National Income and Business

Cycles
Shyam Sreekumaran Nair
Institute of Management Technology Nagpur
GDP and GNP
Gross Domestic Product: Market value of final goods and
services newly produced within a nations borders during a
fixed period of time
Gross National Product: Market value of final goods and services
newly produced by domestically owned factors of production
during a fixed period of time

Source: Macroeconomics, Abel et al., seventh edition
Three approaches
Product approach: the amount of output produced
Income approach: the incomes generated by production
Expenditure approach: the amount of spending by purchasers
Any output produced (product approach) is purchased by
someone (expenditure approach) and results in income to
someone (income approach)


Challenges and solutions
Population size and GDP per capita income
GDP expressed in different currencies converting it into a
common currency ($ or )
Price level varies across countries purchasing power parity
GDP of India
Current Prices
: $ 1.84 trillion
GDP Per Capita
Current Prices
: $ 1491
GDP PPP: $ 4. 68 trillion
GDP Per Capita PPP: $ 3829

Source: IMF Database 2012. IMF staff estimates in bold.




Business Cycles
Economic activity never runs along a straight line but traces a
fluctuating wave with varying amplitude and duration. The
economic variables exhibiting these cycles may be,
macroeconomic, such as GDP, IIP, agricultural output,
consumer or wholesale price levels or international trade
The fluctuation of economic activity around the long term
growth path. A cycle involves a period of above trend
growth of output (recovery and prosperity) and a period of
below trend stagnation or decline (contraction or
recession)
A fluctuation in the level of economic activity (usually proxied
by national income) which forms a regular pattern, with an
expansion of activity followed by a contraction succeeded by
further expansion. Such cycles occur about the SECULAR or
long run trend path of output
Phases of Business Cycles
Expansionary path Contractionary path
Peak Trough
Recovery (reflation)
Expansion (inflation)
Slowdown (disinflation)
Recession (deflation)
Depression

IMF version
Recession negative growth rate in two subsequent quarters
in a year
Slowdown decline in growth rate in two subsequent
quarters in a year, while, the rate of growth remained positive
Identification of Business Cycles using
economic indicators
Leading indicators: like consumer expectations, stock prices,
money supply, raw material prices etc, hint at likely economic
scenario 12 15 months later
Coincident indicators: like real GDP, IIP etc, hint at indicators
which change at the same time as aggregate economic
activity
Lagging indicators: like interest rate, outstanding loans etc, lag
behind the turning points in aggregate economic activity

Index of Industrial Production
*
Better than GDP to monitor industrial growth
Appears every month, albeit in arrears by two month
Comprises data from three major sectors weighted to give a
composite number
Manufacturing weighted at 75.5%, mining and quarrying
14.3% and electricity 10.3%
Computed by Central Statistical Organisation
Base Year 2004-05=100

*
Sodhi et al., A robust and forward looking industrial production
indicator, EPW, Nov 30, 2013
Trends in IIP (Base 2004-05=100)
Weight Index
05-06 06-07 07-08 08-09 09-10 10-11 11-12
General Index 1000 108.6 122.6 141.7 145.2 152.9 165.5 170.2
Mining and
Quarrying
141.57 102.3 107.5 112.5 115.4 124.5 131 128.4
Manufacturing 755.27 110.3 126.8 150.1 153.8 161.3 175.6 180.8
Electricity 103.16 105.2 112.8 120 123.3 130.8 138 149.3