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MEASURING MACROECONOMIC
AGGREGATES
Lecture 2
September 13 2017
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Unit
• There are many goods and services and
many different inputs firms buy, so to
add “apples and oranges” we need a
common unit, prices in some currency,
for example rupees
MEASURING GDP
• Gross domestic product GDP is the total value of all
final goods and services produced in an economy in
a period of time (one year)
• If current rupee prices are used, we get the nominal
(money value) of GDP at current prices
• If we use some benchmark prices (base year) then
we get GDP at constant prices of the base year: for
instance if the base year is 1995, we will say that we
have measured GDP for 2010-11 at 1995 prices
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Value Added
• Intermediate products: inputs purchased by
business on which value is added for further
sales: buy textiles, make and sell, say ‘kurtas’
• We should avoid counting the value of the
material of the kurta, and also the value of the
kurta (which includes the value of the material)
• We need to avoid double or triple counting. We
need to take final goods and services only
• To avoid this there is an alternative way: ‘value
added’ method
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Factor services
FIRMS
HOUSEHOLDS Goods
Government
Financial markets
Personal consumption
Other countries
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• T-INC • K-INC
*Wages paid to *Wages paid to
its employees Rs.15000 its employees Rs.10000
*Taxes paid *Taxes paid
to government Rs.5000
to government Rs.2000
* Sales Revenue
*Tomatoes bought
Total Rs.35000
* From tomatoes sold from T-inc Rs.25000
to households Rs.10000 *Sales Revenue
From tomatoes Total Rs.40000
sold to K-inc Rs.25000
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Three Approaches
• It follows from above that since the
product approach and the income
approach are both equal to the
expenditure approach, they themselves
must be equal to each other
• Hence all three yield the same result
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USES OF SAVING
• When households and firms save in an
economy the flow gets used up in
alternative ways
• Firms borrow to fund investment
projects
• Government taxes out part of it for its
own spending needs
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SAVING –
PRIVATE and GOVERNMENT
• Private saving is private disposable
income less consumption, taxes being T
• Sprivate = (Y – T – C)
• Sgovernment = (T – G)
• National Saving is the sum of the two,
equal to: (Y – C – G)
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Saving-Investment (Contd..)
• We can substitute C+I+G+NX for Y
• So for the national economy, S = (C+I+G+NX) – C – G
• S = I + NX
• Sprivate = I + NX – Sgovernment
• Sprivate = I + NX – (T – G)
• This gives us a very useful identity. We will use the
notation S as private saving in an economy with
government),
• Sprivate = S
• S = I + NX + (G – T)
• (S – I) = (X – M) + (G – T)
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Saving-Investment (Contd..)
• Or, we can re-write the identity as
• (S-I) + (T-G) = (X-M)
• If net exports are negative (imports are more than exports) then
either in the private sector I is more than S, or the government
sector must be dissaving { (T-G) must be negative}
• If we have a trade surplus then (S-I) and/or (T-G) must be
positive
• If the trade balance (X-M) is positive, then (say for India) we
must be lending to foreigners or buying foreign stocks or land or
other assets
• Remember, if NX is measured to include net factor payments
from abroad, then the associated Y measures GNP. If not, Y
measures GDP
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Which Measure of I or Y?
• If I measures net investment (net of
depreciation), rather than gross
investment, then Y is NNP or NDP
depending on how one measures NX
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• Year 2005
• Computers 10 50000 500000
• Pizzas 250 200 50000
• TOTAL 550000
• % growth in real GDP (550000 – 290000)/290000
• = 89.6%
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• Year 2005
• Computers 10 25000 250000
• Pizzas 250 240 60000
• TOTAL 310000
• % growth in real GDP (310000 – 173000)/173000
• = 79.2%
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MEASURING UNEMPLOYMENT
• Unemployment Rate =
Number of Unemployed X 100
Labour Force
• Labour Force = Number employed + Number
unemployed
• Labour force participation rate =
Labour Force X 100
Adult Population
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A NUMERICAL EXAMPLE
• Consider the following data for a • Compute:
hypothetical economy: • GDP
• Private Consumption C = 150
• GNP
• Net Private Investment = 30
• Government Purchases = 30 • NNP
• Net Exports = -10 • Exports
• Government Budget Surplus = 10 • Private saving
• Net Factor Income from abroad = 10 • Government saving
• Imports = 20 • National Saving
• Depreciation = 20 • Verify that (S-I) = (G-T) + (X-M)
• GDP = C + Gross I + G + NX
= 150 +(Net I +Depreciation) +G +NX
= 150 + (30+20) +30 -10
= 220
• GNP = GDP + Net Factor Payments From abroad
= 220 + 10 = 230
• NNP = GNP – Depreciation = 230 – 20 =210
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Solution
• Exports X - Imports M = • Sgovernment = BS = T – G =
NX 10
• So, X – 20 = -10
• X=10
• Hence total national
• Private Saving S = Y – C –
savings:
T • = 30 +10 = 40
• We take Y as GDP, and • Verify (S-I) = (G-T) + (X-
note taxes T must be
Budget Surplus plus G M)
• So T=10+30 = 40 • 30-50 = (30 – 40) + (-10)
• S = 220 – 150 – 40 = 30 • -20 = -10 - 10 = - 20
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http://www.mospi.gov.in/
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Expenditure on GDP
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Improved Coverage
• Corporate Sector
– In the 2004-05 series, the Private Corporate Sector in 2004-05 series was being covered using
the RBI Study on Company Finances, with financial results of around 2500 companies.
– In the new series, comprehensive coverage of Corporate Sector has been ensured in mining,
manufacturing and services by incorporation of annual accounts of companies as filed with the
Ministry of Corporate Affairs (MCA) and Accounts of about 5 lakh companies have been
analysed and incorporated for 2011-12 and 2012-13.
• Financial Corporations
– Financial corporations in the private sector, other than banking and insurance, in the earlier
series was limited to a few mutual funds and estimates for the Non-Government Non-Banking
Finance Companies as compiled by RBI.
– In the new series, the coverage of financial sector has been expanded by including stock
brokers, stock exchanges, asset management companies, mutual funds and pension funds, as
well as the regulatory bodies, SEBI, PFRDA and IRDA.
• Local bodies and autonomous institutions
– Earlier, estimates for local bodies and autonomous institutions were prepared on the basis of
information received for seven autonomous institutions and local bodies of four States – Delhi,
Himachal Pradesh, Meghalaya and Uttar Pradesh.
– In the new series, there has been an improved coverage of local bodies and autonomous
institutions, covering around 60% of the grants/transfers provided to these institutions.
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Thank
You
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