Macroeconomics

Measuring Economy

Rayees Ahmad Sheikh

30-09-2024
 Title of the
Presentation

Agenda

• Measuring GDP/National Income

• Three Methods of Measuring GDP

•Problems in Measuring National

Income

• Two Important Identities

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 Introduction to
Macroeconomics

Course Outline
Introducti Measuring
on Economy

Economy in Short Run

Stabilisation Policies
Goods Money IS-LM
Monetary Policy
Market Market Model
Fiscal Policy
Economy in Long Run Run
Aggregate Demand and
Phillips Curve
Supply

Open Economy in Short and Long Run

Extensions of IS-LM
Extensions of IS- International
in
LM in Adjustments and
Mobility of Goods
Mobility of Capital Interdependence

Budget, Public Debt, and Inflation

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 Measuring Economy

Gross Domestic Product

(GDP)
•GDP is a measure of Output of an economy

•GDP is the value of all final goods and

services produced in within a given period.

Note: GDP includes only current production

and so does not count the resale of items.

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 Measuring Economy

Three methods of measuring GDP

• Production Method: Measure the value-added

(sale price less cost of raw materials) summed
across all firms

• Income Method: Labour income (wages/salary)

+ Capital Income (interest, dividends) + Land
income (rent) + Entrepreneur’s income (Profit)
+ Government Income (taxes)

• Expenditure Method: Spending by consumers

(C) + Spending by businesses (I) + Spending by
govt (G) + Spending by foreign sector (NX)
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 Measuring Economy

Production Method

Add up value of all output in the economy,

P1Q1 + P2Q2 + ……………. + PnQn

In other words, market value of all final goods

and services produced within economy in a
given year.

Catch to definition : How do we know

whether a good is a final good or an
intermediate good?
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 Measuring Economy

Income Method

Labour income (wages/salary)

Capital income (interest, dividend)
Land income (rent)
Entrepreneur’s income (profit)
Government income (taxes)

GDP = Labor inc + Capital inc + Land inc +

Entre inc + Taxes

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 Measuring Economy

Expenditure Method

Output is made up of four components:

•Consumption spending by households (C)

•Investment spending by firms (I)

•Government spending (G)

•Foreign demand for our net exports (NX)

Y = C + I + G + (X – M)
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 Measuring Economy

Consumption (C)

• Consumption = purchases of goods and

services by the household (individuals)
sector

•includes durables (ex. Cars/ACs/)

•non-durables (ex. Food)
•services (ex. Haircut, Tourism)

Doesn’t include Housing

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 Measuring Economy

Consumption as % share of GDP in India

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 Measuring Economy

Investment (I)

Sum of durables, non-durables and services

purchased domestically by BUSINESSES

Business & Residential structures, Capital

equipment and Inventory Investment

What is not : Land & Stocks purchase

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 Measuring Economy

India : Investment (GFCF) as a %

of GDP

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 Measuring Economy

Government (G)
• Government purchases of goods and services
include items such as national defense expenditures,
costs of road paving by state and local governments,
and salaries of government employees

•Government also makes transfer payments =

payments made to people without their providing a
current service in exchange
Ex. Social security, unemployment benefits

•Transfer payments are NOT included in GDP since

not a part of current production
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 Measuring Economy

India – Government Spending % of GDP

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 Measuring Economy

Net Exports (NX)

• Accounts for domestic purchases of

foreign goods (imports) and foreign
purchases of domestic
• goods (exports) >> NX = Exports –
Imports

•Subtract imports from GDP since

accounting for domestic production

•NX can be >, <, or = 0

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 Measuring Economy

Export India – % of GDP

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 Measuring Economy

Imports India – % of GDP

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 Measuring Economy

Gross National Product

• Gross national product (GNP) is an

estimate of the total value of all the final
products and services turned out in a given
period by the means of production owned by
a country's residents.

• GNP = GDP +/- NFIFA

•Net Factor Income from abroad

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 Measuring Economy

Goss Vs. Net Domestic Product

•GDP is the value of a country's total output

of goods and services

•Net domestic product (NDP) is equal to

GDP minus depreciation.
- Capital wears out, or depreciates, while it
is being used to produce output.

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 Measuring Economy

Real Vs. Nominal GDP

•Real GDP is the value of a country's total

output of goods and services adjusted for
inflation or deflation.

•Nominal GDP is given in current prices,

without adjustment for inflation.

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 Measuring Economy

Food for Thought

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 Measuring Economy

Per Capita GDP

• Gross Domestic Product (GDP) per

capita shows a country's GDP divided by its
total population.

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 Measuring Economy

Food for Thought

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 Measuring Economy

Per Capita GDP

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 Measuring Economy

PPP –Purchasing Power

Parity
• PPP is price relatives, which show the
ratio of the prices in national currencies of
the same good or service in different
countries.

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 Measuring Economy

Burgernomics

The Economist Big Mac Index is a

comparative tool that facilitates the
comparison of the purchasing power parity
between two countries using the price of a
McDonald's Big Mac burger in the
respective countries in their legal tender.

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 Measuring Economy

Burgernomics

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 Measuring Economy

Problems of GDP Measurement

•There are major criticisms of the GDP measure:

•Omits non-market goods and services

•Ex. Work of stay-at-home mothers and fathers not

included in GDP

•No accounting for “bads” such as crime and

pollution

•Despite these drawbacks, GDP is still considered

one of the best economic indicators
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 Measuring Economy

GDP Measurement

• Place each of the following transactions in

one of the four components of expenditures:
consumption, investment, government
purchases, and net exports.

a. Tata sells a Safari to the Indian Army.

b. Tata sells a Safari to Reliance Industries.
c. Tata sells a Safari to Japanese Person.
d. Tata sells a Safari to a Indian person.
e. Tata makes a Safari to be sold next year.
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 Measuring Economy

GDP Measurement
•Patidar Farms
> Wages paid to employees = Rs. 15,000
> Taxes paid to government = Rs. 5,000
>Revenue received from sale = Rs. 35,000
>Potatoes sold to public = Rs. 10,000
> Potatoes sold to Balaji Wafers = Rs. 25,000

• Balaji Wafers
Wages paid to employees = Rs. 10,000
Taxes paid = Rs. 2,000
Potatoes purchased from Patidar Farms = Rs.
25,000
Revenue received from sale = Rs. 40,000
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 Measuring Economy

GDP Measurement
Production Method:
Value added
= (Sales – Intermediate goods)PF + (Sales – Intermediate
goods)Balaji
= Rs. 35,000 + Rs. (40,000 – 25,000)
= Rs. 50,000

Income Method:
Cost
= (Wages + Profits + Taxes)pf + (Wages + Profits +
Taxes)Balaji
= Rs. (15,000 + 15,000 + 5,000) + Rs. (10,000 +
2,000 + 3,000)
= Rs. 50,000 31
 Measuring Economy

GDP Measurement

Expenditure Method:
Y = C + I + G + (X – M)
= C1 + C2
= Rs. 10,000 + Rs. 40,000
= Rs. 50,000

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 Measuring Economy

Saving and Income Identity

Closed economy with no Government &
external sector
Y C  I

Households can do only two things income:

Consume and Save
Y C  S

  I Y C
C   S
demand income

I Y  C S
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 Measuring Economy

Adding G and NX

• Add government and the foreign sector

YD = Y + TR -TA
• Disposable (after-tax) income, YD, is what
consumers split between C and S
YD = C + S

YD – TR + TA = C + I + G + NX

C+ S –TR + TA = C + I + G + NX

S - I = (G + TR –TA) + NX 34
 Measuring Economy

Some Identities: Adding G and NX

S  I (G  TR  TA )  NX
 
TradeSurplus
BudgetDeficit

• Excess of savings over investment (S > I) in

the private sector is equal to the government
budget deficit plus the trade surplus

• Any sector that spends more than it receives in

income has to borrow to pay for the excess
spending

Private sector can dispose of savings in three

ways:
1.Make loans to the government 35
2. Private sector can lend to foreigners
 Measuring Economy

Understanding Identities – In
figures

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 Measuring Economy

Inflation and Prices

• Price Indexes measure the cost of a fixed ‘basket’ of goods
over time

• Inflation rate = % change in P, where P is the general price

level

Inflation = [P(t+1) - P(t)] / P(t)

• Prominent Price Indices

GDP Deflator
Value of Current Output at Current Prices / Value of Current
Output at Base Year Prices

CPI (Consumer Price Index) and WPI (Wholesale Price Index) 37

 Measuring Economy

Measures of Inflation
• GDP Deflator is the only measure of inflation
that takes into account the inflation in all the
good and services produced in the economy.

• Consumer Price Index is a weighted sum of

prices of a standard basket of goods and services
consumed by a typical domestic consumer.

•WPI measures overall change in producer prices

over time.

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 Measuring Economy

CPI vs. WPI

Wholesale Price Index Consumer Price Index
Index available on weekly basis with short Index constructed on a monthly basis
time lag of 2 weeks with lag of 1 month
Base year is 2012; earlier 04-05 Base year is 2012; 2016

Primary Products 22.02 Food 46.19

Food Articles 15.40 Pan, Supari, Tobacco
Minerals 0.49 & Intoxicants 2.27
Fuel Group 14.23 Fuel & light 6.43
Coal Mining 1.75
Electricity 5.48
Manufactured Products 63.75 Housing 15.27
Food Products 11.54 Clothing, Bedding &
Textiles 9.80 footwear 6.58
Chemicals 11.93 Miscellaneous 23.26
Basic Metals 8.34
Machinery & machine tools 8.36
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 Measuring Economy

Unemployment

• Frictional Unemployment

• Structural Unemployment

• Cyclical Unemployment

• Seasonal Unemployment

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Data Sources in India

• Government of India, Ministry of Statistics and

programme Implementation Web site: http://mospi.gov.in/

•CSO: The Central Statistical Organisation is responsible

for coordination of statistical activities in the country, and
evolving and maintaining statistical standards.
•Data: National Income Accounts, CPI, WPI etc.

•NSSO- The National Sample Survey (NSS), initiated in the

year 1950, is a nation-wide, large-scale, continuous survey
operation conducted in the form of successive rounds.
Surveys on consumption, employment

•RBI - https://cimsdbie.rbi.org.in/#/dbie/home
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Take Home Question
1. Consider Following Information:
GDP 6000
Gross Investment 800
Net Investment 200
Consumption 4000
Government Purchases 1100
Government Budget 30
Surplus

Find:
a. NDP
b. Next Exports
c. Disposable Personal Income
d. Personal Savings
e. Government taxes minus
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transfers
Thank You