Measuring Economic

Performance

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Real GDP: YoY

Readings

• Lequiller François and Derek Blades, 2006, Under standing NATIONAL ACCOUNTS, Organization for Economic Cooperation and Development, Chapter 1 and 2. Link

• Bureau of Economic Analysis “Introduction to the National Income and Product Accounts” Link

Value vs. Volume• Consider the sales of a hypothetical single good

k (for example, k = apples). • Dollar Value of sales (called vk) is the product of

the volume of goods sold (called qk) measured in the goods natural units (i.e. bushels of apples) and the dollar price per good (called pk)

vk = pk * qk

• Growth of value can be decomposed into growth of volume and growth in prices.

(1 ) (1 )(1 )k k kv p qg g g

Economic Growth• Rate of Increase of Production. • If Qt is a measure of production, the simple net

growth rate is

• Implying

1

1

q t tt

t

q qgq

1

1 q tt

t

qgq

What is Economic Growth in a world of many goods?

• We need to combine the many goods produced or consumed in an economy into one measure.

++

++

=?

(Simple) Average Growth

• If there are K goods then we could calculate the average growth rate of each type of good.

• Problem: Taking the simple average of the growth of different types of goods may give a distorted picture of average growth, since different goods are of different importance in the economy.

1 2 3

...K

AVERAGEq q q q

q g g g ggK

Weighted Average Growth

• Instead we could construct a weighted average

where the weights add to 1.

• An even weight is wk =1/K but we could adjust

the weights to be indicate the importance of each good in the economy.

_

1 2 31 2 3 ...

WGTD AVGE

K

q

q q q K q

g

w g w g w g w g

1 2 3 ... 1Kw w w w

_

1 1

1WGTD AVGE k

K Kq k q k

k k

g w g w

Measuring the Economy

• National accounts are the core statistical measure of the economy.

• Accounts cover many features of the economy but organizing concept is

Gross Domestic Product (GDP)

Gross Domestic Product (GDP)• “GDP combines in a single figure, and with no double

counting, all the output (or production) carried out by all the firms, non-profit institutions, government bodies and households in a given country during a given period, regardless of the type of goods and services produced, provided that the production takes place within the country’s economic territory.” L & B p. 15

All goods sold in an economy share a common unit of measure: the price at which they are sold.

Sum up the value of goods

GDP is a measure of production

• Value added at production establishment i

• GDP is the sum of VA across establishments.

iValue Added =Sales + inventories -raw materials, semi-processed inputs and energy costs.

i iGDP Value Added

• Accounts are created by national statistical agencies

• UN System of National Accounts is the “internationally agreed standard set of recommendations” used by most countries.

• Annual data for many countries available at the UN

Link

Link

Production ApproachSub-aggregates

• Divide production establishments into sectors usually along the line of – Primary: Natural Resources (Agriculture, Forestry,

Fishing, Mining, Quarrying) – Secondary: Goods production (Manufacturing,

Construction, Utilities)– Tertiary: Intangibles Production

Agr

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ting,

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,fis

hing

(IS

IC A

-B)

Min

ing

& U

tiliti

es

Man

ufac

turin

g (IS

IC D

)

Con

stru

ctio

n (IS

IC F

)

Who

lesa

le, r

etai

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de,

rest

aura

nts

and

hote

ls (I

SIC

G-H

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Tran

spor

t, st

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unic

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n (IS

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Oth

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ities

(IS

IC J

-P)

1970

20100

10

20

30

40

50

60Hong

Kong:

Value

Added

by

Sector

Hong Kong Census and Statistics

Expenditure Approach

• Purchase of Final goods by end users are divided into two categories:

1. Consumption: Household expenditure (durables, nondurables & services); government (nondurables & services) expenditure; nonprofit expenditures

2. Investment: Inventories, Fixed Investment (equipment, structures)

Some Asian Expenditure Shares: 2010

Source: United Nations Main Aggregates Database Source: United Nations Main Aggregates Database

1 2 3

123

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Household consumption expenditure General government final consumption expenditureGross fixed capital formation Changes in inventoriesSeries5

People’s Republic of China

Share of Value• We could measure total value for the economy. • Divide our economy into K categories of goods

indexed by k = 1,…, K.• Value of sales of good k, vk. GDP is represented as

the sum of value across goods

• The weight of k in the economy could be defined as which add up to 1 across sectors.

1 2 3... Kt t t t t tGDP V v v v v

kk vw V

1

Kk

t tk

V v

Using GDP to Measure Economic Performance

•

Growth Rates of Products and Ratios

1 1 1 1 1

1

1111

(1 )(1 )

1 1

(1 )(1 )

(1 ) (1 )(1 ) 1

X Yt t t t tt t t t t

t t t t t

Z X Y Y X Z X Yt t t t t t t t

t t Xt tt t t

Ytt t ttt

tt

X Z Y Z Y Y Z Z X Yt t t t t t t t t t

Z X Y X YZ X Y g g

Z X Y X Y

g g g g g g g gX X

Z YX X gZ Y Y gXZYY

g g g g g g g g g g

Share of Value• We could measure total value for the economy. • Divide our economy into K categories of goods

indexed by k = 1,…, K.• Value of sales of good k, vk. GDP is represented as

the sum of value across goods

• The weight of k in the economy could be defined as which add up to 1 across sectors.

1 2 3... Kt t t t t tGDP V v v v v

kk vw V

1

Kk

t tk

V v

Volume Growth

• Define as a weight

• By construction, the weights add up to one, so volume growth is a weighted average of the growth of production of each type of good

1 11

1

k kk t tt

t

p qwV

1 2 31 2 31 1 1 1

11

....k

k

Q q q q K qt t t t t t t t t

Kk qt t

k

g w g w g w g w g

w g

Aggregate Growth• Macroeconomic aggregates such as GDP and

its sub-totals are the sum of values of sales (or purchases) from different firms.

• We also decompose the growth of the aggregates into growth in prices (inflation) and growth in volume (output).

t i i ii i

V v p q

(1 ) (1 )(1 )V P Qt t tg g g

How statistical agencies calculate volume growth.

1. Construct representative market basket of each category of goods, k. For example, if k were apples, the market basket could consist of a certain number of Red apples, Green apples, Fuji apples depending on how many of each of these are purchased.

2. Sample goods of type k at time t and at time t-1 to assess the price level of the market basket at each time period.

1,k kt tp p

Building Blocks for Volume GrowthValue and Inflation Vectors

3. For every type of good at time t, measure and construct an inflation vector representing the growth rate of prices.

4. Convert the dollars spent on good k into their purchasing power measured at time t-1 prices.

ktv

11

kkpt

k tt

p gp

1

1

k kkt t

ktkttkt

v vp ppp

• Conceptually, if we think of value of good k as the product of price and quantity vk = pk*qk we can think of value divided by the inflation vector as the quantity of goods produced at time t measured at the value in terms of the previous period prices.

1 1 1

k k kk k k kt t tt t t tk k

t t

v p qp p p qp p

Volume Growth5. Sum the inflation adjusted values across the

types of goods and divide by value in previous period

2 31 2 31 1 1 1

1 2 3

1

1

....

Qt

k KKt t t t

Kt t t tt t t t

t

g

p p p pv v v vp p p pV

Qtg

1

1

11

K kk t

ktQ tkt

t

pv pg V

Volume Growth cont.

• Conceptually, the numerator of volume growth is the sum of goods produced at time t valued at the price prevailing at time t-1 while the denominator is the sum of goods produced at time t-1 valued at the price prevailing at time t-1. The yardstick of value, dollar prices in time t-1 prices, are the same in the numerator and denominator.

1 1 2 2 3 31 1 1 11 1 2 2 3 3

1 1 1 1 1 1 1 1 1

....1....

K KQ t t t t t t t tt K K

t t t t t t t t t

p q p q p q p qgV p q p q p q p q

Volume Growth cont.

• Conceptually, we can also think net volume growth as a weighted average of the growth rate of quantities of each type of good.

1 1 2 2 3 31 1 1 11 1 2 2 3 3

1 1 1 1 1 1 1 1 1

1 1 2 2 3 31 1 1 1 1

1 1

1 1 2 2 3 31 1 1 1 1

.... 1....

....

....

K KQ t t t t t t t tt K K

t t t t t t t t t

K Kt t t t t t t t t

t t

K Kt t t t t t t t t

t

p q p q p q p qgV p q p q p q p q

p q p q p q p q VV V

p q p q p q p q VV

1

• We can rewrite the numerator as

• Collect terms

• Rewrite

1 1 2 2 1 1 2 21 1 1 1 1 1 1 1 1

1

.... ....K K K Kt t t t t t t t t t t tQ

tt

p q p q p q p q p q p qg

V

1 1 1 2 2 21 1 1 1 1 1

1

( ) ( ) .... ( )K K KQ t t t t t t t t tt

t

p q q p q q p q qgV

1 1 2 21 1 2 21 1 1

1 1 1 1 1 11 21 1 1

1

( ) ( ) .... ( )

Qt

K KK Kt t t t t t

t t t t t t Kt t t

t

g

q q q q q qp q p q p qq q q

V

• Note that and divide through by Vt-1 .

• Define as a weight

• By construction, the weights add up to one, so volume growth is a weighted average of the growth of production of each type of good

1

1

( )kk k

q t tt k

t

q qgq

1 21 1 2 2

1 1 1 1 1 1

1 1 1

....K

K KQ q q qt t t t t tt t t t

t t t

p q p q p qg g g gV V V

1 11

1

k kk t tt

t

p qwV

1 2 31 2 31 1 1 1....

kQ q q q K qt t t t t t t t tg w g w g w g w g

Volume Levels• To compare the level of aggregate

quantities at different points in time, total up the growth that appears in between periods.

1. Calculate the growth rate for all periods using the prices from the immediately previous periods to adjust current values.

2. Choose a reference period, ref, preferably in a recent period and set a constant price series equal to value in that period

Qtg

REF REFQ V

Chained Index

3. Define the constant price series recursively in all periods using the equation

The relationship between the levels of the chain volume index at any two points t and t+T is the product of the growth between the two points.

1(1 )Qt t tQ g Q

1 2 3(1 ) (1 ) (1 ) .... (1 )REF T REF

Q Q Q QREF REF REF REF T

Q Q

g g g g

1 2 3 1(1 ) (1 ) (1 ) .... (1 )REF T

REF Q Q Q QREF REF REF REF T

QQg g g g

Comparing GDP across Countries

We want to compare output in two countries though those are measured in different currencies.

Market Basket Index?

• Construct an international market basket of goods produced and purchased around the world. For country j, PPPj could be the relative price of the market basket relative to price of the market basket in US$.

• Problem: Judging the cost of living by the cost of the international market basket may not be fair if customers in the local market can buy the types of goods which are cheaper at home.

• Major project to compare prices internationally implemented by the World Bank with the help of UN and national statistical agencies.

• ICP has been implemented by UN Statistical Office since 1968.

Link

PPP’s1. Divide expenditures into k = 1,..,K (in 2005, K

= 155) “basic heading” categories of goods.2. All j = 1,..J countries (in 2005, J = 146) report

total expenditure in domestic currency of all categories .

kjv

ICP Handbook

PPP’s cont.3. Sample prices of representative goods from

each category in each country. 4. Construct average of those prices (relative to

“anchor” economy) for each country j basic heading type of good k .

k kj ANCp p

Note: Measured in # of j country Currency units per anchor country currency units. Example. If Japan = j and anchor is USA, and 1 kg. rice is 400 yen in Japan and $2 in USA :

200kJPN

kANC

pp

PPP in Anchor Currency.4. Define quantity of good of type k valued

5. Calculate price of j’s market basket in j’s prices relative to price of j’s market basket in anchor country prices.

kk j

kjj

vq p

1 2: $

1 2

1 2 2

1 2 2

...

...

Kj j jj AC

j Kj j j

j j j

AC AC AC

v v vPPP

v v vp p p

p p p

Numerator in j currency, denominator in AC currency

• Conceptually PPP is the cost of the goods purchased by consumers in their country relative to the cost of those same goods in anchor country terms.

1 1 2 2: $

1 1 2 2

......

K Kj j j j j jj AC

j K KANC j ANC j ANC j

p q p q p qPPP

p q p q p q

1 21 2

$ 1 21 ...

,......,

KKANC ANC ANC

AC j j j Kj j j j

nn jj

j

p p pw w wPPP p p p

v w V

• We could also calculate relative price of anchor countries market basket.

• Index number theory suggest Fisher Ideal index (i.e. geometric average of and represent the differences in the cost of living).

1 1 2 2: $

1 1 2 2

......

K Kj AC j AC j ACj AC

AC K KAC AC ANC AC AC AC

p q p q p qPPP

p q p q p q

: $ : $ : $$

j AC j AC j ACIntl AC jPPP PPP PPP

: $j ACACPPP : $j AC

jPPP

2011Price level ratio of PPP conversion factor PPP conversion factor

Country Name to market exchange rate (LCU per international $)China 0.542527 3.505536Hong Kong SAR, China 0.701644 5.461593Indonesia 0.411219 3606.566India 0.314063 15.10943Japan 1.346427 107.4543Korea, Rep. 0.771083 854.5857Lao PDR 0.307315 2467.753Myanmar 43.16115 234.974Philippines 0.412201 17.85372Singapore 0.708778 0.891484Thailand 0.405696 12.37038

Large Variations in Labor per Person (www.ggdc.net)

Hours per Worker 2001

0 500 1,000 1,500 2,000 2,500 3,000

EU

USA

Japan

Hong Kong

Singapore

South Korea

Taiwan

Variation in Labor Force Participaton

Employment as a share of Population

38.00%

40.00%

42.00%

44.00%

46.00%

48.00%

50.00%

52.00%

Europe U.S.A Japan Hong Kong Singapore South Korea Taiwan

Pre-Industrial RevolutionSource: Angus Madisson, Measuring the Chinese Economy

GDP per Capita

0

200

400

600

800

1000

1200

50AD 960AD 1280 1400 1820

1990

US$ China

Europe

Main Differences in Countries are Due to Variation in Labor Productivity

GDP per Worker

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

Hong K

ong

Indon

esia

Korea

Malays

ia

Phillip

pines

Singap

ore

Taiwan

Thaila

nd

Now, China is calculating GDP based on economic activity of each quarter to make the data "more accurate in measuring the seasonal economic activity and more sensitive in capturing information on short-term fluctuations", the NBS said.

Previously, China's quarterly GDP data, in terms of value and growth rates, was derived from cumulated figures rather than economic activity of that particular quarter, the bureau said.

The new methodology - in line with that of major developed countries - will pave the way for China to adopt the International Monetary Fund's Special Data Dissemination Standard (SDDS) in calculating GDP, it said.Link

Labor Share of Income

Link

0 20 40 60 80 100 120 140 1600

200

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600

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1000

1200

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1600

Determinants of Income

GDP per Capita, 1000's of US$

Hour

s per

Cap

ita

0 20,000 40,000 60,000 80,000 100,000 120,0000.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

Determinants of Income

GDP per Capita

Labo

r Pro

ducti

vity

Productivity Catch Up: EuropeSource: Groningen Growth & Development Center

1950% of USA 2003

% of USA

Growth Rate

U.S.A 12.00 100.0% 33.97 100.0% 2.00%

France 5.63 46.9% 37.75 111.1% 3.46%

Germany 4.36 36.3% 30.01 88.3% 3.95%

UK 7.49 62.4% 28.01 82.5% 2.91%

Spain 2.60 21.7% 22.21 65.4% 4.94%

1990 US$, Average Output per Hour (Y/L)

Productivity Catch Up: Latin America

Source: Groningen Growth & Development Center

1950 % of USA

2003 % of USA

Growth Rate

U.S.A 12.00 100.0% 33.97 100.0% 2.00%

Argentina 6.16 51.4% 10.57 31.1% 1.04%

Brazil 2.48 20.7% 7.81 23.0% 2.21%

Chili 4.66 38.9% 14.07 41.4% 2.12%

Mexico 3.56 29.7% 10.24 30.1% 2.03%

Productivity Catch Up: East Asia Source: Groningen Growth & Development Center

1950 % of USA 2003 % of USA Growth Rate

U.S.A 12.00 100.0% 33.97 100.0% 2.00%

Japan 2.30 19.2% 24.78 73.0% 4.57%

1973 % of USA 2003 % of USA

Hong Kong

7.49 35.0% 22.28 65.6% 4.74%

Korea 3.64 17.0% 14.25 42.0% 5.93%

Singapore 6.80 31.8% 19.63 57.8% 4.61%

Taiwan 4.37 20.4% 18.77 55.2% 6.33%

y1951 % of USA y2011 % of USA

Argentina 2.592284 15.1% 19.29067 35.3%

Australia 13.4734 78.6% 38.31929 70.2%Brazil 1.646719 9.6% 9.128079 16.7%Chile 5.803535 33.9% 14.40455 26.4%France 6.578401 38.4% 49.28606 90.2%

Germany 49.18272 90.1%

Hong Kong 28.55739 52.3%I taly 4.366204 25.5% 40.41155 74.0%J apan 2.06587 12.1% 38.14028 69.8%Mexico 6.828484 39.8% 14.68958 26.9%

Singapore 34.86622 63.8%

South Korea 26.84044 49.1%

United Kingdom 9.541419 55.7% 39.9666 73.2%

United States 17.14322 100.0% 54.61435 100.0%

Labor Productivity per Hour2014 US$

Country 1950.00 2014.00% of USA % of USA

France 8.64 43.3% 63.97 96.2%Germany 6.57 33.0% 63.44 95.4%Italy 8.22 41.2% 50.41 75.8%United Kingdom 12.18 61.1% 49.66 74.7%

Canada 16.07 80.6% 51.17 77.0%United States 19.94 100.0% 66.47 100.0%

Australia 14.15 71.0% 53.35 80.3%New Zealand 15.59 78.2% 39.03 58.7%

Labor Productivity per Hour2014 US$

Economy 1950.00 2014.00% of USA % of USA

Hong Kong 3.29 16.5% 47.16 71.0%Japan 3.24 16.2% 42.06 63.3%Singapore 7.81 39.2% 60.42 90.9%South Korea 1.74 8.7% 33.67 50.7%Taiwan 1.48 7.4% 43.27 65.1%

Argentina 10.45 52.4% 22.21 33.4%Brazil 4.70 23.6% 16.94 25.5%Chile 6.30 31.6% 27.38 41.2%Mexico 8.12 40.7% 19.89 29.9%Peru 6.06 30.4% 15.27 23.0%

19501952

19541956

19581960

19621964

19661968

19701972

19741976

19781980

19821984

19861988

19901992

19941996

19982000

20022004

20062008

20100

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Capital Productivity

Brazil France South Korea United States

Midterm Exam

• Thursday, October 15, 2015, 2:00-4:00, LTG• Location: Lecture Theater G• Bring writing materials and calculator.• Coverage: Material (through Tuesday,

October, 13, 2015).• Semi-open book: Bring 1 A4 size piece of

paper with handwritten notes on both sides.

19761977

19781979

19801981

19821983

19841985

19861987

19881989

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

20102011

20122013

25.00%

30.00%

35.00%

40.00%

45.00%

50.00%

China Capital Productivity