Macroeconomic

Indicators
National Income Accounting
 Introduction
• Aggregate statistics in national income accounts
• Output typically measured as GDP
“value of all final goods and services produced within
a country over a particular period of time”
• Note: flow vs. stock
• Two definitions:
1. supply side: payments to workers (wages), capital (interest and
dividends)
2. Demand side: total purchases in the economy
 Production (Supply) Side
• Transform inputs into output (GDP)
• Inputs: factors of production; e.g. labor, capital
• Payments to these factors = factor payments

• Production function: mapping inputs to outputs

Y = f(K, L, …)
• “Output is a function of labor and capital”
• Production side and long-run growth
Circular-Flow diagram
 Aggregate Demand
• Measuring GDP: Expenditure Approach
• Total (aggregate) demand for domestic output:
1. Consumption spending by households (C)
2. Investment spending by firms (I)
3. Government spending (G)
4. Foreign demand for our net exports (NX) (= EX - IM)

→ The fundamental national income accounting identity:

 Consumption
• Purchases of goods and services by HHs
• Spending on durable (ex. Cars), non-durable (ex. Food), and
services (ex. Medical services)
• Consumption is the primary component of demand
 Investment
• Investment: additions to the physical stock of capital
• building machinery, construction of factories, additions to firms
inventories

• Private sector’s adding to the physical stock of capital

• Household’s building up of inventories considered
consumption
• New home constructions considered part of I, not C

• Gross investment included in GDP measure

• Gross investment = net investment plus depreciation
 Government Expenditures
• Government’s balance sheet
T = G + TR
• Taxation: source of money
• G: public consumption of goods and services
• national defense expenditures
• salaries of government employees

• TR: public transfers

• payments to HHs with no current service in exchange
• Ex. Social security, unemployment benefits
• NOT included in GDP, since no current production!
 Net Exports
NX = Exports – Imports
•Imports: domestic purchases of foreign goods
• not domestically demanded!
•Exports: foreign purchases of domestic goods
•trade deficit: negative NX
 Components of GDP in India
120

100

80 Consumption (60)
% of GDP

60

Investment (33)
40

20 Gov. Exp. (15)

-20
Net Exports (-8)

Source: RBI HOSIE 2013-14.

GDP Components of the U.S.
Structure of the Indian Economy
70.00

60.00

50.00

% 40.00
of
GDP 30.00 agriculture
industry
20.00 services

10.00

0.00

Year
Source: RBI HOSIE 2013-14.
 A Simple Economy
• Assumption 1 : national income equals GDP
• Assumption 2: A closed economy with no public sector

• HH’s view: only two things can do with income:

• national income:

• Rearrange to get:

• investment = savings!
 Extending Analysis (1)
• Fundamental identity:

• disposable income (YD):

• also, we know:
TR = transfer payments
TA = taxes

rearrange and substitute:

 Extending Analysis (2)
• and

• Implies,

• Since ,

• Eventually,
 Government Budget and Trade

G + TR – TA: government budget deficit

If then
 A Closer Look at GDP
• GDP = value of final goods and services currently produced within a
country over a period of time
• Final goods and services → NO DOUBLE COUNTING
• full price of a car
• Not tires bought by the manufacturer for the car (intermediate goods)

• Goods and services currently produced

• excludes transactions involving used goods
• construction of new homes vs. the sale of existing homes

• Goods and services produced within a country, regardless of

the ownership/nationality of the producing firm
• sale of a car produced by a Japanese car manufacturer located in the
U.S. is in the U.S. GDP
Problems of GDP Measurement
• Three major critiques:
1. Omits non-market goods and services
• Work of stay-at-home mothers and fathers not included in GDP
2. No accounting for “bads” such as crime and pollution
• crime and corruption detrimental to society
• but no subtraction from GDP to account for it
3. No correction for quality improvements
• technological improvements beneficial to the economy
• but nothing added to GDP to account for them

→ Despite these drawbacks, GDP still one of the best

economic indicators
 Nominal vs. Real GDP
Values measured in current/constant units of currency

vs.
 More Points
• Calculated by Central Statistical Office (CSO), Ministry of Statistics
and Programme Implementation (MOSPI)
• Quarterly and Annually!

• GDP vs. GNP

• GNP = GDP + Net Factor Income from Abroad (NFIA)
• Gross vs. Net
• Net Domestic Product (NDP)= GDP - Depreciation
Price Index
 Inflation and Prices
• Inflation, Π, is the growth rate of (any) price index:

• Or,

• If Π > 0, prices are increasing over time → inflation

• If Π < 0, prices are decreasing over time → deflation

• Disinflation: reduction in inflation

• Aggregate price indexes: CPI, PPI, and GDP deflator
 Consumer Price Index (CPI)
• CPI: cost of buying a fixed basket of goods and
services
• representative of the purchases of consumers
• cost of living for the average household

• Main price index to compute inflation

• Used by the RBI for “inflation targeting” under the
Monetary Policy framework
• limited to a specific and fixed basket of goods and
services (used only by households)
 Producer Price Index (PPI)
• cost of buying a fixed basket of goods and services
representative of a firm
• Captures the cost of production for a typical firm
• Basket includes raw materials and semi-finished goods

• PPI precedes CPI in the production and distribution process

• PPI signals changes to come in the CPI
• Over long periods of time, the two measures yield similar trends

• PPI not used in India

 Wholesale Price Index (WPI)
• Wholesale prices of (many) commodities
• used to be main measure of inflation
• Now, CPI being used in India’s monetary policy framework
• WPI covers goods while CPI covers goods & services
• Published by Ministry of Commerce & Industry, not MOSPI

Weight No. of Items

Major Groups
2004-05 base year 2011-12 base year

Primary Articles 20.118 22.618

Fuel and Power 14.91 13.152

Manufactured Products 64.972 64.23

All Commodities 100 100

 GDP Deflator
• Ratio of nominal GDP (NGDP) to real GDP (RGDP) with fixed
prices
 

• usually normalize base year prices to 100

• GDP deflator involves all goods and services

• More comprehensive and flexible than CPI

• If NGDP = $6.25 and RGDP = $3.50,

then GDP deflator is $6.25/$3.50 = 1.79
prices have increased by 79% since the base year
 GDP deflator vs. CPI

•Unlike CPI, weights of goods in GDP deflator are not

fixed over time
• How?
• GDP deflator is a Paasche index where the basket of
goods (quantities) allowed to change over time.
• CPI is based on a fixed basket is taken over time
(Laspeyres index)
 GDP deflator in India
GDP GDP
  (Rs. Crores) (Rs. Crores)        

Current Rupee Constant (2011-12) GDP deflator Change in GDP

Year New Series prices New series Nominal GDP/ Real GDP (2011-12=100)   deflator (%)

1.00
2011-12 8,736,039 8,736,329 100.00    

1.08
2012-13 9,946,636 9,213,017 107.97 2012-13 8.0
1.15
2013-14 11,236,635 9,801,370 114.65 2013-14 6.2
1.18
2014-15 12,445,128 10,536,984 118.11 2014-15 3.0
1.20
2015-16 13,675,331 11,381,002 120.16 2015-16 1.7
1.25
2016-17 15,183,709 12,189,854 124.56 2016-17 3.7
1.29
2017-18 16,773,145 13,010,843 128.92 2017-18 3.5
 CPI Inflation in India
India: Consumer Price Index
(% change, year-on-year)
40.0
Oil Shock
35.0
30.0
25.0
20.0
15.0
10.0
%

5.0
0.0
-5.0
-10.0
-15.0
19 17 15 14 12 10 08 06 04 03 01 99 97 95 93 92 90 88 86 84 82 81 79 77 75 73 71 70 68 66 64 62 60
/ 20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /19 /19 /19 /19 /19 /19 /19 /19 /19 /19 /19 /19 /19 /19 /19 /19 /19 /19 /19 /19 /19 /19
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
/0 /0 /0 /0 /0 / 0 /0 /0 /0 /0 /0 /0 /0 /0 /0 /0 /0 /0 /0 /0 / 0 /0 /0 /0 /0 /0 /0 / 0 /0 /0 /0 /0 /0
07 09 11 01 03 05 07 09 11 01 03 05 07 09 11 01 03 05 07 09 11 01 03 05 07 09 11 01 03 05 07 09 11
Inflation and Output in India
Unemployment
 Unemployment
• fraction of workforce that is
1. out of work, and
2. looking for a job, or expecting a recall from a layoff
• Optimal unemployment rate linked to the potential level of output for a given
economy
 Labor Force
• Labor Force = Employed + Unemployed
• Employed: working in ‘gainful economic activity’
• Unemployed: Looking for, but unable to find work
• LF Participation Rate = Labor Force/ Population
• PLFS (Periodic Labour Force Survey)
• Annual Reports since 2017-18 and,
• Quarterly Estimates
Unemployment Rate

Source: Annual Report of the PLFS 2017-18.

Labor Force Participation Rates
Productivity and Labor Force
Productivity measure: Output per worker

Sector % of GDP % of Workforce

Agriculture 20 50
Industry 20 15
Services 60 35
Nominal Rates
 Interest Rates
• Interest rate = rate of payment on a loan (or other
investment)
• over and above the principle repayment
• Usually, in terms of an annual percentage
• Cost of borrowing money OR benefit of lending money

• Nominal interest rate (R): return on an investment in current Rs

• Real interest rate (r): return on an investment, adjusted for inflation
Real Interest Rate
 Exchange Rate
• Each country has its own currency
• U.S. dollars, Canadian dollars, Euro, Indian Rupees, …

• Exchange rate = price of a foreign currency

• $1 U.S. is worth 74.22 INR.

• Two exchange rate regimes:

1.Floating → currency prices determined by supply and demand
2.Fixed → price of a currency is fixed (by the government)
• A Bermuda dollar is always worth one U.S. dollar
• $1 U.S. has been pegged at 3.75 SAR.
 Schools of Thought
• Classical Economics
• Prices adjust to clear markets; small role for govt. intervention
• Neo-Classical economics: Math + General Equlibrium
• Marxist Economics
• Crises occur due to fluctuations in rate of profit
• Theory on class struggles and stages of development of economic
systems
• Austrian School | Chicago School | Monetarism
• Free-Markets
• Keynesianism
• Role of govt. in demand management
 Policy Approach
• Classical Models
• Markets clear demand and supply via prices
• Only short-term disruptions, economy will get back to full-employmen t

• New Classical Models

• Price expectations play an important role
• Long-run vs. short-run response to gov. interventions

• Keynesian (and new) Keynesian Models

• Short- (and long-) term benefits of gov. interventions
• Sticky Wages, imperfect competition, …

• Real Business Cycle Theory

• Productivity shocks lead to deviations from trend
• Dynamic Stochastic General Equilibrium (DSGE) models