Understanding National Economic Data for

policy making

Indrajith Aponsu
Department of Economics
University of Colombo
 In global context
 Asia poised to faster economic growth @ 7%+
 Current account surplus to continue
 Inflation remain well contained
 Prospects for capital flows look good
 Risk due to a more than expected slowdown in US
 Higher oil prices can hamper growth prospects
 Inflation will result due to high costs and financial
volatility
 Rapid growth in China, later India, provide mixed
blessings for the region
Regional Economic Outlook, IMF
 The stories continue…..So, what do
we do ? ……
 Different from the tele-stories, as we need to
analyse and act.
 Others sure will, even if I ignore
 Right understanding gives the edge
 Globalisation has opened a Pandora’s box
 Internet, new space age for all Toms, Dicks,
and Harrys
 The one with the right information is on a time
travel
More specifically,
Why economics information?
Commonly,

• For better returns on investment

• Making decisions on capital and financial outlays
• Get to know the economy and its functioning
• Reduce inherent risks
• To be ahead of the rest

Or simply,

• almost all our decisions are inescapably tied to

economics, and every human being (almost) is a
practicing economist
To measure economic performance
Economic indicators are used

Economic indicators are statistics that Tell

about the health of an economy
Direction of change
Likely pitfalls Implications
of policy Development
prospects Impact of rest of
the world

In practice we use an array of main economic

indicators, and they fall into few broad categories
 Broad Economic Growth Equation
Primary Inputs Intermediate Inputs Output

 Productive capital  Mobilisation of • Accelerated Real

stock financial capital GDP growth
 A sound financial  Growth in capital • Reduced
system stock unemployment
 Sound  Growth in productivity • Higher standard of
infrastructure  New technology – living
 Disciplined means of production • Greater social
workforce  Learning by doing welfare
 Appropriate policy  More savings for • Economic strength
and strategies investment • Political stability
 Visionary political  Growth in human
leadership capital
 Development process and outcome
– both desirables and undesirables
Country’s output/ income growth
Financial system
in a year measured by
Capital Stock Gross Domestic Product / Income
(Mach.+Tech+Land+…)
Inflation

BOP status
Labour exchange rate
(Knowledge+Skills+Knowhow+…)

Demand stability

Fiscal measures
and income gaps

Public debt

Rising per capita

Reduction of employment
Closing income gaps
Economic indicators come under:
 Production, income and employment
 Price levels and inflation
 Fiscal policy also referred to as budget policy
 Demand management policies also referred to as
monetary policy
 Trade and industry policy – framework for creating
growth
 Balance of payment – foreign exchange flows and
rates
 International wealth and liabilities
Economic indicator’s relate to each other and to the
business cycle, economy, and decision making as

Leading-
Indicates before hand likely changes-
Stock market with growth
Stock indices falter when GDP growth begins to decline
Falling reserves indicates X rate under pressure

Lagged
Happens with a delay
Unemployment improves only sometime after a recovery
Rising interest rates chokes growth
 Selected Indicators - Economic
 The rate of growth of GDP
 The rate of growth of per capita GDP
 The rate of unemployment


 The rate of inflation

 The rate of domestic savings
 The rate of national investment
 Change in the structure of the economy
 The capital output ratio
 Economic Indicators
 The Budget surplus/ deficit current account and
overall
 Revenue as a percentage of GDP
 The growth of public debt

 Balance of Payments Current Balance / Overall

Balance as a percentage of GDP
 The terms of trade
 The level of external reserves
 Social Indicators
 Life Expectancy at Birth
 Male
 Female
 Infant Mortality rate
 Maternal Mortality rate
 Crude Birth rate
 Crude Death rate
 Total Fertility Rate
 Literacy level
 Male
 Female
 School enrolment rate
 Primary
 Secondary
 Prevalence of under 5 child malnutrition
 Poverty Head Count
 Political Indicators
 Regularity of Elections
 Freedom and Fairness of Elections
 Sharing of Power
 Devolution of Power
 Multi- party system
 Freedom of Speech
 Freedom of Association
 Freedom of the media
 Incidence of political violence
 Incidence of grave crime
 Violations of Human Rights
 Governance
 Transparency
 Independence of Judiciary

 Corruption
 Indicators- another perspective
 Outcome Indicators -

GDP, Life Expectancy, Adult Literacy

Unemployment rate , Poverty Headcount

 Input Indicators

Savings , Investment Budget surplus deficit ,

school enrolment
 Indicators…… (cont’d)
 Levels of Aggregation

 Aggregate Indicators

GDP, Life Expectancy , Fertility rate, Age Literacy, Regularity of

Elections

 Sectoral indicators / single variable Indicators

Share of agriculture in GDP; infant mortality ; primary school

enrolment , drop out , rate of voter participation
 Indicators- quantitative or
qualitative

 Quantitative Indicators – amenable to numerical

measurement; forms into interlocking set of
macroeconomic data / national accounting matrix

 Qualitative Indicators. Scalar measurement as in the

case of attitudes, often collected via opinionistic
surveys; subject to challenge; increasingly popular-
Indicators of good governance; transparency;
happiness index
 Have a look at
Happiness Index

 Life Expectancy

 Life Satisfaction

 Ecological Footprint.
 Selected Qualitative Indicators

 Process Indicators
 Indicators of good governance
 Transparency
 Accountability
 Non- Discrimination
 Equity
 Inclusivity
 Participation
Critical Indicators
Gross Domestic Product or GDP

the value of the output generated within the country in

one year
However, this distorts value due to changes in price
Hence, we create two measures, nominal GDP vs. Real
GDP
Nominal GDP = prevailing price x quantity
Real GDP = some specific price ( base price) x quantity
( for the whole series of GDP only one set of prices used)

Large GDP means Hippos- big bullies, slow moving, with big tummies
Small GDP means more likely to be piggy backers,
can be fast moving Cheetahs, or be strategic minded Beavers,
Key is making the looks attractive to the hippos
 Real GDP is what we look for
 Real GDP eliminates value illusion caused by price
changes
 Measures the actual output generation in value

terms
 In practice, only real GDP is relevant for the

assessment of country’s economic health

 Also referred to as GDP at constant prices

 Gives a measure of relative size of the economy

 Also, provides a yardstick for domestic market

size
all analyses begin with GDP data
Real Growth (also called Growth)
Most vital is the Rate of Growth in GDP
It reflects the vitality of the GDP
US grew @ nearly 5% during 1990-2000 ( exceptional)
 Developing countries should achieve faster growth (used to be

over 5%, now over 7% is the bottom point)

 Typically, rich countries grow slower (below 5%);

 East –Asia grew in excess of 7-8 percent, for a long-period. China

is galloping @ 10%+ , for over a decade

 SL hit 7%+ in 2006 while India notches 8%+

Most economic policies are targeted at Real

Growth. Sustained high growth makes the economy looks sexy
 GDP per Capita Income
(Real GDP/ Mid-year Population)
 Income each citizen gets if GDP distributed evenly
 A crude, yet the most common, measure of Standard of living
 Indicator of the overall economic well-being
 For businesses, a barometer of purchasing power
 For Foreign businesses, how attractive economy looks (especially
for smaller economies)

Sri Lanka – US $ 1000+

took 50 years to get to Low –Middle income range ($800+ -3400+)
require another 25 years to Upper-Middle range (3400+ -10,000+) if we grow at 7%+
( Nicholas)
Malaysia – US $ 4,900+
achieved within 50 years
Other products of GDP
(long term indicators)

GDP per capita growth

 How fast the country is getting richer
 Superior measure of economic development
 Increasingly used as a measure of wealth creation
2000-4
SL 4%; China 9%; India 7.%; Malaysia 3% (WDR 2007)
Other products of GDP
(long term indicators)………………………..

Structure of the economy

Each major sector’s contribution (%) to the GDP
Reflects fundamental character of the economy
Poor – Agriculture dominates ( South Asia)
Fast growing – Industry dominates ( Asia –pacific)
Highly advanced – Services dominate (US)
 Other products of GDP…..
Gross Domestic Savings Ratio – Savings/GDP
 Portion of investment financed by GDP

 Corporate savings by firms+ household savings+

public savings
 Reflects what has not been consumed from the
domestic production ( but, does not reflect what is
available)
National Savings ratio – Savings adjusted for net
inflows/ GDP
what is available within the economy
Asians command high levels of savings
 Finance related indicators
Narrow Money supply- M1
Cash and demand deposits in circulation

Most liquid form of money

Broad Money supply – M2

Time deposits +M1
Above money stock values are used for
monetary targets for control of inflation by the
Central bank
 What makes the GDP click?
Rate of Investment - Investment /GDP
 Main measure of capacity and future production
potential
 A higher value indicate greater growth potential ahead

 Poor ratio indicate a fundamental bottleneck to

growth
 Raising investment is a relaible forecast for faster

growth
 Very cyclical in nature ,a dn quite sensitive to growth

expectations ( profit expaecations)

 What makes the……
Productivity – GDP/ (Labour+ Capital)
 A combine measure of how efficiently labour and
capital are used
 Countries thrive to enhance productivity
 It leaves more savings for further capacity creation
 Developing countries with low productivity are
poor economic performers
 SL and similar countries pay less attention to this
aspect
 No direct measures of productivity are in use in SL
Spoilers of the GDP party
Inflation
An unwelcome, yet inevitable by product of growth
Bad, because,
 it blurs the market signals and affects efficiency
 Notoriously unpredictable, hence, creates uncertainty
 Affects income distribution

Originate from two fronts:

 Demand-pull created due to rising budget deficit, credit
expansion, wage rise due to labour shortages, tax cuts
 Cost-push is caused by import prices, exchange rates,
commodity price volatility,
Poor Double digit inflation is worrisome
Rich More tight margin for inflation
Modest inflation is inevitable: excessive control harmful
 Measuring inflation
 Control on inflation affects growth prospects
 Too much inflation affects competitiveness
 Attracts tight fiscal and monetary policy

CPI is the inflation index

most common and most timely
Reflects only consumer prices

WPI is the lead indicator of inflation – producer index

Most critical to competitiveness
Affects exchange rate via the trade balance - negative
High inflation makes imports good and exports bad
Rising WPI indicates CPI inflation to come and vice
versa
 Relatively High inflation
 Puts interest rates under pressure
 Exchange rates under pressure
 Budget deficit under pressure

It is also true that,

High interest rates pushes inflation up
Also, Currency deprecation and
High budget deficit
SL : over 10% , India below 5%; Japan below 0%
Budget policies – government’s impact on finances
Problematic Yet can’t be without-
Government expenditure / deficit
As share of GDP high in LDCs
Influences imports
Pressures costs up and hence inflation
Foreign borrowings backed expenses boosts forex

Government revenue
higher revenue gives more flexibility
more tax on the private sector
Deficit
The means of financing has implications
Size of it too
Reduction of defcit too have implications
Finance with the rest of the world
Terms of trade
Price of imports in terms of that of locally produced
Deteriorating TOT is a sign of exchange trouble and
Sign that Foreign exchange is leaking out
Trade balance as % of GDP
Exports minus imports
Usually, as a proportion of GDP
Widening trade balance is bad as country is
overspending
 Assets and liabilities to the rest of
the world
Capital account balance as % of GDP
 current account deficit is financed from
surplus in capital account
 More capital inflows means rising liabilities
 Nevertheless, we borrow and invite FDIs

Overall balance as % of GDP

 Requires to be positive
If negative, BOP support from the IMF is the only way
out
 Country’s financial credibility
hinges upon:
Balance of payments
 Composite statement of all currency
transactions
 Degree of liberalisation directly correlate to
the Forex
 Degree of Capital controls
 ( SL, China, India still have capital controls,
Malaysia has not. All Rich countries have liberal
capital accounts)
 Country’s financial credibility..
 Reserves in months of imports
 shows the Health of the BOP in the short term
Falling reserves means Foreign Exchange
situation is turning to be precarious
 Foreign debt outstanding
 Short-term debt attracts speculative attacks (
Thailand in 1998)
 Long-term – normally from multilateral
lending
International value of the Currency - Exchange rate
Nominal rate ( either spot or forward)
• The actual price of currency either current, end period, or
sometimes, period average
• Useful for making comparisons/ correlations with other
real time data
• Commonly, used as a weighted average of major trading
currencies

Real exchange rate

• Incorporates exchange rate fluctuations and inflation
differentials simultaneously
• Calculated to reflect trade competitiveness
• The rate used in economic analysis to determine how badly
real economic situation dislodged from currency
Currency fluctuations
Appreciate - when local currency is more priced
• Happens when either exports, capital flows (loans, FDI,
portfolio, etc.) surges
• Speculative demand for the domestic currency surges hoping
an interest rate rise
• Transaction demand picks up, rather slowly, with enhanced
economic activity
Depreciates – when local currency looses international value
• Caused by a widening trade deficit and hence, BOP
• Rising prices of essential commodities, like oil
• Short fall in export proceeds
• Capital flight
• Rising budgetary excesses
 Currency value for trade
Over valued currency
• Currency fixed over and above the ‘market rate’
• Maintains a policy to counter domestic inflation
• Bad for exports and economic growth
• SL adopts a de-facto overvaluation due to its
preoccupation with inflation fears
Undervalued currency
• Currency is under priced or made to remain so
• A deliberate policy to make exports competitive
• Pro-growth, pro-export regimes use this effectively
• East-Asians used this policy very effectively
• Chinese Renminbi ‘under valuation’ has become
major thaw in the eyes of US policy makers
Currency regimes………….

Pegged floats ( semi-fixed and floating )

• Currency pegged to value or band, either fixed or adjusted
periodically
• SL Rupee since late 1970s
• Common intermediate stage from fixed to floating

Linked rates
• Currency rate is fixed , but market operates freely
• Currency Board for the HKD
 Millenium Development Goals

 Eight goals to be achieved by 2015, with 18 quantifiable

targets and measured by 48 indicators.

Eradicate extreme poverty and hunger

Achieve universal primary education
Promote gender equality and empower women
Reduce child mortality
Improve maternal health
Combat HIV AIDS malaria and other diseases
Ensure environmental sustainability
Develop a global partnership for development
 Analysis of Indicators
 Targets /Indicators for the goal of eradication of poverty

 Proportion of population below poverty line

 Poverty gap ratio

 Share of poorest quintile

 Growth rate of GDP per person employed

 Proportion of own account workers

 Proportion of underweight children

 Proportion of population below minimum energy consumption

Sri Lanka’s Place in the International Indexes

 The Human Development Index 99 out of 174 countries

 The Quality of Life Index Economic Intelligence Unit - 43 out of 111

countries

 The Happiness Index - 22 out of 179 countries

 The Fredom House Index - partly free

 The Integrity Index. Overall rating Very Weak 58 out of 100

That’s it