s2m national income accounting 2

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1 Measuring Macroeconomic Activities 1. National Output(Q) or Income (Y) or Expenditure(E) 2. Price Levels(P) or Inflation (П) 3. Unemployment (U) and Poverty National Accounting(NA) Measuring Price (P) Changes: Deflator, WPI, CPI, PPI P

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Page 1: S2M National Income Accounting 2

1

Measuring Macroeconomic Activities

1. National Output(Q) or Income (Y) or Expenditure(E)

2. Price Levels(P) or Inflation (П)

3. Unemployment (U) and Poverty

National Accounting(NA)

Measuring Price (P) Changes:

Deflator, WPI, CPI, PPI

P

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Price Data

Bulk Transactions Small Transaction

WPI CPI

• Central Statistical Organization(CSO)• National Sample Surveys Organization (NSSO)• Director of Economics and Statistics (DES)• Labor Bureau (LB)• National Buildings Organization (NBO)• Indian Bureau of Mines (IBM)• Reserve Banks of India (RBI)• Director General of Commercial Intelligence and Statistics (DGCIS)• Office of the Coal Controller and Textile Commissioner (OCC&TC) etc.

Implicit

Deflator

Measuring Prices

Measuring Price Changes: Indices• GDP Deflator

– Implicit Price Index. Calculated from Nominal and Real GDP• WPI (676 + commodiries with 2004‐05 base year) started since 1902  

– AC  All commodities (by Office of Economic Advisor , Ministry of Industry)

– PA  Primary articles.» FA  Food articles.» NF  Non‐food articles.» Minerals.

– FPL& L i.e.   Fuel, power, light & lubricants – MP  Manufactured products

• CPI (260+ items with 2004‐05 base year ) started since 1970s– UNME  Urban non‐manual employees(by CSO) 180 + items, 310 towns , 1114 

price quotations ( urban middle class people)– IW  Industrial workers: 78 selected urban center, (workers in 7 sectors)– AL  Agricultural labors: 23 to 38 items,  Shops and outlets of 603 villages : 

(Workers in Agl)– RL Rural Labors:, 1181 Villages( workers working in Agl+ Nonagl sector))

• Producer Price Index (PPI)  ( Dr Abhijit Sen Suggestions)– Includes only manufacturing goods 

(Labor Bureau)

260 + items, 160,000 retail price quotes obtain each month16,545 outlets and selected open markets 

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India Uses Laspeyres Method

Basic Concepts:

Index No: It is a statistical device (measure) to express average changes in related variables.

Price Index:Measures relative changes in average prices over time.  

Measuring Price Changes: Indices

Average Prices Quantity Sold

1992 1994 % Change 1992 1994

Food Rs 12 Rs 14 17 % 4 5

Housing 9 10 11 % 3 3

Fun 4 5 25 % 3 4

Machines 20 20 0 % 2 2

CPI: - Machines not included. - Base year (1992) quantities (market basket) rather than base year prices used.

Calculations: Laspeyer’s Method

CPI = (Σptq0/ Σp0q0 )x 100Σp0q0=

= 1992 Quantities x 1992 Prices= 4 • Rs.12 + 3 • Rs.9 + 3 • Rs.4= Rs.48 + Rs.27 + Rs.12= Rs.87

Σptq0

= 1992 Quantities x 1994 Prices= 4 • Rs.14 + 3 • Rs.10 + 3 • Rs.5= Rs.56 + Rs.30 + Rs.15= Rs.101

CPI for 1994 is = Σptq0/ Σp0q0 x 100 = (101 / 87) = 116.09 => 1.16%

Measuring Price Changes: CPI in India

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Measuring Price Changes: Chain Based Method

Existing (1981-82) seriesTotal: 447 commoditiesi) Primary article: 93( Food 44, non food 28

and minerals 21)ii) Fuel, power etc: 20iii) Manufactured Items: 334

Weights are assigned in proportion to their share in the total value of transaction (output)in the economy.

Existing (1993-94) seriesTotal: 435 commoditiesi) Primary article: 98( Food 98, non food 25

and minerals 19)ii) Fuel, power etc: 19iii) Manufactured Items: 318

Measuring Price Changes: WPI Weights

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Weights are assigned in proportion to their share in the total value of transaction (output)in the economy.

Major Group / Group

Weight No. of items No. of Quotations

2004-05 1993-94 2004-05 1993-94 2004-05 1993-94

All Commodities 100.00 100.00 676 435 5482 1918

I Primary Articles 20.12 22.02 102 98 579 455

II Fuel & Power 14.91 14.23 19 19 72 72

III Manufactured Products

64.97 63.75 555 318 48311391

Measuring Price Changes: WPI Weights

Weights are assigned as the ratio of total consumption expenditure of estimated number of families allocated to a center in the state to the sum of all such expenditures over all centers in the country

Measuring Price Changes: CPI Weights

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• Inflation () is the rate of changes in price levels:

• Inflation () rate:

1

1

t t

t

P P

P

1001

1

t

tt

P

PP

GDP Deflator Inflation:

Inflation from 2005 to 2006:

= (Deflator 2006 –Deflator 2005) • 100Deflator 2005

= (171.9 - 100.0) • 100 = 71.9%100.0

CPI Inflation:

Inflation from 2005 to 2006:

= (CPI2006 – CPI 2005) • 100CPI 2005

= (121.9 - 100.0) • 100 = 21.9%100.0

Measuring Price Changes: Inflation Rate

Measuring Price Changes: Inflation Rate

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CPI vs. GDP deflator

In each scenario, determine the effects on the CPI and the GDP deflator.

A. Tata Tea raises the price of Tea.

B. Mahindra and Mahindra raises the price of the industrial tractors it manufactures at its Nagpur factory.

C. Armani raises the price of the Italian jeans it sells in India.

Answers

A. TATA Tea raises the price of Tea.

The CPI and GDP deflator both rise.

B. Mahindra and Mahindra raises the price of the industrial tractors it manufactures at its Nagpur factory.

The GDP deflator rises, the CPI does not.

C. Armani raises the price of the Italian jeans it sells in India.

The CPI rises, the GDP deflator does not.

Page 8: S2M National Income Accounting 2

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Inflation Rate in India

Correcting Variables for Inflation:Real vs. Nominal Interest Rates

Example: Deposit Rs.1000 for one year.

Nominal interest rate is 9%. 

During that year, inflation is 3.5%.

Real interest rate 

= Nominal interest rate – Inflation

=  9.0%  – 3.5%   =   5.5%

The purchasing power of the Rs1000 deposit  has grown 5.5%.

Interest rates reported in the media are nominal rates

r = i- actual inflation rate r = i- expected inflation rate

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U

Measurement of Employment (E) and Unemployment (U)

NSSO collect data on unemployment rate - once in 5 yrs.

The Labor Market: Employment Vs Unemployment

• An Unemployed person is  on who is – Not working, willing and able to work– Actively seeking a job and willing to accept a job at the prevailing market wage

Not counted as unemployed• Unable or unwilling to work, underage (<16yrs), college students, home makers, child care 

person, retired persons , crooks and thugs, • persons active in the military( not part of lab force, so does not appear in unemployment 

rate).

Measurement: ( Household Survey)a. Total labor force (L)

= Employed persons (E)+  Unemployed persons(U)

b. Civilian non institutional population (16 and over)=  Total labor force (L) +  Not in  labor force

Unemployment Rate (u) in percent

=  Unemployed (U)    * 100

Total Labor Force(L)

Participation Rate (percent)

=  Total Labor Force * 100

Civilian Population

The employment–population ratio.

100population age Working

Employment

Discouraged workers:

People who are available for work but have notlooked for a job during the previous four weeksbecause they believe no jobs are available forthem. They are not counted as employed norunemployed.

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Labor Market :Types of Unemployment

• Frictional Unemployment: where people become unemployed betweenjobs. Due to imperfect information in labor market.

• Structural Unemployment: caused by changes to the structure ofindustry in the economy – e.g. the decline of the coal, ironsteel industries.

• Seasonal Unemployment ‐ unemployment arises due to seasonalchanges in aggregate economic activity. e.g. holiday resorts

• Cyclical Unemployment ‐Unemployment that results from a decline inaggregate economic activity

• Disguised Unemployment: mostly in agriculture, more workers in place ofactual requirement.

• Demand Deficient Unemployment – where AD is less than AS

• Technological Unemployment – caused where people are put out ofwork by changes in technology

• Real Wage or Classical Unemployment – caused by wage rates beingheld above market clearing levels

Labor Market :Types of Unemployment

•Natural Rate of Unemployment: consistent withfrictional, structural, and seasonalunemployment.

•Full Employment Output: total output of economywhen unemployment is at the natural rate.During the business cycle total outputfluctuates around the full employment levelleading to changes in the cyclicalunemployment.

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The Labor Market: Unemployment Rate in India

The Labor Market: Unemployment Rate in India

For the Year 2012‐13 

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The Labor Market: Unemployment in India

•Important Data Source for Unemployment

a.Population Census

b.National Sample Survey Organization ( NSSO)

c.Employment Market Information Program

d.Employment Exchange Statistic

e.Economic Census

f.Ministry of Labor

•Government Initiative Program for Unemployment's

a.Prime Minister Employment Generation Program ( PMEGP)

b.Mahatma Gandhi National Rural Employment Generation Guarantee Act ( MGNREGA)

c.Sampoorna Grameen Rozgar Scheme (SGRY)

d.Employment Assurance Scheme (EAS)

e.Jawahar Rozgar Yojana (JRF)

f.Training for Rural Youth for Self Employment (TRYSEM)

The Labor Market: Unemployment in India

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Measurement of

Poverty and Inequality

Meaning and Measurement of Poverty

Poverty is multidimensional, so no unique definition of poverty.

A poor person is on who is 

• Deprivation in income, illiteracy, malnutrition, mortality,morbidity, access to water and sanitation, vulnerability toeconomic shocks.

• Income deprivation is linked in many cases to other forms ofdeprivation, but do not always move together with others.

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Measurement of Poverty (Percentage of Poor)

Two basic ingredients in measuring poverty:

• 1. Poverty Line: definition of threshold income or consumption level

• 2. Size of Distribution of income or consumption collected by a sample survey representative of the population.

Measurement of Poverty (Percentage of Poor)

1. Poverty Line (PL): Absolute vs. Relative

• Absolute Poverty Line : A situation where individuals donot have access to the basic requirements of life –food, clothing, shelter. It refers to a threshold income(consumption) level defined in absolute terms.Persons below a pre‐defined threshold income arecalled poor.

• Relative Poverty Line: defined in relative terms withreference to level of living of another person; or, inrelation to an income distribution parameter.

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2. Size of Distribution of income or consumption :i.e. minimum level of living necessary for physical and social development of a person.

Estimated as: total consumption expenditure level that meets energy  (calorie) need of an average person. 

•It comprises of both food  and non‐food components of consumption. 

•Difficult to consider minimum non‐food needs entirely on an objective basis

Measurement of Poverty (Percentage of Poor)

NSSO: a person is poor if calorie requirement is <2100 for urban area per month<2400 for rural area per month

Year Rural (Rs) Urban(Rs)1973-74 49 562000-01 329 4542004-05 356 5392011 -12 780 (25/day) 960 (31/day)

•The Figures are monthly per capita consumption expenditure for monthlyrequirement of calorie provided by NSSO on household consumptionexpenditure.

•Updated using an appropriate price index (CPI‐AL for rural India, CPI‐IWfor urban).

•In 2004‐05. More than a quarter of India’s population remain below PL28.3% Rural 25.7% Urban 27.5% TotalAbsolute no.: 302 million in 2004‐05

An Example of Size Distribution of Consumption Expenditure

Rural(Rs.)Urban (Rs.) Yr15 20 2004-0527 33 2011-12 32 47 2011-12

Tendulkar committee(2009)

C Rangarajan committee(2014)

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An Example of Size Distribution of Consumption Expenditure

MPCE %Population

0-150 3.2150-200 4.0200-250 6.5250-300 8.6300-340 10.0 (half of 10% are below poverty line 320)340-400 11.3400-450 8.6450-500 9.2500-550 9.3550-650 11.4650-800 8.9800-1000 5.0Above 1000 4.0All classes 100.0

MPCE: Monthly Per Capita Consumption Expenditure ( for calorie requiremnet)

Poverty Line: Rs. 320 per capita per monthHCR= 3.2+4.0+6.5+8.6+5.0 = 27.3%

Poverty Measures

n

mHCR

)(11

m

i

i

z

yznPG

2

1

1

m

i

i

z

yznSPG

m= no. of poor population, n = total population,z= poverty line, yi =income of i-th person

1. Head Count Ratio (HCR):

2.Poverty Gap (PG):

3. Squared Poverty Gap (SPG):

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Alternative Poverty Measures

• Head Count Ratio (HCR): proportion of total population thatfalls below poverty threshold income or expenditure. Basedon either national PL or dollar‐a‐day PL.

• Poverty Gap Index (PGI): unlike HCR, it gives us a sense ofhow poor the poor are. It is equivalent to income gap belowPL per head of total population, and expressed as apercentage of the poverty line.

• Squared Poverty Gap index (SPG): Adds the dimension ofinequality among the poor to the poverty gap index. For agiven value of the PGI, population with greater dispersion ofincome among poor indicates a higher value for the SPG.

Measures of Income Inequalities

• Lorenz Curve

• Gini Coefficient

Page 18: S2M National Income Accounting 2

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35

Measures of Income Inequalities:The Lorenz Curve

36

Measures of Income Inequalities:The Gini Coefficient

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Measures of Income Inequalities:The Kuznets Curve

Kuznets Curve:A Kuznetscurve is the graphicalrepresentation of SimonKuznets' hypothesis that as acountry develops, there is anatural cycle of economicinequality driven by marketforces which at first increasesinequality, and then decreasesit after a certain averageincome is attained.[

References

• N G Mankiw : Macroeconomics (2012 ed) Ch 2.

• Blanchard O: Macroeconomics ( 4th ed) Ch2

• D N Dwivedi : Macroeconomics Theory and Policy 3 ed. Ch 4

• G S Gupta Macroeconomic Theory and Applications, 3editon

• Handout supplied to you

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Thank You All