital formation.

• Gross fixed capital formation includes acquisitions less disposals of new and existing fixed
assets. Fixed assets are tangible and intangible assets created as outputs of production processes
that are themselves used repeatedly in production for periods of more than a year. Consumption
of fixed capital during the accounting period is shown as a separate item.

• Consumption of fixed capital reflects the decline in the value of the stock of fixed assets used
in production as a result of physical deterioration, normal obsolescence, and normal accidental
damage. It excludes the value of fixed assets destroyed by war or natural disasters. Gross fixed
capital formation less consumption of fixed capital equals net fixed capital formation.

• Change in inventories comprises the value of the inventories acquired by an enterprise less the
value of the inventories disposed of during an accounting period.

• Acquisitions less disposals of valuables refers to net transactions in goods (artwork, antiques,
old coins etc.) that are held as stores of value over time or to realize holding gains.

• Acquisitions less disposals of nonproduced nonfinancial assets refers to acquisitions less


disposals of land, other nonproduced tangible assets (e.g., subsoil assets), and intangible
nonproduced assets (e.g., patented entities, leases, and purchased goodwill).

• Capital transfers receivable/payable are unrequited transactions, which may be in kind or in


cash. Capital transfers in kind arise when ownership of an asset other than inventories and cash is
transferred from one unit to another or liabilities are canceled by a creditor (debt forgiveness).
Both capital transfer receivables and payables are recorded on the right side of the account
because they directly affect net worth. A capital transfer receivable increases net worth, while a
capital transfer payable reduces net worth.

Net lending/Net borrowing is the balancing item of the capital account, calculated as net saving
plus capital transfers receivable less capital transfers payable less acquisition less disposals of
nonproduced nonfinancial assets. The net resources available to an economy or sector from
saving and net capital transfers that are not used for capital accumulation are the amount of
resources available for net acquisition of financial assets, that is, net lending. Economies or
institutional sectors with a surplus of resources (through saving and net capital transfers) over
capital accumulation are net lenders. Economies or institutional sectors that have capital
expenditures in excess of these resources are net borrowers.

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Box 8.4. The Balance Sheets and Accumulation Accounts

Opening Balance Sheet

The stock of nonfinancial assets and financial assets and liabilities of an economy, sector, or
institutional unit at the beginning of an accounting period.
The balancing item is opening net worth, calculated as total assets less total liabilities.
Capital Account

During an accounting period, the capital account records (1) the value of nonfinancial assets
acquired less nonfinancial assets disposed of and (2) capital transfers receivable less capital
transfers payable. Changes in the value of nonfinancial assets resulting from revaluation and
changes in the volume of nonfinancial assets not resulting from transactions are not recorded in
the capital account.
Net saving carried forward from the current accounts and net capital transfers measure the
resources available for capital and financial accumulation, a total that is equal to changes in net
worth as a result of saving and capital transfers. The balancing item for the account is net
lending or borrowing, which is equal to savings and capital transfers less net capital formation.
Financial Account

The financial account records transactions during an accounting period that involve financial
assets and liabilities. Changes in the value of financial assets and liabilities resulting from
revaluation, and changes in the volume of financial assets and liabilities not resulting from
transactions, are not recorded in the financial account.
Net lending or borrowing, carried forward from the capital account, is equal to net acquisition of
financial assets less net incurrence of liabilities.
Revaluation Account

The revaluation account records the holding gains or losses resulting from changes in market
prices (including exchange rates) that accrue during the accounting period to owners of
nonfinancial assets and financial assets and liabilities
The balance of holding gains/losses is changes in net worth resulting from holding gains/losses.
OCVA (Other changes in the volume of assets account)

Changes in nonfinancial assets and financial assets and liabilities during an accounting period that
are not due to transactions or revaluations.
The balance of the OCVA account (changes in assets less changes in liabilities) equals changes in
net worth resulting from other changes in volume of assets.
Closing Balance Sheet

The stock of nonfinancial assets and financial assets and liabilities of an economy, institutional
sector, or institutional unit at the end of an accounting period. The stock of assets in the closing
balance sheet equals the stock in the beginning balance sheet plus the flow changes shown in the
capital, financial, revaluation, and OCVA accounts.

The balancing item is closing net worth.

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5. Broad Money Supply

Money has four basic functions, serving as a


(a) medium of exchange—the means for acquiring goods, services, and financial and
nonfinancial assets without resorting to barter;
(b) store of value—a means of holding wealth;
(c) unit of account—a standard for denominating the prices of goods and services and
the values of financial and nonfinancial assets, thereby providing a means for
comparisons of values and for preparation of financial accounts; and
(d) standard of deferred payment—a means of relating current and future values in
financial contracts.

Box -1. Broad Money and Its Holders and Issuers: Representative Sectors and Liabilities

Broad-money holders
Central government (inclusion usually pertains only to national currency holdings)
Other financial corporations
State and local government
Public nonfinancial corporations
Other nonfinancial corporations
Other resident sectors
Nonresidents (inclusion usually pertains only to national currency holdings)

Broad-money liabilities

Issued by depository corporations


National currency
Transferable deposits
Demand deposits (transferable by check, giro order, or similar means)
Bank checks (if used as a medium of exchange)
Traveler’s checks (if used for transactions with residents)
Deposits otherwise commonly used to make payments
Other deposits
Nontransferable savings deposits
Term deposits (i.e., time, or fixed, deposits)
Securities other than shares
Certificates of deposit
Commercial paper
Others

Issued by other sectors


National currency issued by central government
Foreign currency (applies to countries in which foreign currency circulates as a medium of exchange)
Transferable deposits
Transferable deposits accepted by central government or the postal system
Traveler’s checks issued by units other than depository corporations
Other deposits accepted by central government or the postal system

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Currency and transferable deposits : Currency and transferable deposits comprise the
most liquid financial assets, and all countries include them in their broad-money
aggregates. They have the following characteristics:
· Legal tender or general acceptability.
· Fixed nominal (face) value.
· Easy Transferability.
· No Transaction costs.
· Divisibility.
· Maturity..
· No or marginal Yield.

6. Money Supply- A Case Study for India

Table-1: Measures of Monetary and Liquidity Aggregates in India

Reserve Money (M0) = Currency in circulation + Bankers’ deposits with the RBI + ‘Other’ deposits
with the RBI
(M )
0 = Net RBI credit to the Government + RBI credit to the commercial sector +
RBI’s claims on banks + RBI’s net foreign assets + Government’s currency
liabilities to the public – RBI’s net non-monetary liabilities
M
1= Currency with the public + Demand deposits with the banking system +
‘Other’ deposits with the RBI.
M
2= M1 + Savings deposits of post office savings banks
M M
3= 1 + Time deposits with the banking system
M
3= Net bank credit to the Government + Bank credit to the commercial sector +
Net foreign assets of the banking sector + Government’s currency liabilities
to the public – Net non-monetary liabilities of the banking sector
M
4= M3 + All deposits with post office savings banks (excluding National Savings
Certificates).
NM
1= Currency with the public + Demand deposits with the banking system +
‘Other’ deposits with the RBI.
NM
2= NM1 + Short-term time deposits of residents (including and up to the
contractual maturity of one year
NM NM
3= 2 + Long-term time deposits of residents + call/ term funding from
financial institutions
L1 = NM3 + All deposits with the post office savings banks (excluding National
Savings Certificates).
L2 = L1 +Term deposits with term lending institutions and refinancing institutions
(FIs) + Term borrowing by FIs + Certificates of deposit issued by FIs.
L3 = L2 + Public deposits of non-banking financial companies.
Net bank credit to Net RBI credit to the Government (i.e., Net RBI credit to the Centre + Net
Government = RBI credit to the State Governments) + Other banks’ credit to the
Government
Bank credit to the RBI credit to the commercial sector + Other banks’ credit to the commercial
commercial sector = sector
Net foreign assets of RBI’s net foreign assets + Other banks’ foreign assets
The banking sector =
Net non-monetary RBI’s net non-monetary liabilities + Net non-monetary liabilities of other
liabilities of the banks.
banking sector =

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TABLE-2: RESERVE BANK OF INDIA BALANCE SHEET : ISSUE DEPARTMENT


(Rupees Crore)
Item 1995 2000 2005
LIABILITIES
1 Notes held in the Banking Department
14 15.3 13
2 Notes in circulation 110882 201486 378468
Total Notes issued 110896 201501 378481
ASSETS
1 Gold Coin and Bullion
(a) Held in India 11680.6 10761.3 15828.4
(b) Held outside India 1.5 0 0
2 Foreign Securities 10200 86700 361033
3 Total (1+2) 21882.2 97461.3 376862
4 Rupee Coin 45.9 115.3 101.9
5 Government of India Rupee Securities
88967.6 103925 1517.2
Total Assets 110896 201501 378481

TABLE-3: SELECT MONETARY RATIOS FOR INDIA

Year Major monetary ratios Income velocity*

CP/DD BR/DD CP/AD BR/AD M1 M3 GDP/ GDP/ GDP/


/RM /RM M3 M1 CP

1 2 3 4 5 6 7 8 9 10
1951-52 2.28 0.19 1.45 0.12 1.32 1.55 4.81 5.64 8.21
1960-61 2.61 0.21 1.01 0.08 1.28 1.83 4.4 6.3 8.78
1970-71 1.53 0.14 0.68 0.06 1.51 2.26 4.42 6.62 11.02
1980-81 1.49 0.56 0.32 0.12 1.21 2.95 2.82 6.88 11.63
1990-91 1.37 0.81 0.25 0.15 1.09 3.11 2.28 6.52 11.43
2000-01 1.33 0.51 0.2 0.08 1.26 4.33 1.72 5.91 10.46
2004-05 1.3 0.4 0.19 0.06 1.35 4.79 1.47 5.2 9.28
CP: Currency with the public.
DD: Demand deposits with banks.
BR: Bank reserves (balances with RBI plus cash with banks).
AD: Aggregate deposits.
RM: Reserve money.
M
1: Narrow money.
M
3: Broad money.
GDP: Gross Domestic Product at current market prices.
Source: RBI.

* Irving Fisher's equation of exchange P•T = M•V, where T stands for Transactions of
goods and services, P average price, M money supply and V velocity of money. This
relates the value of national output to the money supply and velocity of money. It is also
called Quantity Theory of Money Given values of the other terms in the equation viz. PQ
= GDP and M=Money Supply, velocity V can be calculated.

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Workout Session on Money Supply


Table-4: Money Stock in India: Components and Sources
(Rupees Crore)

Outstanding as on

Items End-June End-June End-June


2005 2006 2007
1 2 3 4
1 Currency with the Public 375363 436916 501223
2 Demand deposits with banks 299410 363989 431929
3 Time deposits with banks 1680886 1978796 2447949
4 "Other" deposits with RBI 4457 5255 7815
5 Net Reserve Bank credit to the Government -8700 8189 -19731
6 Other banks’ credit to the Government 774805 781837 876884
7 Reserve Bank credit to commercial sector 1390 1387 1386
8 Other banks’ credit to the commercial sector 1340104 1706547 2096913
9 Net foreign exchange assets of banking sector 635877 784281 910435
10 Government's currency liabilities to the public
7831 7833 8457
11 Banking sector's net non-monetary liabilities
other than time deposits 391193 505119 485428
12 of which : Net non-monetary liabilities of RBI 108819 178377 133451
13 GDP at current market prices
3529200 3991300 4486800

Given the above data, estimate the following for the Indian economy:

(a) Narrow money supply (M1) and broad money supply (M3) during July 2005-
June 2006 and July 2006-June 2007.
(b) Cross-check M3 from both supply and demand side.
(c) Yearly growth rates of M1 and M3 and their components during July 2005-
June 2006 and July 2006-June 2007, and comment on variations of the
growth rates.
(d) Income velocity of money during July 2005-June 2006 and July 2006-June
2007.

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Productivity Analysis

Professor Tarun Das, IILM, New Delhi-110003, India

Introduction

Productivity of an input or a factor of production means the contribution of the


factor to overall production for which it is used. In general, productivities are
measured by fitting production functions.

1) Production Function

Production Function is a technical relation which connects factor inputs and


outputs. It represents technology of a firm, industry or the economy, and includes all the
technically efficient methods of production.

a) Method of production means combination of inputs (factors) required to produce one


unit of output.

b) Technically efficient method of production: When there are two methods of production
A and B, A is said to be more technically efficient than B, if A uses less of at least one
factor and no more of other factors compared to B.

2) Isoquant: Let us assume that a firm uses two factors Labor (L) and Capital (K)
and produces a single Output (Q). Then the production function is given by Q = f (K,
L)

An isoquant is the locus of all feasible combinations of inputs (K, L) which produce the
same level of output (Q°). Q° = f (K, L)

a) Linear isoquant

Perfect Perfect complementarity of inputs


Substitutability

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b) Smooth curve isoquant: Continuous substitutability of K and L over a


certain range, beyond which factors cannot substitute each other

3) General form of a production function

X = f (L, K, ν, γ)

Where X= value added


L= labour input
K= capital input
ν = Returns to scale parameter
γ = efficiency parameter or total factor productivity (reflecting technological,
entrepreneurial-organizational aspects, which are not due to productivities of inputs)

4) Important concepts involved in production functions

There are two broad concepts of productivity – average product (AP) and marginal
product (MP). Average product measures the output per unit of an input, whereas
marginal product means rate of change in output due to change in input by one unit.

i) Average product of factors

APL = Q / L, APK = Q / K

ii) Marginal product of factors

MPL = ∂X/ ∂L, MPK = ∂X/ ∂K

Average product is always positive. Theoretically, marginal product may be positive,


zero or negative. However, production theory concentrates only on the efficient part of
the production function (MPL>0 and MPK>0). Also, the production theory concentrates
only on the diminishing (but positive) part of the marginal product. That is

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MPL>0 and ∂( MPL )/ ∂L=∂2X/ ∂L2 < 0


MPK>0 and ∂( MPK )/ ∂K=∂2X/ ∂K2 < 0

iii) Marginal Rate of Substitution (MRS): The slope of the isoquant -∂K/ ∂L is
called the MRS or the rate of technical substitution. It defines the degree of
substitutability of factors.

MRS = -∂K/ ∂L = (∂X/ ∂L) / (∂X/ ∂K) = MPL/ MPK

iv) Factor Intensity: Slope of the line joining origin to the isoquant gives the
factor intensity. The lower part of the isoquant is more labour intensive while the upper
part is more capital intensive.

v) Elasticity of substitution: MRS depends upon the units of measurement.


Elasticity of substitution is a unit-free measure and is defined as follows

σ = [∂(K/L)/(K/L)] / [∂(MRS)/(MRS)]

vi) Product Lines: A product line shows the physical movement from one
isoquant to another, which is the same as the change in output from level to another,
resulting from change in one or both of the factors of production.

vii) Isocline: Isocline is the locus of points on different isoquants where the MRS is
constant. For homogenous functions, the isoclines are straight lines passing through the
origin and the K/L ratio (factor intensity) is constant along the isocline. However, in case
of non-homogenous production functions, isoclines are not straight lines and the K/L
ratio (factor intensity) is not constant along the isocline.

5) Homogeneity and Returns to Scale

Suppose the production function is X= f (L, K) and we increase the inputs


λ times, then the new output is X* = f (λ L, λ K).

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β β
If X*= f (λ L, λ K) = λ . f (L,K) = λ . X,

then the production function is said to be homogenous of degree β . It means that if both
β
the inputs increase λ times, then production rises λ times.

There are three possible cases of a homogenous production functions.

β =1; Constant returns to scale => Output increases in the same proportion as inputs.

β <1; Decreasing returns to scale => Output increases less than proportionately with
inputs

β >1; Increasing returns to scale => Output increases more than proportionately with
inputs

Causes of Increasing Returns to Scale: Technical upgradation and economies of scale.


Causes of Decreasing Returns to Scale: Managerial diseconomies at higher levels of
output.

6) Law of Diminishing Returns

If one of the factors of production (say capital) is fixed, the marginal product of the
variable factor (labour) will diminish. If the production function is homogenous with
constant or diminishing returns to scale, the productivity of variable factor will
necessarily diminish. If the production function exhibits increasing returns to scale,
the diminishing returns from decreasing marginal product of the variable factor may
be offset, if the returns to scale are significantly large.

7) Equilibrium of the Firm

a) Maximization of output subject to a cost constraint

Max X=f(L,K) subject to C = wL+rK where w is the wage rate and r the interest
rate.

Max φ = X+λ(C-wL-rK) where λ is the Lagrangian multiplier

∂φ / ∂K =∂X/ ∂K – λr = 0 => λ = 1/r. ∂X/ ∂K


∂φ / ∂L =∂X/ ∂L – λw = 0 => λ = 1/w. ∂X/ ∂L
Equating the values of λ we get [∂X/ ∂L]/[∂X/ ∂K] = MP / MP
L K = w/r

b) Minimization of cost subject to a output constraint

Min C = wL+rK subject to X=f(L,K)

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Minψ = wL+rK+λ(X-f(L,K))

[ ]
∂ψ / ∂K =r-λ.∂X/ ∂K = 0 => λ = r/ ∂X/ ∂K .
∂ψ / ∂L =w-λ.∂X/ ∂L = 0 => λ = w/[∂X/ ∂L]
Equating the values of λ we get [∂X/ ∂L]/[∂X/ ∂K] = MP / MP L K = w/r

Therefore the conditions for equilibrium of the firm are

i) MPL/ MPK = w/r


ii) The isoquants are convex to the origin.

8) Choice of the optimal expansion path

The optimal expansion path in the long run is the locus of points of tangency of isocost
lines and successive isoquants. If the production function is homogenous, the expansion
path is a straight line passing through the origin with the slope being equal to the ratio of
factor prices. In the short run, it is a straight line parallel to the axis of the variable factor
9) Cobb-Douglas Production Function2

In economics, the Cobb-Douglas functional form of production functions is widely used


to represent the relationship of an output to inputs. It was proposed by Kunt Wicksell
(1851-1926), and tested against statistical evidence by Paul Douglas and Charles Cobb in
1928. For production, the function is

Y = ALαKβ,

where: Y = output; L = labor input ; K = capital input and A, α and β are constants
determined by technology.

If α + β = 1, the production function has constant returns to scale

If α + β < 1, returns to scale are decreasing, and

If α + β > 1, returns to scale are increasing.

Assuming perfect competition, α and β can be shown to be labour and capital's share of
output.

2
Cobb C W and Douglas P H (1928) "A Theory of Production", American
Economic Review, 18 (Supplement), 139-165.

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The exponents α and β are output elasticities with respect to labor and capital,
respectively. Output elasticity measures the responsiveness of output to a change in levels
of either labor or capital used in production, ceteris paribus. For example if α = 1.5, a 1%
increase in labor would lead to approximitely a 1.5% increase in output.

Cobb and Douglas,were influenced by statistical evidence that appeared to show that
labour and capital shares of total output were constant over time in developed countries;
they explained this by statistical fitting least-squares regression of their production
function. There is now doubt over whether constancy over time exists.

Various representations of the production function

The Cobb-Douglas function form can be estimated as a linear relationship using the
following expression:

Log Y = log A + α log L + β log K

10) Total factor productivity

Total-factor productivity (TFP) addresses any effects in total output not caused by
inputs or productivity. For example, a year with unusually good weather will tend to have
higher output, because bad weather hinders agricultural output. A variable like weather
does not directly relate to unit inputs or productivity, so weather is considered a total-
factor productivity variable.

The equation below (in Cobb-Douglas form ) represents total output (Y) as a function of
total-factor productivity (A), capital input (K), labor input (L), and the two inputs'
respective shares of output (α is the capital input share of contribution).

Technology Growth and Efficiency are regarded as two of the biggest sub-sections of
Total Factor Productivity, the former possessing "special" inherent features such as
positive externalities and non-rivalness which enhance its position as a driver of
economic growth.

Total Factor Productivity is often seen as the real driver of growth within an economy
and studies reveal that whilst labour and investment are important contributors, Total
Factor Productivity may account for up to 60% of growth within economies.

Growth accounting exercises and Total Factor Productivity are open to the Cambridge
Critique. Therefore, some economists believe that the method and its results are invalid.

As a residual, TFP is also dependent on estimates of the other components. A 2005 study
on human capital attempted to correct for weaknesses in estimations of the labour
component of the equation, by refining estimates of the quality of labour. Specifically,

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years of schooling is often taken as a proxy for the quality of labour (and stock of human
capital), which does not account for differences in schooling between countries. Using
these re-estimations, the contribution of TFP was substantially lower.

11) Growth accounting

Growth accounting is a set of theories used in economics to explain economic growth.


The total national income in an economy may be modeled as being explained by various
factors. A basic function of these factors is of Cobb Douglas type;

Q=ALxKy

K: the total stock of capital (for example, buildings and machinery) available.
L: the size of the labor force
A: Known as the productivity available, and is computed from technology and
efficiency.

Here, an increase in national income is explained by an increase in the capital available


(K), an increase in the labor force (L), or an improvement in the productivity used (A).
The Production Function shows that there are two factors involved in economic growth
viz. factor accumulation and improvements in efficiency.

The levels of national income, the capital stock, and the size of the labor force can all be
estimated through widely available economic statistics. A regression line can then be
estimated to explain the level of national income in terms of labor, capital and a residual.
A change in the residual, total factor productivity, represents the change in national
income that is not explained by changes in the level of inputs (capital and labor) used.
Total Factor Productivity can be measured by A=Q/(Lx Ky)

This is normally taken as a measure of the level of technology employed. The annualized
growth rate of A is called the "Solow residual." Over longer periods of time, it may be
used as a measure of technological change. Over shorter periods of time, it could reflect
the effect of the business cycle.

12) Solow residual

The Solow residual is a number describing empirical productivity growth in an economy


from year to year and decade to decade. Robert Solow defined rising productivity as
rising output with constant capital and labour input. It is a "residual" because it is the part
of growth that cannot be explained through capital accumulation. The Solow Residual is
procyclical and is sometimes called the rate of growth of total factor productivity.

Solow assumed a very basic model of annual aggregate output over a year (t). He said
that the output quantity would be governed by the amount of capital (the infrastructure),
the amount of labour (the number of people in the workforce), and the productivity of

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that labour. He thought that the productivity of labour was the factor driving long-run
GDP increases. An example economic model of this form is given below :

Where:

Y(t) represents the total production in an economy (the GDP) in some year, t.

K(t) is capital in the productive economy - which might be measured through the
combined value of all companies in a capitalist economy.

L(t) is labour; this is simply the number of people in work, and since growth models are
long run models they tend to ignore cyclical unemployment effects, assuming instead that
the labour force is a constant fraction of an expanding population.

A(t) represents multifactor productivity (often generalized as "technology"). The change


in this figure from A(1960) to A(1980) is the key to estimating the growth in labour
'efficiency' and the Solow residual between 1960 and 1980, for instance.

Different types of labor are reduced to a common unit, usually unskilled labor. In more
complicated general equilibrium models, labor and capital are assumed to be
heterogeneous and measured in physical units. In most versions of neoclassical growth
theory (for example, in the Solow growth model), however, the function is assumed to
apply to the entire economy. Then, the neoclassical theory of the distribution of income
sketched above is assumed to apply: under perfect competition, the rate of return on
capital goods (r) equals the marginal product of capital goods, while the wage rate (w)
equals the marginal product of labor.

To measure or predict the change in output within this model, the equation above is
differentiated in time (t), giving a formula in partial derivatives of the relationships:
labour-to-output, capital-to-output, and productivity-to-output, as shown:

Observe:

Similarly:

and

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Therefore:

The growth factor in the economy is a proportion of the output last year, which is given
(assuming small changes year-on-year) by dividing both sides of this equation by the
output, Y:

The first two terms on the right hand side of this equation are the proportional changes in
labour and capital year-on-year, and the left hand side is the proportional output change.
The remaining term on the right, giving the effect of productivity improvements on GDP
is defined as the Solow residual:

The residual, SR(t) is that part of growth not explicable by measurable changes in the
amount of capital, K, and the number of workers, L. If output, capital, and labour all
double every twenty years the residual will be zero, but in general it is higher than this:
output goes up faster than growth in the input factors. The residual varies between
periods and countries, but is almost always positive in peace-time capitalist countries.
Some estimates of the post-war U.S. residual credited the country with a 3% productivity
increase per-annum until the early 1970s when productivity growth appeared to stagnate.

13) Regression analysis and the Solow residual

The above relation gives a very simplified picture of the economy in a single year; what
growth theory econometrics does is to look at a sequence of years to find a statistically
significant pattern in the changes of the variables, and perhaps identify the existence and
value of the "Solow residual". The most basic technique for doing this is to assume
constant rates of change in all the variables (obscured by noise), and regress on the data
to find the best estimate of these rates in the historical data available (using an Ordinary
least squares regression). Economists always do this by first taking the natural log of their
equation; this produces a simple linear regression with an error term, ε :

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Ln (Y(t)) = α ln (K(t)) + (1 - α ) ln (L(t)) + (1 - α ) ln (A(t)) + ε :

A constant growth factor implies exponential growth in the above variables, so


differencing gives a linear relationship between the growth factors which can be deduced
in a simple regression.

Solow Growth Accounting


B. Estimation

The two methodologies used in most papers on productivity growth have been growth
accounting and econometric estimation of production functions. We briefly review the two
methods.
(i) Growth Accounting
For empirical purposes, expression (4) poses a conceptual problem. Although it represents
output per unit of joint inputs, its interpretation is much less straightforward than that of the
partial productivity index, and its meaning, i.e., level of technology, is not clear in direct
comparison among different economic units (see the discussion about Kim and Lau’s work
[1994] in Section III). For this reason, it is usually expressed in growth rates, that is,

Where qt, lt, kt denote the growth rates of output, labor, and capital, respectively, and ϕt
is the rate of total factor productivity growth. The expressions in front of the
growth rates of the factors are the respective elasticities. How does neoclassical
economics proceed empirically?
By assuming perfect competition and profit maximization. Under such conditions, the price
elasticity of demand is infinite, factor elasticities equal the factor shares in output, and thus
the equation becomes

Where at and (1-at) are the labor and capital shares, respectively (this is the so-called
Divisia Index weighing system). Since the national accounts and other statistics provide
estimates of all the right-hand side variables, one can easily obtain the rate of
productivity growth as a residual category. Expression (6) is the so-called “Solow-
residual”, a procedure called growth accounting. The objective of this method is to
determine how much economic growth is due to accumulation of inputs and how much
can be attributed to technical progress; or, put in different terms, how much of growth
can be explained by movements along a production function, and how much should be
attributed to advances in technological and organizational competence, the shift in the
production function (Nelson 1973).
With discrete data, researchers use the so-called Tornqvist index. This views that
expressions (5)-(6) are derived using differential calculus. In the discrete case it can be
shown that Chambers 1988)

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14) Why the productivity growth is attached to labour

The Solow residual measures total factor productivity, but is normally attached to the
labour variable in the macroeconomy because return on investment doesn't seem to
change very much in time or between developing nations, and developed nations—not
nearly as much as human productivity seems to change, anyway.

15) Critique of the measurement in rapidly developing economies


Many economists observed that Solow’s model is a simplistic version of reality. There
are many factors contributing to growth such as:
(1) Increasing globalisation leading to trade liberalization
(2) Impact of "learning by doing".
(3) Growth of informations and communications technology (ICT)
(4) Capital controversy over whether the level of capital in an economy can
be measured even in theory; if not, neither can the Solow residual.
(5) There could be impact of business cycles.

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(6) There could be switching and reswitching of production techniques due to


significant changes in wages and inteest rates.
(7) There is problems for aggregation of capital due to variations in vintages.
(8) There is also problem of aggregation of labor due to differences in skill
and experiences.

16) Multifactor Productivity Index (MFPI)

Multifactor Productivity Index (MFPI) measure the changes in output per unit of
combined inputs. Indexes of MFP are produced for the private business, private non-farm
business, and manufacturing sectors of the economy. MFPI is also developed for 2-and 3-
digit Standard Industrial Classification (SIC) manufacturing industries, the railroad
transportation industry, the air transportation industry, and the utility and gas industry.

Whereas labor productivity measures the output per unit of labor input, multifactor
productivity looks at a combination of production inputs (or factors): labor, materials, and
capital. In theory, it’s a more comprehensive measure than labor productivity, but it’s
also more difficult to calculate.

(1) Labor Productivity (output per hour)=Output/Labor Inputs

(2) Multifactor Productivity=Output/(KLEMS)

Multi Factor Productivity is a measure of the physical output produced from the use of a
given quantity of inputs by the firm. When having multiple outputs and multiple inputs,
the ratio of the weighted sum of outputs with respect to the weighted sum of inputs is
used to calculate the Multi Factor Productivity Index. In general, the weights are the cost
share for inputs and the revenue shares for the outputs.

Prices or cost shares and revenue shares may change between two periods. There are two
alternatives in dealing with this problem which implies different calculations: the same
weights may be used in both periods, or each period may use a different weight.

Advantages of Index Methods: The approach only requires data on two observations,
such as two firms or two time periods.

Disadvantages of Index Methods: TFP cannot be decomposed into the different types of
efficiencies (i.e. technical, allocative and economic, as mentioned earlier).

Application of Index methods: An example of an analysis using the TFP index method
in the water and sanitation sector is an assessment of the performance after privatization
in England and Wales

104
Official Economic Statistics by Tarun Das

17. Ranil Salgado (IMF) index for TFP

TFP Growth = α GR(LP) +(1- α ) GR(KP)


Where GR(LP) = Growth rate of Labor Productivity
GR(KP) = Growth rate of Capital Productivity
LP (Labor Productivity) = Output per employee
KP (Capital Productivity) = Output per capital input
α = the average shares of labor in output over the consecutive years t and t-1.
α (Share of labor) = Ratio of compensation to employees in total output (GDP)
Share of capital = 1 - α

18) OECD Methodology for Measuring Total Factor Productivity

(a) Labor Productivity

Labour productivity is defined as GDP per hour worked; where GDP for each country
refers to its Gross Domestic Product, in national currency, at constant prices, OECD base
year 2000, and output for country groups / zones GDP refers to the Gross Domestic
Product, in US dollars, at constant prices, constant PPPs, OECD base year 2000. Labour
input is defined as total hours worked of all persons employed. The data are derived as
average hours worked from the OECD Employment Outlook, OECD Annual National
Accounts, OECD Labour Force Statistics and national sources, multiplied by the
corresponding and consistent measure of employment for each particular country. The
measures of labour productivity are presented as indices and as rates of change. Source:
OECD Employment Outlook, OECD Labour Force Statistics, OECD Annual National
Accounts and OECD Quarterly National Accounts, and national sources.

(b) Multi-factor Productivity

The Multi-factor Productivity for the total economy is computed as the difference
between the rate of change of output and the rate of change of total inputs, and presented
as a rate of change. Price indices for information and communication technology assets
are those published by the U.S. Bureau of Economic Analysis, corrected for overall
inflation.
The shares of compensation of labour input and of capital inputs in total costs are for the
total economy. Shares are measured at current prices. Compensation of labour input
corresponds to the compensation of employees and self-employed persons. Compensation
of capital input is the value of capital services.

Total inputs are volume indices of combined labour and capital inputs for the total
economy. The indices have been constructed as weighted averages of the rate of change
of total hours worked and the rate of change of capital services. Cost shares of inputs
averaged over the two periods under consideration serve as weights (Törnqvist index).
Price indices for information and communication technology assets are those published
by the U.S. Bureau of Economic Analysis, corrected for overall inflation.

105
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106
Official Economic Statistics by Tarun Das

107
Official Economic Statistics by Tarun Das

Workout Session on Productivity

The following data relate to Japanese Economy. Estimate Total Factor Productivity
for the Japanese Economy on the basis of a Cobb Douglas Production Function and
Harrod neutrality.

Year GDP Plant-Machinery Employees Share of


(billion Yen) (billion Yen) (10 thosand) Labor in GDP

1980 313140 132032 3971 0.770


1981 322328 140342 4039 0.768
1982 331236 150509 4108 0.765
1983 336575 158437 4176 0.765
1984 347073 166831 4245 0.767
1985 364712 176575 4313 0.767
1986 375503 183872 4379 0.765
1987 389753 192547 4428 0.779
1988 416119 203443 4538 0.773
1989 438136 217987 4679 0.782
1990 460926 234272 4835 0.771
1991 476369 247563 5002 0.752
1992 481000 258052 5119 0.723
1993 482191 284149 5202 0.722
1994 487488 272846 5238 0.731
1995 496922 276844 5283 0.735
1996 513893 283423 5322 0.731
1997 523421 288788 5391 0.725
1998 517515 288210 5368 0.715
1999 517811 286603 5331 0.715
2000 532542 285750 5386 0.707
2001 534852 285966 5389 0.725
2002 532962 284623 5331 0.736
2003 547133 283782 5344 0.724

108
Official Economic Statistics by Tarun Das

Answers to Workout Sessions

UNSIAP GFS Workout Session-1

Indian Budget 2007-08


Items Rs. Billion
1.Tax revenues 4039
2.Non-tax revenues 825
2a.Interest receipts 193

3. Capital receipts 1941


3a. Recovery of loans 15
3b. Disinvestment of govt. equity 417

4.Revenue expenditure 5579


4a. Interest payments 1590

5.Capital expenditure 1226


5a. Loans to States and PSUs 45

6.Memo item: GDP at current mp 47122

Exercise-1
Given data on Indian Budget 2007-08 as above,
Estimate the following in Rupees Billion
And express these as percentages to GDP.
Rs. Billion % to GDP
Revenue deficit = (4) - (1) - (2) 715 1.5
Capital deficit = (5) - (3) -715 -1.5
Budget deficit = (4) + (5) - (1) - (2) - (3) 0 0.0
Gross Fiscal Deficit= (4)+(5) - (1)-(2)- 3a - 3b 1509 3.2
Gross Primary deficit = GFD - 4a -81 -0.2
Net lending = 5a - 3a 30 0.1
Net interest payments = 4a - 2a 1397 3.0
Net Fiscal Deficit = GFD - net lending 1479 3.1
Net Primary deficit = NFD- net int. payments 82 0.2

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Official Economic Statistics by Tarun Das

GFS WORKSHOP-2

Mongolian Government Finance Statistics for 2003 are based on the IMF GFS
Manual-2001 Manual. However it has the following limitations:
(a) It does not estimate consumption of fixed capital.
(b) It does not provide cash accounting for the year 2003.
(a) Given the data and information for the Mongolian GG in the following table, the participants
are required to estimate consumption of fixed capital by assuming life span and depreciation rates
for different groups of fixed non-financial assets (depending on their knowledge and experience).
(b) Then rework the Statement on Expenses and the Statement on Government Operations.
GFS Accounts Mongolia Revised
GG 2003
Items Billion MNT Billion MNT
Statement of govt operations
1. Revenue 599.94 599.94
2. Expenses 465.85 515.54
GOB Gross operating balance (1-(2-3)) 134.09 134.09
Less Consumption of fixed capital 0 49.69
NOB Net operating balance 134.09 84.40
31 Net acquisition of nonfinancial assets 139.02 139.02
NLB Net lending/ borrowing (NOB-31) -4.93 -54.62
32 Net acquisition of financial assets 54.86 54.86
33 Net incurrence of liabilities 63.22 112.91
NLB Statistical discrepancy (-NLB+32-33) -3.43 -3.43
Statement of other economic flows
Balance sheet
6 Net worth -449.42 -499.11
61 Nonfinancial assets 1306.79 1306.79
62 Financial assets 0 0
63 Liabilities 1756.21 1805.90
Statement of sources and uses of cash (for 2002)
1 Cash receipts from operating activities 489.77
11 Taxes 287.27
12 Social securities 54.93
13 Grants 19.31
14 Other receipts 128.26
2 Cash payments for operating expenses 402.92
21 Compensation of employees 112.1
22 Purchases of goods and services 163.93
24 Interest 20.04
25 Subsidies 8.79
26 Grants 0.62
27 Social Benefits 90.62
28 Other payments 6.82
CIO Net cash inflow from oper.activities 86.85
31.1 Purchases of nonfinancial assets 99.65
31.2 Sales of nonfinancial assets 0
31 Net cash outflow from investments 99.65
in nonfinancial assets

110
Official Economic Statistics by Tarun Das

CSD Cash surplus/ deficit -12.8


32x Net acquisition of fin.assets,excl.cash 37.04
321x Domestic 36.74
322x Foreign 0.3
323 Monetary gold and SDR 0
33 Net incurrence of liabilities 65.36
331 Domestic -16.86
332 Foreign 82.22
NFB Net cash inflow from financial activities 28.32
NCB Net change in the stock of cash 15.52
CSD Statistical discrepancy 0
Table-1 Revenue
1 Revenue 599.94 599.94
11 Taxes 353.69 353.69
111 taxes on income, profits, capital gains 97.58
1111 Individuals 28.8
1112 Corporations and other enterprises 68.78
112 Taxes on payroll and workforce 0
113 Taxes on property 12.66
114 Taxes on goods and services 209.96
1141 General taxes on goods and services 121.87
1142 Excises 58.58
115 Taxes on Intnl. trade & transactions 32.65
116 Other taxes 0.84
12 Social contributions 90.84 90.84
121 Social security contributions 90.84
122 Other social contributions 0
13 Grants 8.73 8.73
131 From foreign governments 8.66
132 From international organisations 0.06
133 From other general govt units 0.01
14 other revenue 146.68 146.68
Table-2 Expense by economic type
2 Expense 465.85 515.5404
21 Compensation of employees 142.92 142.92
211 Wages and salaries 117.34 117.34
212 Social contributions 25.58 25.58
22 Use of goods and services 178.23 178.23
23 Consumption of fixed capital 0.00 49.69
24 Interest 17.65 17.65
25 Subsidies 9.38 9.38
26 Grants 0.73 0.73
261 To foreign governments 0 0
262 To international organisations 0.72 0.72
263 To other general govt units 0.01 0.01
2631 Current 0.01 0.01
2632 Capital 0 0
27 Social Benefits 116.81 116.81
28 Other expense 0.13 0.13
281 Property expense other than interest 0 0

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Official Economic Statistics by Tarun Das

282 Miscellaneous other expense 0.13 0.13


2821 Current 0.13 0.13
2822 Capital 0 0
Table-3 Transactions in assets & liabilities
3 Change in net worth from transactions
31 Net acquisition of nonfinancial assets 139.02 139.02
311 Fixed assets 100.14
3111 Buildings and structures 96.77
3112 Machinery and equipment 1.38
3113 Other fixed assets 1.99
312 Inventories 38.01
313 Valuables 0
314 Nonproduced assets 0.87
3141 Land 0
3142 Subsoil assets 0
3143 Other naturally occurring assets 0.64
3144 Intangible nonproduced assets 0.23
32 Net acquisition of financial assets 54.86 54.86
by instruments 60.2
3202 Currency and deposits 60.4
3203 Securities other than shares 0
3204 Loans 19.17
3205 Shares and other equity -19.37
3206 Insurance technical services 0
3207 Financial derivatives 0
3208 other accounts receivables 0
By debtor 54.86
321 Domestic 62.67
322 Foreign -7.81
323 Monetary gold and SDR 0
33 Net incurrence of liabilities 63.22 112.91
by instruments
3302 Currency and deposits 0 0
3303 Securities other than shares 78 78
3304 Loans -23.66 -23.66
3305 Shares and other equity 0 0
3306 Insurance technical reserves 0 0
3307 Financial derivatives 0 0
3308 Other accounts payable 0 49.69
By creditor 63.22 112.91
331 Domestic 162.98 212.67
332 Foreign -99.76 -99.76
Table 4 Holding gains in assets & liabilities
Table-5 Other changes in the volume of
assets and liabilities
Table-6 Balance Sheet
6 Net worth -449.42 -499.1104 this year
61 Nonfinancial assets 1306.79 1306.79 139.02
611 Fixed assets 1140.59 1140.59 100.14
6111 Building and structures 788.79 788.79 96.77

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Official Economic Statistics by Tarun Das

6112 Machinery and equipment 309.16 309.16 1.38


6113 Other fixed assets 42.64 42.64 1.99
612 Inventories 165.97 165.97 38.01
613 Valuables 0 0 0
614 Nonproduced assets 0.23 0.23 0.87
6141 Land 0 0 0
6142 Subsoil assets 0 0 0
6143 Other naturally occurring assets 0 0 0.64
6144 Intangible nonproduced assets 0.23 0.23 0.23
62 Financial assets
by instruments 1477.94 1477.94
6202 Currency and deposits 162.96 162.96
6203 Securities other than shares 0 0
6204 Loans 931.38 931.38
6205 Shares and other equity 357.7 357.7
6206 Insurance technical reserves 0 0
6207 Financial derivatives 0 0
6208 Other accounts payable 25.9 25.9
By creditor 1477.94 1477.94
621 Domestic 1477.94 1477.94
622 Foreign 0 0
623 Monetary god and SDR 0 0
63 Liabilities 1756.21 1805.90
by instruments
6302 Currency and deposits 0 0
6303 Securities other than shares 108.84 108.84
6304 Loans 1626.92 1626.92
6305 Shares and other equity 0 0
6306 Insurance technical services 0 0
6307 Financial derivatives 0 0
6308 other accounts payable 20.45 70.14
By debtor
631 Domestic 320.72 320.72
632 Foreign 1435.49 1435.49
Memorandum items
6M2 Net financial worth -278.28 -278.28
6M3 Debt at market value n.a. n.a.
6M35 Debt at face value n.a. n.a.
6M4 Debt at nominal value n.a. n.a.
6M5 Arrears n.a. n.a.
6M6 Obligation for social security benefit n.a. n.a.
6M7 Contingent liabilities n.a. n.a.
6M71 Guaranteed debt at market value n.a. n.a.
6M72 Uncapitalized military weapons n.a. n.a.
Table-7 Outlays by functions of govt. (for 2002)
7 Total outlays 502.58
701 General public services 88.94
7017 Public debt transactions 20.04
7018 General transfers between levels of govt 0
702 Defense 24.91

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Official Economic Statistics by Tarun Das

703 Public order and safety 29.76


704 Economic affairs 95.88
7042 Agriculture and allied 15.07
7043 Fuel and energy 17.28
7044 Mining, manufacturing, construction 3.57
7045 Transport 31.78
7046 Communications 20.4
705 Environmental protection 1.47
706 Housing and community services 7.57
707 Health 52.54
7072 Outpatient services 48.7
7073 Hospital services 0
7074 Public health services 3.84
708 Recreation, culture and religion 15.88
709 Education 88.23
7091 Pre-primary and primary education 67.25
7092 Secondary education 15.12
7094 Tertiary education 5.86
710 Social protection 97.4
7 Statistical discrepancy, total outlay 0
Table-8 Transactions in financial assets
and liabilities by sector
82 Net acquisition of financial assets 54.87
821 Domestic 62.68
8211 General government -35.3
8212 Central bank 58.57
8213 Other depository corporations 20.37
8214 Financial corporations n.i.e. 0
8215 Nonfinancial corporations 15.81
8216 Households & NPIs serving households 3.23
822 Foreign -7.81
8221 General government 0
8227 International organisations 0
8228 Financial operations other than Intl.Orgns. -7.81
8229 Other non-residents 0
823 Monetary gold and SDR 0
83 Net incurrence of liabilities 63.22 112.91
831 Domestic 162.98 212.67
8311 General government -34.73 14.96
8312 Central bank 169.28 169.28
8313 Other depository corporations 19.55 19.55
8314 Financial corporations n.i.e. 0 0
8315 Nonfinancial corporations 8.88 8.88
8316 Households & NPIs serving households 0 0
832 Foreign -99.76 -99.76
8321 General government 0 0
8327 International organisations 0 0
8328 Financial operations other than 0 0
international organisations
8329 Other non-residents -99.76 -99.76

114
Official Economic Statistics by Tarun Das

Estimation of Consumption of Fixed Capital

Table-6 Balance Sheet Depre Depre Life


this last
6 Net worth -449.42 year year % Years
61 Nonfinancial assets 1306.79 139.02 1167.77
611 Fixed assets 1140.59 100.14 1040.45 43.29
6111 Building and structures 788.79 96.77 692.02 20.76 3% 30
6112 Machinery and equipment 309.16 1.38 307.78 18.47 6% 15
6113 Other fixed assets 42.64 1.99 40.65 4.07 10% 10
612 Inventories 165.97 38.01 127.96 6.40 5%
613 Valuables 0 0 0 0 0%
614 Nonproduced assets 0.23 0.87 -0.64 0
6141 Land 0 0 0 0 0%
6142 Subsoil assets 0 0 0 0 0%
6143 Other naturally occurring assets 0 0.64 -0.64 0 0%
6144 Intangible nonproduced assets 0.23 0.23 0 0 0%

115
Official Economic Statistics by Tarun Das

GFS WORKSHOP SESSION-3

As per Australian Accounting Standards (in


Australia $ million)
Sl.no Item AAS Plus/
. Minus GFS
to get GFS
1 Total tax revenue 206600 206600
1.1 Income tax 172114 Plus 172114
1.2 Indirect tax 28116 Plus 28116
1.3 Fringe benefits tax 4084 Plus 4084
1.4 Other taxes 2286 Plus 2286
2 Total non-tax revenue 17565 15584
2.1 Sales of goods and services 4604 Plus 4604
2.2 Interests and dividends 8805 Plus 6824
2.2.1 of which, swap interest revenue 1981 Minus 0
2.2.2 Other interest revenue 6824 Plus 6824
2.3 Other non-tax revenue 4156 Plus 4156
Total Revenue 224165 222184
3 Total gains 1348 0
3.1 Foreign exchange gains 139 Minus 0
3.2 Proceeds from sale of assets 1 Minus 0
3.3 Other economic revaluations 1208 Minus 0
4 Total income (1+2+3) 225513 222184
Expenses
5 Total goods and services 56684 139898
5.1 Compensation to employees 23555 Add 116536
PerBenft
5.2 Suppliers 17701 13828
5.2.1 Of which, defense weapons 3873 Minus 0
platforms
5.2.2 Other supplies 13828 Plus 13828
5.3 Depreciation and amortization 4617 2190
5.3.1 Of which, defense weapons 2427 Minus 0
platforms depreciations
5.3.2 Other depreciations 2190 Plus 2190
5.4 Net write-down of assets 3465 Minus 0
5.4.1 of which, mutually agreed 923 Plus 923
write-downs
5.4.2 Unilateral wtite-downs 2542 Plus 2542
5.5 Losses from sale of assets 2 Minus 0
5.6 Foreign exchange losses 0 Minus 0\
5.7 Other goods and services 7344 Plus 7344
6 Total subsidies and grants 147202 54221

116
Official Economic Statistics by Tarun Das

6.1 Personal benefits 92981 Part of 0


CtoL
6.2 Subsidies 11099 Plus 11099
6.3 Grants 43122 Plus 43122
7 Borrowings cost 5911 4066
7.1 Interests 5843 Plus 3998
7.1.1 of which, swap interest 1845 Minus 0
expenses
7.1.2 Other interest expenses 3998 Plus 3998
7.2 Other borrowing costs 68 Plus 68
8 Total expenses (5+6+7) 209797 198185
9 Operating balance (4-8) 15716 23999

BOP Workout Session -1

Items (Rupees billion)


1.GNP 27459

117
Official Economic Statistics by Tarun Das

2.Public Expend (PubExp) 3121


3.Private Expend (PvtExp) 17353
4.Public Invest (PubInv) 1802
5.Private Invest (PvtInv) 5680
6.Public savings (PubSav) 284
7.Private savings (PvtSav) 7695
8.Taxes less subsidies (T) 2402
9.Exports of goods & services (X) 4078
10.Imports of goods and services (M) 4434

Given above data, estimate the following:


GDP at current market prices (GDP)
= PubEXP+PvtEXP+PubINV+PvtINV+X-M 27600
Net factor income from abroad (NFI)
= GNP - GDP -141
Current account balance (CAB) = X - M + NFI -497
Private Investment-Savings gap -2015
Public Investment-Savings gap 1518
Overall Investment-Savings gap -497
Private account balance (PVTAB) = CAB, verified 2024
Public account balance (PUBAB) -2521
PVTAB + PUBAB = CAB, verified -497

118
Official Economic Statistics by Tarun Das

BOP Workout Session -2

Given the data on India's BOP in 2006-07


Estimate the following:
US$ Million As % of GDP
1 Goods balance -64,905 -7.3
2 Net invisibles 55,296 6.2
2.1 Invisibles receipts 118,201 13.2
2.1.1 Services 81,330 9.1
2.1.2 Income 8,010 0.9
2.1.3 Transfers 28,861 3.2
2.2 Invisibles paymets 62,905 7.0
2.2.1 Services 48,603 5.4
2.2.2 Income 12,856 1.4
2.2.3 Transfers 1,446 0.2
3 Currence account balance -9,609 -1.1
4 Foreign investment 15,499 1.7
5 Non-debt capital flows 15,499 1.7
6 Other capital flows 29,445 3.3
7 Total capital flows 44,944 5.0
8 Net balance of payments 35,335 4.0
9 Build up of foreign exchange 35,335 4.0
10 End-year foreign.exch.reserves 197,985 22.2

119
Official Economic Statistics by Tarun Das

Workout Session-1 on Money Supply

Given data in Table-1 below, estimate the following for the Indian economy:
(a) Narrow money supply (M1) and broad money supply (M3) during July 2005-June 2006
and July 2006-June 2007.
(b) Cross-check M3 from both supply and demand side.
(c) Yearly growth rates of M1 and M3 and their components during July 2005-June 2006
and July 2006-June 2007, and comment on variations of growth rates.A7
(d) Income velocity of money during July 2005-June 2006 and July 2006-June 2007.

Table-1: Money Stock in India: Components


and Sources
(Rupees Crore)
Stocks Outstanding as on

Items End-June End-June End-June


2005 2006 2007
1 2 3 4
1 Currency with the Public 375363 436916 501223
2 Demand deposits with banks 299410 363989 431929
4 "Other" deposits with RBI 4457 5255 7815
M1 1+2+4 679230 806160 940967
3 Time deposits with banks 1680886 1978796 2447949
M3 S M1 + 3 2360116 2784956 3388916
M3 D 5 + 6+7+8+9+10-11 2360116 2784956 3388916
5 Net Reserve Bank credit to the Government -8700 8189 -19731
6 Other banks’ credit to the Government 774805 781837 876884
7 Reserve Bank credit to commercial sector 1391 1388 1386
8 Other banks’ credit to the commercial sector 1340105 1706547 2096913
9 Net foreign exchange assets of banking sector 635877 784281 910435
10 Government's currency liabilities to the public 7831 7833 8457
11 Banking sector's net non-monetary liabilities other 391193 505119 485428
than time deposits
12 of which : Net non-monetary liabilities of RBI 108819 178377 133451
13 GDP at current market prices 3567177 4128895 4712198

Income Velocity
GDP/ Currency 9.5 9.5 9.4
GDP/ M1 5.3 5.1 5.0
GDP/ M3 1.5 1.5 1.4

Flows
1 Currency with the Public 61553 64307

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Official Economic Statistics by Tarun Das

2 Demand deposits with banks 64579 67940


4 "Other" deposits with RBI 798 2560
M1 1+2+4 126930 134807
3 Time deposits with banks 297910 469153
M3 S M1 + 3 424840 603960
M3 D 5 + 6+7+8+9+10-11 424840 603960
5 Net Reserve Bank credit to the Government 16889 -27920
6 Other banks’ credit to the Government 7032 95047
7 Reserve Bank credit to commercial sector -3 -2
8 Other banks’ credit to the commercial sector 366442 390366
9 Net foreign exchange assets of banking sector 148404 126154
10 Government's currency liabilities to the public 2 624
11 Banking sector's net non-monetary liabilities other than time deposits 113926 -19691

12 of which : Net non-monetary liabilities of RBI 69558 -44926


13 GDP at current market prices 3567177 4128895 4712198

Flows
1 Currency with the Public 16.4 14.7
2 Demand deposits with banks 21.6 18.7
4 "Other" deposits with RBI 17.9 48.7
M1 1+2+4 18.7 16.7
3 Time deposits with banks 17.7 23.7
M3 S M1 + 3 18.0 21.7
M3 D 5 + 6+7+8+9+10-11 18.0 21.7
5 Net Reserve Bank credit to the Government -194.1 -340.9
6 Other banks’ credit to the Government 0.9 12.2
7 Reserve Bank credit to commercial sector -0.2 -0.1
8 Other banks’ credit to the commercial sector 27.3 22.9
9 Net foreign exchange assets of banking sector 23.3 16.1
10 Government's currency liabilities to the public 0.0 8.0
11 Banking sector's net non-monetary liabilities other than time deposits 29.1 -3.9

12 of which : Net non-monetary liabilities of RBI 63.9 -25.2

121
Official Economic Statistics by Tarun Das

Workout Session on Productivity

Table-1
Year GDP Machinery Employees Capital Labor
(bln Yen) (bln Yen) (10 thosand) Share share

1980 313140 132032 3971 0.23 0.770


1981 322328 140342 4039 0.23 0.768
1982 331236 150509 4108 0.24 0.765
1983 336575 158437 4176 0.24 0.765
1984 347073 166831 4245 0.23 0.767
1985 364712 176575 4313 0.23 0.767
1986 375503 183872 4379 0.23 0.765
1987 389753 192547 4428 0.22 0.779
1988 416119 203443 4538 0.23 0.773
1989 438136 217987 4679 0.22 0.782
1990 460926 234272 4835 0.23 0.771
1991 476369 247563 5002 0.25 0.752
1992 481000 258052 5119 0.28 0.723
1993 482191 284149 5202 0.28 0.722
1994 487488 272846 5238 0.27 0.731
1995 496922 276844 5283 0.26 0.735
1996 513893 283423 5322 0.27 0.731
1997 523421 288788 5391 0.27 0.725
1998 517515 288210 5368 0.29 0.715
1999 517811 286603 5331 0.29 0.715
2000 532542 285750 5386 0.29 0.707
2001 534852 285966 5389 0.27 0.725
2002 532962 284623 5331 0.26 0.736

122
Official Economic Statistics by Tarun Das

Table-2

Year AP of AP of GR of GR of TFP
Captal Labor AP(K) AP(L) Growth

1980 2.37 78.86


1981 2.30 79.80 -3.21 1.18 0.17
1982 2.20 80.64 -4.27 1.05 -0.19
1983 2.12 80.59 -3.53 -0.05 -0.87
1984 2.08 81.77 -2.09 1.45 0.62
1985 2.07 84.56 -0.72 3.36 2.41
1986 2.04 85.75 -1.13 1.40 0.81
1987 2.02 88.02 -0.89 2.61 1.82
1988 2.05 91.70 1.04 4.09 3.41
1989 2.01 93.64 -1.75 2.10 1.24
1990 1.97 95.33 -2.13 1.79 0.91
1991 1.92 95.24 -2.22 -0.10 -0.61
1992 1.86 93.96 -3.18 -1.34 -1.83
1993 1.70 92.69 -9.39 -1.36 -3.59
1994 1.79 93.07 5.15 0.40 1.70
1995 1.79 94.06 0.46 1.06 0.90
1996 1.81 96.56 1.01 2.62 2.19
1997 1.81 97.09 -0.04 0.55 0.39
1998 1.80 96.41 -0.93 -0.71 -0.77
1999 1.81 97.13 0.62 0.75 0.71
2000 1.86 98.88 3.10 1.78 2.16
2001 1.87 99.25 0.36 0.38 0.37
2002 1.87 99.97 0.12 0.73 0.56

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Official Economic Statistics by Tarun Das

Table-3

LogY LogK LogL GR(Y) GR(K) GR(L)


1 2 3 4 5 6 7
1980 12.65 11.79 8.29
1981 12.68 11.85 8.30 2.8919 6.1038 1.7078
1982 12.71 11.92 8.32 2.7261 6.9941 1.6791
1983 12.73 11.97 8.34 1.5990 5.1334 1.6514
1984 12.76 12.02 8.35 3.0714 5.1624 1.6246
1985 12.81 12.08 8.37 4.9573 5.6764 1.5986
1986 12.84 12.12 8.38 2.9158 4.0494 1.5187
1987 12.87 12.17 8.40 3.7247 4.6100 1.1128
1988 12.94 12.22 8.42 6.5458 5.5046 2.4538
1989 12.99 12.29 8.45 5.1558 6.9050 3.0598
1990 13.04 12.36 8.48 5.0708 7.2047 3.2797
1991 13.07 12.42 8.52 3.2955 5.5182 3.3957
1992 13.08 12.46 8.54 0.9675 4.1496 2.3121
1993 13.09 12.56 8.56 0.2473 9.6338 1.6084
1994 13.10 12.52 8.56 1.0925 -4.0591 0.6897
1995 13.12 12.53 8.57 1.9167 1.4547 0.8554
1996 13.15 12.55 8.58 3.3582 2.3486 0.7355
1997 13.17 12.57 8.59 1.8371 1.8752 1.2882
1998 13.16 12.57 8.59 -1.1348 -0.2003 -0.4275
1999 13.16 12.57 8.58 0.0572 -0.5591 -0.6917
2000 13.19 12.56 8.59 2.8051 -0.2981 1.0264
2001 13.19 12.56 8.59 0.4328 0.0756 0.0557
2002 13.19 12.56 8.58 -0.3540 -0.4707 -1.0821
2003 13.21 12.56 8.58 2.6242 -0.2959 0.2436

124
Official Economic Statistics by Tarun Das

Table-4
Labor Contribution Contribution MFP
share (a) 0f labor 0f capital Growth
(%) to GDPGR to GDPGR =5-9-10
1 8 9 10 11
1980 0.770
1981 0.768 1.31 1.41 0.17
1982 0.765 1.29 1.63 -0.19
1983 0.765 1.26 1.21 -0.87
1984 0.767 1.24 1.21 0.62
1985 0.767 1.23 1.32 2.41
1986 0.765 1.16 0.95 0.81
1987 0.779 0.86 1.05 1.82
1988 0.773 1.91 1.23 3.41
1989 0.782 2.38 1.53 1.24
1990 0.771 2.55 1.61 0.91
1991 0.752 2.58 1.32 -0.61
1992 0.723 1.70 1.09 -1.83
1993 0.722 1.16 2.67 -3.59
1994 0.731 0.50 -1.11 1.70
1995 0.735 0.63 0.39 0.90
1996 0.731 0.54 0.63 2.19
1997 0.725 0.94 0.51 0.39
1998 0.715 -0.31 -0.06 -0.77
1999 0.715 -0.49 -0.16 0.71
2000 0.707 0.73 -0.09 2.16
2001 0.725 0.04 0.02 0.37
2002 0.736 -0.79 -0.13 0.56
2003 0.724 0.18 -0.08 2.53

125
Official Economic Statistics by Tarun Das

TABLE-5

LogY LogK LogL


1980 12.65 11.79 8.29 Regression Results:
1981 12.68 11.85 8.30 SUMMARY OUTPUT
1982 12.71 11.92 8.32
1983 12.73 11.97 8.34 Regression Statistics
1984 12.76 12.02 8.35 Multiple R 0.99
1985 12.81 12.08 8.37 R Square 0.98
1986 12.84 12.12 8.38 Adjusted R Square 0.98
1987 12.87 12.17 8.40 Standard Error 0.03
1988 12.94 12.22 8.42 No of Observations 24
1989 12.99 12.29 8.45
1990 13.04 12.36 8.48 ANOVA
1991 13.07 12.42 8.52 df SS MS
1992 13.08 12.46 8.54 Regressn 2 0.80 0.40
1993 13.09 12.56 8.56 Residual 21 0.01 0.00
1994 13.10 12.52 8.56 Total 23 0.82
1995 13.12 12.53 8.57
1996 13.15 12.55 8.58 Coeffs. Std. Error t Stat
1997 13.17 12.57 8.59 Intercept 1.232 1.48 0.83
1998 13.16 12.57 8.59 X1 Var-1 0.318 0.18 1.80
1999 13.16 12.57 8.58 X2 Var-2 0.924 0.43 2.16
2000 13.19 12.56 8.59
2001 13.19 12.56 8.59
2002 13.19 12.56 8.58
2003 13.21 12.56 8.58

126
Official Economic Statistics by Tarun Das

TABLE-6

Observation Predicted Y Residuals TFP GR-TFP Above Est


1 12.65 0.01 1.24
2 12.68 0.00 1.23 -0.51 0.17
3 12.72 -0.01 1.22 -0.85 -0.19
4 12.75 -0.02 1.21 -1.28 -0.87
5 12.78 -0.02 1.21 -0.06 0.62
6 12.81 -0.01 1.22 1.38 2.41
7 12.84 -0.01 1.23 0.18 0.81
8 12.87 0.01 1.24 1.00 1.82
9 12.91 0.03 1.26 2.04 3.41
10 12.96 0.03 1.27 0.10 1.24
11 13.01 0.03 1.26 -0.20 0.91
12 13.06 0.02 1.25 -1.27 -0.61
13 13.09 -0.01 1.22 -2.00 -1.83
14 13.14 -0.05 1.18 -3.52 -3.59
15 13.13 -0.04 1.20 1.48 1.70
16 13.14 -0.03 1.20 0.55 0.90
17 13.16 -0.01 1.22 1.60 2.19
18 13.18 -0.01 1.22 0.04 0.39
19 13.17 -0.02 1.22 -0.55 -0.77
20 13.16 -0.01 1.23 0.72 0.71
21 13.17 0.01 1.24 1.59 2.16
22 13.17 0.02 1.25 0.29 0.37
23 13.16 0.02 1.26 0.64 0.56
24 13.16 0.05 1.28 1.98 2.53

127