Beruflich Dokumente
Kultur Dokumente
Lectures on
Official Economic Statistics
Part-2
Monetary and Financial Statistics
Productivity Measures
Answers to Workout Sessions
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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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Contents
PART-1
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Official Economic Statistics by Tarun Das
PART-2
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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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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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.
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.
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.
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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:
CLASSIFICATION
The assets and liabilities of the financial corporations sector are classified in the following broad
categories:
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;
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 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:
DC = NCG + CORS
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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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.
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.
• 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.
• 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 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.
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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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.
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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
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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.
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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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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Outstanding as on
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
Introduction
1) Production Function
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
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X = f (L, K, ν, γ)
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.
APL = Q / L, APK = Q / K
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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.
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.
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.
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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.
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
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.
Max X=f(L,K) subject to C = wL+rK where w is the wage rate and r the interest
rate.
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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
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
Y = ALαKβ,
where: Y = output; L = labor input ; K = capital input and A, α and β are constants
determined by technology.
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.
The Cobb-Douglas function form can be estimated as a linear relationship using the
following expression:
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.
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.
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.
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.
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.
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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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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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.
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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.
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
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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.
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.
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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.
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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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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
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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.
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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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
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Table-1
Year GDP Machinery Employees Capital Labor
(bln Yen) (bln Yen) (10 thosand) Share share
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Table-2
Year AP of AP of GR of GR of TFP
Captal Labor AP(K) AP(L) Growth
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Table-3
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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
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TABLE-5
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TABLE-6
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