Lesson 2: Magnitudes in current prices,

prices indexes and indicators of volume

1. Some useful tools to present economic information
2. Real growth vs nominal growth
3. Measuring inflation
4. Using deflators

Bibliography
- The paper provided in “miaulario”
- For section 1:
- http://pages.uoregon.edu/rgp/PPPM613/class8a.htm
- http://econtutorials.com/blog/what-are-index-numbers/
- RATIOS, PROPORTIONS, PERCENTAGES, AND RATES (in miaulario)
- For section 2 and 4: Understanding National Accounts (Chapters 1 and 2)
- For section 3: Consumer Price Indices Technical Manual – 2014. Office for National Statistics,
http://webarchive.nationalarchives.gov.uk/20150907025923/http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices---technical-manual/index.html

1
1. Some useful tools to present economic information:
ratios, proportions...

●
Ratios: ratios are one number expressed in relation to another by dividing
the one number by the other
●
Proportions: proportions are special kinds of ratios where the
denominator is the total while the numerator is a subpart of the total.
This tells us what part the numerator is of the total.
●
Percentages are just a form of the proportion based on 100.To calculate a
percentage we simply multiply a proportion by 100

2
 1. Some useful tools to present economic information:
ratios, proportions...

Sector VA Proportion Percentage

An Example
(Navarra 2018) Agriculture 755 0,037 3,72
Industry 5497 0,289 28,92
Construction 1099 0,062 6,16
Market services 8104 0,407 40,73
Non-Market services 2900 0,125 12,51

Net taxes on products 1927 0,087 8,71

GDP Navarre 20282 1,000 100,00

755 Proportion 755 Percentage 755

Ratio (razón) ∗100
(Proporción)
20282 (porcentaje) 20282
5497

3
1. Some useful tools to present economic information:
growth rate...

Growth rate

Percentage Growth rate

Annual Percentage Growth rate

Growth rate in a given period of t years

(simple) Average growth rate Growth rate in t years / t

Compound average growth rate

Tasa de crecimiento acumulativa

4
1. Some useful tools to present economic information:
growth rate...

For a long period the differences could be very large

For example 35 years
GDP0 = 1000 GDP35 = 1700 ==> Average = [(1700-1000)/1000]*100/35=2%

But if a country grows at 2% accumulatively

(1000*1,02^35)=2000

Compound average growth rate:[(1700/1000)(1/35)-1]*100=1’53%

GDP0 = 1000 Country A: grows 2% over the value of the 1st year during 35 years: 1700
GDP0 = 1000 Country B: grows 2 % accumulatively during 35 years: 2000
5
1. Some useful tools to present economic information:
growth rate...

The rationale behind the compound average growth rate

6
Exercise

Calculate
Navarra GDP
- Inter-annual growth rate
2008 18870
-Growth rate in the period
2009 18315

2010 18510
-Simple average growth rate
2011 18818 - Compound growth rate
2012 18380

2013 18075

2014 18288
2015 18821

7
1. Some useful tools to present economic information:
index numbers

●
We want to know how certain variables like prices, production, etc.
have changed over time and space. And it is not very useful to work
with the original values because they are too large or because we need
to aggregate them.
We choose a reference point (time, place)
●

●
We calculate index numbers for one variable (simple index) or for more than one
(composite index) in different years (months..), or in different regions (countries..)
●
We are going to study
●
Price index
●
Quantity index
●
Aggregate index (Value index)
●
Simple and composite

8
1. Some useful tools to present economic information:
simple index numbers

1. Simple index numbers

Price Movie ticket Base 2014 Base 2015 Base 2016
2014 7 ,0 0 1 0 0 ,0 0 9 8 ,5 9 9 7 ,2 2
2015 7 ,1 0 1 0 1 ,4 3 1 0 0 ,0 0 9 8 ,6 1 101.43=(7.1/7)*100
2016 7 ,2 0 1 0 2 ,8 6 1 0 1 ,4 1 1 0 0 ,0 0

Tickets Base 2014 Base 2015 Base 2016

Quantity 2014 1 0 0 .5 0 0 1 0 0 ,0 0 9 7 ,7 6 9 7 ,4 8 100.29=
2015 1 0 2 .8 0 0 1 0 2 ,2 9 1 0 0 ,0 0 9 9 ,7 1 (103100/102.800)*100
2016 1 0 3 .1 0 0 1 0 2 ,5 9 1 0 0 ,2 9 1 0 0 ,0 0

Value tickets Base 2014 Base 2015 Base 2016

Value 2014 703500 1 0 0 ,0 0 9 6 ,3 9 9 4 ,7 7
2015 729880 1 0 3 ,7 5 1 0 0 ,0 0 9 8 ,3 2 94.7=
(703500/742320)*100
2016 742320 1 0 5 ,5 2 1 0 1 ,7 0 1 0 0 ,0 0

9
1. Some useful tools to present economic information:
composite index numbers

- An index number that is computed from two or more variables is

called a composite index number. For example, the “IBEX35” and
consumer price index numbers are composite index numbers
Price increase
Tickets:
expenses Price Price index Price index (7,1-7)/7 *100
=1,43%
2014 2014 2015 No weight weighted
Tickets 703500 7,00 7,10 102,38 101,89
Price increase
Pop corn 225000 3 3,1 Pop corn:
Total 928500 (3,1-3)/3 *100
=3,33%
[ (7,1 / 7 + 3,1 / 3) / 2 ] *100 [ (7,1 / 7)*(703500 / 928500)
+ (3,1 / 3) (225000 / 928500)] *100

Sum of
10 Weight Tickets: (expenses tickets / total expenses) Weights?
1. Some useful tools to present economic information:
composite index numbers

We could also calculate the increase of volume of goods

/services:
expenses Volume Volume index
2014 2014 2015 No weight weighted
Tickets 703500 100500 102800 104,48 103,40
Pop corn 225000 75000 80000
Total 928500
[ (102800 / 100500 + 80000 / 75000) / 2 ] *100
Volume increase
[ (102800 / 100500)*(703500 / 928500) Tickets:
(102800/100500 -1)*100
+ (80000 / 75000)* (225000 / 928500)] *100 =2,28%

Weight Pop corn: 0,242 (expenses pop / total expenses) Volume increase
Pop:
(80000/75000 -1) *100
11 =6,67%
1. Some useful tools to present economic information:
weights

As we have seen in the example, we can use different weights:

Price 2015 Price 2014
2014 2015 Volume 2014 Volume 2015
Price Volume Value Price Volume Value Value Value
Movie Ticket 7,00 100500 703500 7,10 102800 729880 713550 719600
Pop corn 3 75000 225000 3,1 80000 248000 232500 240000
928500 977880 946050 959600
Weights Weights
Ticket 0,758 Ticket 0,746
Pop corn 0,242 Pop corn 0,254

Weights
Ticket 0,754 0,750
If we use weights of the first year: Pop corn 0,246 0,250
Paasche
Laspeyres Index Quantities
ƩNewP*NewQ / Paasche
ƩNewP*OldQ Prices
Pp 55-56 ƩNewP*NewQ /
UNA If we use a “mix”: ƩOldP*NewQ
Paasche index
12
Exercise

Year 0 Year 1
Volume Price Volume Price
Electricity 120 0,20 160 0,22
Gas 800 0,04 900 0,06

Laspeyres volume index Paasche price index

∑ q t pt =∑ [ q t pt p0 ]=∑ [ q t p 0 pt
]
∑¿ qt p 0 ∑¿ qt p 0 p0 ∑¿ q t p0
❑
p0

13
Calculate price and quantity index, Laspeyres and Paasche (reference year 0)
2. Real growth vs nominal growth

“Economists and journalists have acquired the unfortunate habit

of using the general term “growth” instead of specifying “growth
in real GDP”. A typical sentence is: “growth is 2%” instead of
“growth in real GDP is 2%”. This lack of precision sometimes
results in bizarre terminology, such as “negative growth”, which
is an oxymoron; it would be better to say “a decrease of GDP in
volume”. Incidentally, national accountants prefer the term “GDP
in volume” to “real GDP” because inflation is just as real as
growth.” p. 21-22 UNA

14
2. Real growth vs nominal growth

●
“The A-B-C of macroeconomics consists of distinguishing what
part of the change in national accounts aggregates at current
prices stems from a change in the quantities produced and what
part stems from a change in prices”
GDP at “current prices” (or nominal GDP)
●

GDP in volume (or real GDP)

●

When GDP changes from one period to other, the change is due to
●

Changes in volume: real growth

●

Changes in prices: inflation (deflation)

●

15
2. Real growth vs nominal growth

Volume Price Value

2014 2015 2014 2015 2014 2015
Car 100 102 10000 10500 1000000 1071000
Example: we produce cars. The value of cars produced has increased…
Is 7.1% the “real growth”?
7.1% Nominal growth
No.
Price growth? 5%

Volume (real) growth? 2% 1.071 = 1.02 x 1.05

P 22
16 UNA
2. Real growth vs nominal growth

Volume Price Value

2014 2015 2014 2015 2014 2015
Car 100 102 10000 10500 1000000 1071000

Value 2015 (current prices) Value 2014 x (1 + [growth rate / 100])

1,071,000 1,000,000 x (1 + [7.1 / 100])

1 + [7.1 / 100]= 1.071

And 1.071 = 1.02 x 1.05

Volume Index / 100 Price Index / 100

Value 2015 Value 2014 x (volume index /100)

1,071,000 x (Price index / 100)

1,071,000 / 1,05 Value 2014 x 1,02 = “Real 2015 value”

17
2. Real growth vs nominal growth

●
Deflate: convert “current prices” values in “real” values

GDP at current prices

Real GDP
(GDP at constant prices)

Price Index / 100

●
Price index are used to “deflate”
●
The price index that we use to deflate GDP is the “GDP deflator”:
includes prices of FCE of households and general government, GCF,(X-M)

18
19 UNA p 48-49
20 p. 23 UNA
3. Measuring inflation: CPI and HCPI

●
We need price index to:
●
Deflate GDP, GCF, wages => we will be able to make inter-temporal
comparisons
●
Study the evolution of prices is interesting by itself: the main purpose of the
ECB in to guarantee that inflation will be low. The ECB needs to measure
inflation to achieve this goal.
●
Consumer Price Index: includes only goods and services used and paid by
consumers
●
It is a Laspeyres Price Index:
●
Remember than this index can also be written this way:

21
 3. Measuring inflation: CPI and HCPI

Index for each good or

Weights
service

Weights are calculated with a combination of
-Data fron national acocunts (main aggregates)
-“Encuesta de presupuestos familiares” (Household
Budget Survey):A survey made each quarter to the
households, to find out how they spend (subclasses)
Each month INE takes the prices of
479 articles in 177 municipalities in
some 29,000 establishments:
Every month they are written down
around the 220,000 prices

The classification of goods and services conforms to the harmonized nomenclature of the European Union
Aggregation levels: 12 groups, 43 subgroups, 101 classes and 219 subclasses

22
3. Measuring inflation: CPI and HCPI
Weights CPI Spain

Source: INE
23 https://www.ine.es/dynt3/inebase/index.htm?padre=8439&capsel=8439
https://www.ine.es/dynt3/inebase/es/index.htm?padre=3662&dh=3
3. Measuring inflation: CPI and HCPI

The chained CPI (IPC encadenado)

- Laspeyres Chained
- New weigths every year (Household survey)
- We compare prices ot year t with prices of year t-1, Using the weights of the
Hosusehold Budget Survey year t-1
- We “Chain the index”
The impact of different goods and services in CPI growth:
- Growth rate of CPI is the weighted average of the growth rates of each one of
the items: weight => the same that we use to calculate CPI

24
3. Measuring inflation: CPI and HCPI
An example (base year 1): Chained index
CPI Impact
Weight 1 Weight 2 P1 P2 P3 1 2 3
Food 0,33 0,32 50 53 48
Transport 0,27 0,28 250 260 300
Health 0,21 0,22 100 120 123
Other 0,19 0,18 80 85 93
Total 1 1

Calculate: index for each product, IPC. Which product has contributed more to CPI
increase over the period?

25
3. Measuring inflation: CPI and HCPI

Harmonize Consumer Price Index (HCPI)

Very similar to CPI, but harmonized with all the EU countries

HCPI of the Monetary Union HCPI of the European Union

(HCPIMU, IPCAUM) (HCPIEU, IPCAUE)

There are other indicators, like

“HCPI at constant tax rates”

Core inflation (Inflación subyacente): inflation excluding

food and energy prices, most notably oil and gas, because food and
energy prices fluctuate based on quick-changing emotions of
commodity traders and speculators around the globe rather than the
changes in economic supply and demand

26
3. Measuring inflation: CPI and
HCPI

27 Source: Instituto Nacional de Estadística (nota de prensa IPC diciembre 2023)

https://www.ine.es/dyngs/Prensa/IPC1223.htm?print=1
3. Measuring inflation: CPI and Core Inflation
Growth rate, CPI and core inflation, SPAIN

Source: Instituto Nacional de Estadística (nota de prensa IPC diciembre 2023)

28 https://www.ine.es/dyngs/Prensa/IPC1223.htm?print=1
 -2,0
-1,0
0,0
1,0
2,0
3,0
4,0
5,0
6,0
7,0
8,0
9,0
10,0
11,0
12,0

29
2002M01
2002M06
2002M11
2003M04
2003M09
2004M02
2004M07
2004M12
2005M05
2005M10
2006M03
2006M08
2007M01
2007M06
2007M11
2008M04
2008M09
2009M02
2009M07
2009M12
2010M05
2010M10
2011M03
2011M08
2012M01
2012M06
2012M11
2013M04
Índice general

2013M09
2014M02
2014M07
2014M12
2015M05
2015M10
2016M03
2016M08
2017M01
2017M06
2017M11
2018M04
2018M09
2019M02
2019M07
2019M12
2020M05
2020M10
2021M03
2021M08
2022M01
2022M06
Source: INE https://www.ine.es/dynt3/inebase/es/index.htm?padre=3470&capsel=3466

2022M11
2023M04
2023M09
3. Measuring inflation: CPI and HCPI
Growth rate, HCPI, SPAIN and the MU

Source: Instituto Nacional de Estadística (nota de prensa IPC diciembre 2023)

30 https://www.ine.es/dyngs/Prensa/IPC1223.htm?print=1
3. Measuring inflation: Electricidad, gas, gasolina..
CPI General, Food, Elec, Gas, Com Liq
115,0

105,0

95,0

85,0

75,0

65,0

55,0

45,0

35,0

25,0

15,0

5,0

-5,0

-15,0

-25,0

-35,0

-45,0

Índice general 0451 Electricidad 0452 Gas 0453 Combustibles líquidos 01 Alimentos y bebidas no alcohólicas

31 Source: INE https://www.ine.es/dynt3/inebase/es/index.htm?padre=3470&capsel=3466

 3. Measuring inflation: long term
HICP, 1999=100
155.

150.

145.

140.

135.

130.

125.

120.

115.

110.

105.

100.
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Euro area - 19 (from 2015) Germany Spain

Source: Eurostat,
32 https://ec.europa.eu/eurostat/databrowser/view/prc_hicp_aind/default/table?lang=en
4. Using deflators

IF we want to compare:
- Real wages from this year with those of previous years
- Real GDP
- Real investment Deflators

We have to use price index to deflate values in current prices

“nominal wages” / “Real wages” (prices
(CPI/100) Base year)
GDP deflator: (GDP current prices / GDP constant prices)*100
“Nominal GDP” / “Real GDP” (prices base year)
(GDP Deflator/100) GDP at “constant prices”

∑ q t pt =∑ [ q t pt p0 ]=∑ [ q t p 0 pt
GDP Deflator: Paasche price index: ∑¿ qt p 0 ∑¿ qt p 0 p0 ∑¿ q t p0
❑
p0
]

33
Conclusion: real GDP growth rate

- What is a “good” growth rate? And a “bad”?

- We can’t give an answer for all countries
- But we can calculate a “potential GDP” using several approaches. According to OCDE
(UNA, pp. 512:
“Potential gross domestic product (GDP) is defined in the OECD Economic Outlook publication as the level of output that
an economy can produce at a constant inflation rate. An economy can temporarily produce more than its potential level of
output but the higher level comes at the cost of rising inflation. Potential output depends on the capital stock, the
potential labour force (which depends on demographic factors and on participation rates), the non-accelerating inflation
rate of unemployment (NAIRU), and the level of labour efficiency.”

- And if real GDP ≈ Potential GDP then a “healthy” real growth rate should keep us close
to potential GDP:
- Growth rate should be determined by increase in labor force (linked to population growth),
net capital increase (linked to net saving rate) and labour efficiency (linked to technology,
human capital...) growth.

34
 Conclusion: real GDP growth rate
- If Potential GDP > Real GDP, there is a positive output gap =>
- There is unemployment
- We can increase growth rate without inflation
- (There is other main cause for inflation: cost-push inflation, like the one we have now in Europe)
- A “healthy” growth rate (non inflationary) can be higher until we reach Potential GDP
- In 2020 (COVID) real GDP was down 11.3% in Spain =>
- In 2021 there was a large + gap: GDP 2021 increased 5.5%
- There are several ways to estimate “potential GDP”. But just for now (and for Spain):
- The average GR of real (volume) GDP in Spain since 1996 is 2.27%
- For next years, still with large positive gap, real GDP GR should be >> 2.3%
- When the gap is close to 0, we should increase “labour efficiency” in order keep growing more than 2%
and get closer to EU leader countries

35
Spain: real GDP vs nominal GDP
GDP Spain 1995=100
350
2022: 292,3

300 ACGR: 4,05%

250

200

150

2022: 166,6
100

ACGR: 1,91%
50

0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

GDP current prices (nominal GDP) GDP volume (real GDP)

36
Source: https://www.ine.es/dyngs/INEbase/en/operacion.htm?c=Estadistica_C&cid=1254736164439&menu=ultiDatos&idp=1254735576581
Important ratios

- Some ratios have a great relevance in the economic analysis

- Activity rate and (un)employment rate: EPA
- Activity rate: (employed+unemployed) / population over 16
(employed+unemployed) = active population
- Unemployment rate: Unemployed /active population
- Public deficit/surplus and public debt rates:
- (Net Lending/Borrowing) / GDP
- General government debt / GDP

37
38 Source: INE https://www.ine.es/jaxiT3/Tabla.htm?t=4247