Measuring
Economic
Performance
01-May-15
01-Dec-14
01-Jul-14
01-Feb-14
01-Sep-13
01-Apr-13
01-Nov-12
01-Jun-12
01-Jan-12
01-Aug-11
01-Mar-11
01-Oct-10
01-May-10
01-Dec-09
01-Jul-09
01-Feb-09
01-Sep-08
01-Apr-08
01-Nov-07
01-Jun-07
01-Jan-07
01-Aug-06
01-Mar-06
01-Oct-05
01-May-05
01-Dec-04
01-Jul-04
01-Feb-04
01-Sep-03
01-Apr-03
01-Nov-02
01-Jun-02
01-Jan-02
01-Aug-01
01-Mar-01
01-Oct-00
01-May-00
01-Dec-99
Real GDP: YoY
16
14
12
10
8
6
4
2
0
Readings
• Lequiller François and Derek Blades, 2006, Under
standing NATIONAL ACCOUNTS, Organization for
Economic Cooperation and Development, Chapter 1
and 2. Link
• Bureau of Economic Analysis “Introduction to the
National Income and Product Accounts” Link
Value vs. Volume
• Consider the sales of a hypothetical single good
k (for example, k = apples).
• Dollar Value of sales (called vk) is the product of
the volume of goods sold (called qk) measured in
the goods natural units (i.e. bushels of apples)
and the dollar price per good (called pk)
vk = pk * qk
• Growth of value can be decomposed into growth
of volume and growth in prices.
(1  g )  (1  g )(1  g )
vk
pk
qk
Economic Growth
• Rate of Increase of Production.
• If Qt is a measure of production, the simple net
growth rate is
qt  qt 1
q
gt 
qt 1
qt
• Implying 1  g 
qt 1
q
t
What is Economic Growth in a world of
many goods?
• We need to combine the many goods produced or
consumed in an economy into one measure.
+
+
+
+
=?
(Simple) Average Growth
• If there are K goods then we could calculate the
average growth rate of each type of good.
g
q AVERAGE
g  g  g  ...  g

K
q1
q2
q3
qK
• Problem: Taking the simple average of the
growth of different types of goods may give a
distorted picture of average growth, since
different goods are of different importance in
the economy.
Weighted Average Growth
• Instead we could construct a weighted average
g

qWGTD _ AVGE
w  g  w  g  w  g  ...  w  g
1
q1
2
q2
q3
3
K
where the weights add to 1.
w  w  w  ...  w  1
1
2
3
K
• An even weight is wk =1/K but we could adjust the
weights to be indicate the importance of each
good in the economy.
g
qWGTD _ AVGE
K
 w g
k
k 1
qk
K
k
w
 1
k 1
qK
Measuring the Economy
• National accounts are the core statistical
measure of the economy.
• Accounts cover many features of the economy
but organizing concept is
Gross Domestic Product (GDP)
All goods sold in an economy
share a common unit of measure:
the price at which they are sold.
Sum up
the value
of goods
Gross Domestic Product (GDP)
• “GDP combines in a single figure, and with no double
counting, all the output (or production) carried out by all
the firms, non-profit institutions, government bodies and
households in a given country during a given period,
regardless of the type of goods and services produced,
provided that the production takes place within the
country’s economic territory.” L & B p. 15
GDP is a measure of production
• Value added at production establishment i
Value Addedi =Sales +  inventories
-raw materials, semi-processed inputs and energy costs.
• GDP is the sum of VA across establishments.
GDP  iValue Addedi
Link
• Accounts are created by national statistical
agencies
• UN System of National Accounts is the
“internationally agreed standard set of
recommendations” used by most countries.
• Annual data for many countries available at
Link
the UN
Production Approach
Sub-aggregates
• Divide production establishments into sectors
usually along the line of
– Primary: Natural Resources (Agriculture, Forestry,
Fishing, Mining, Quarrying)
– Secondary: Goods production (Manufacturing,
Construction, Utilities)
– Tertiary: Intangibles Production
by
Sector
Hong Kong Census and Statistics
Other Activities (ISIC J-P)
Transport, storage and
communication (ISIC I)
Wholesale, retail trade,
restaurants and hotels (ISIC
G-H)
Construction (ISIC F)
Added
Manufacturing (ISIC D)
Value
Mining & Utilities
Kong:
Agriculture, hunting, forestry,
fishing (ISIC A-B)
Hong
60
50
40
30
20
10
0
2010
1970
Expenditure Approach
•
Purchase of Final goods by end users are
divided into two categories:
1. Consumption: Household expenditure (durables,
nondurables & services); government
(nondurables & services) expenditure; nonprofit
expenditures
2. Investment: Inventories, Fixed Investment
(equipment, structures)
Some Asian Expenditure Shares: 2010
People’s Republic of China
1
90
0.9
80
0.8
70
0.7
60
0.6
50
0.5
40
0.4
30
0.3
20
0.2
10
0.1
0
1
0
2
Japan
3
4
5
Republic of Korea
6
7
8
9
-10
Household consumption expenditure
General government final consumption expenditure
Gross fixed capital formation
Changes in inventories
Source: United Nations Main Aggregates Database
10
Share of Value
• We could measure total value for the economy.
• Divide our economy into K categories of goods
indexed by k = 1,…, K.
• Value of sales of good k, vk. GDP is represented
as the sum of value across goods
GDPt  Vt  v  v  v ...  v
1
t
2
t
3
t
K
t
• The weight of k in the economy could be defined
as k v k
which add up to 1 across sectors.
w 
K
V
k
Vt   vt
k 1
•
Using GDP to Measure Economic
Performance
Growth Rates of Products and Ratios
Zt
X tYt
X t Yt
Z t  X tYt 


 (1  gtX )(1  gtY )
Z t 1 X t 1Yt 1 X t 1 Yt 1
1  gtZ  1  gtX  gtY  gtY gtX  gtZ  gtX  gtY
Xt
Zt 
Xt
Zt
Yt



Yt
Z t 1 X t 1
Yt 1
Xt
X t 1
Yt

Yt 1
(1  gtX )
(1  gtY )
(1  gtX )  (1  gtZ )(1  gtY )  1  gtZ  gtY  gtY gtZ  gtZ  gtX  gtY
Share of Value
• We could measure total value for the economy.
• Divide our economy into K categories of goods
indexed by k = 1,…, K.
• Value of sales of good k, vk. GDP is represented
as the sum of value across goods
GDPt  Vt  v  v  v ...  v
1
t
2
t
3
t
K
t
• The weight of k in the economy could be defined
as k v k
which add up to 1 across sectors.
w 
K
V
Vt   v
k 1
k
t
Volume Growth
• Define as a weight
k
t 1
w
k
k
t 1 t 1
p q

Vt 1
• By construction, the weights add up to one, so
volume growth is a weighted average of the
growth of production of each type of good
g  w g  w g  w g ....  w g
Q
t
1
q1
t 1 t
K
2
q2
t 1 t
 w g
k 1
k
qk
t 1 t
3
q3
t 1 t
K
qk
t 1 t
Aggregate Growth
• Macroeconomic aggregates such as GDP and
its sub-totals are the sum of values of sales (or
purchases) from different firms.
Vt   vi   pi  qi
i
i
• We also decompose the growth of the
aggregates into growth in prices (inflation) and
growth in volume (output).
(1  g )  (1  g )(1  g )
V
t
P
t
Q
t
How statistical agencies calculate
volume growth.
1. Construct representative market basket of each
category of goods, k. For example, if k were
apples, the market basket could consist of a
certain number of Red apples, Green apples, Fuji
apples depending on how many of each of these
are purchased.
2. Sample goods of type k at time t and at time t-1
to assess the price level of the market basket at
each time period.
k
k
pt , pt 1
Building Blocks for Volume Growth
Value and Inflation Vectors
k
t
3. For every type of good at time t, measure v
and construct an inflation vector representing
the growth rate of prices. p k
k
p
t
k  1  gt
pt 1
4. Convert the dollars spent on good k into their
purchasing power measured at time t-1 prices.
vtk
k

p
t 1 
k
pt
vtk
k
t
k
t 1
p
p
• Conceptually, if we think of value of good k as
the product of price and quantity vk = pk*qk
we can think of value divided by the inflation
vector as the quantity of goods produced at
time t measured at the value in terms of the
previous period prices.
k
t
k
t
k k
t t
k
t
v
p q
k
k
k
k
 pt 1 
 pt 1   pt 1qt
p
p
Volume Growth≡ g tQ
5. Sum the inflation adjusted values across the
types of goods and divide by value in
Q
previous period
1  gt 
v 
1
t
ptk1
1
t
p
v 
2
t
pt21
2
t
p
v 
3
t
pt31
3
t
p
 ....  v 
K
t
ptK1
K
t
p
Vt 1
K
1  gtQ 
k
v
t
k 1
ptk1
ptk
Vt 1
Volume Growth cont.
• Conceptually, the numerator of volume growth
is the sum of goods produced at time t valued
at the price prevailing at time t-1 while the
denominator is the sum of goods produced at
time t-1 valued at the price prevailing at time t1. The yardstick of value, dollar prices in time
t-1 prices, are the same in the numerator and
denominator.
1
1
2
2
3
3
K
K
p
q

p
q

p
q

....

p
q
t 1 t
t 1 t
t 1 t
t 1 t
1  gtQ 
1
1
2
2
3
3
K
K
Vt 1  pt 1qt 1  pt 1qt 1  pt 1qt 1  ....  pt 1qt 1
Volume Growth cont.
• Conceptually, we can also think net volume
growth as a weighted average of the growth
rate of quantities of each type of good.
p q  p q  p q  ....  p q
g 
1
K
K
Vt 1  p q  p q  p q  ....  pt 1qt 1
1
1
t 1 t
1
1
t 1 t 1
Q
t
2
2
3
3
t 1 t
t 1 t
2
2
3
3
t 1 t 1
t 1 t 1
K
K
t 1 t
p q  p q  p q  ....  p q
Vt 1


Vt 1
Vt 1
1
1
t 1 t
2
2
t 1 t
3
3
t 1 t
K
K
t 1 t
p q  p q  p q  ....  p q  Vt 1
Vt 1
1
1
t 1 t
2
2
t 1 t
3
3
t 1 t
K
K
t 1 t
• We can rewrite the numerator as
gtQ 
1
1
2
2
K
K
1
1
2
2
K
K
p
q

p
q

....

p
q

p
q

p
q

....

p
q
 t 1 t t 1 t
t 1 t   t 1 t 1
t 1 t 1
t 1 t 1
• Collect terms
Vt 1
1
1
1
2
2
2
K
K
K
p
(
q

q
)

p
(
q

q
)

....

p
(
q

q
Q
t 1
t
t 1
t 1
t
t 1
t 1
t
t 1 )
gt 
Vt 1
• Rewrite
gtQ 
1
1
2
2
K
K
(
q

q
)
q

q
q

q
pt11qt11 t 1 t 1  pt21qt21 ( t 2 t 1 )  ....  ptK1qtK1 ( t K t 1 )
qt 1
qt 1
qt 1
Vt 1
• Note that g
by Vt-1 .
q
t
k
(q  q )
and divide through

k
qt 1
k
t
k
t 1
1
1
2
2
K
K
1
2
p
q
p
q
p
q
Q
q
q
qK
t 1 t 1
t 1 t 1
t 1 t 1
gt 
gt 
gt  .... 
gt
Vt 1
Vt 1
Vt 1
• Define as a weight
k
t 1
w
k
k
t 1 t 1
p q

Vt 1
• By construction, the weights add up to one, so
volume growth is a weighted average of the
growth of production of each type of good
g  w g  w g  w g ....  w g
Q
t
1
q1
t 1 t
2
q2
t 1 t
3
q3
t 1 t
K
qk
t 1 t
Volume Levels
•
To compare the level of aggregate
quantities at different points in time, total
up the growth that appears in between
periods.
Q
1. Calculate the growth rateg t for all periods
using the prices from the immediately
previous periods to adjust current values.
2. Choose a reference period, ref, preferably in
a recent period and set a constant price
series equal to value in that period
QREF  VREF
Chained Index
3. Define the constant price series recursively in
all periods using the equation
Qt  (1  g )  Qt 1
Q
t
The relationship between the levels of the chain volume
index at any two points t and t+T is the product of the
growth between the two points. QREF T  QREF 
Q
Q
Q
Q
(1  g REF
)

(1

g
)

(1

g
)

....

(1

g
1
REF  2
REF  3
REF T )
QREF
QREF T

Q
Q
Q
Q
(1  g REF
)

(1

g
)

(1

g
)

....

(1

g
1
REF  2
REF 3
REF T 1 )
Comparing GDP across Countries
We want to compare output in two countries
though those are measured in different currencies.
Market Basket Index?
• Construct an international market basket of
goods produced and purchased around the
world. For country j, PPPj could be the relative
price of the market basket relative to price of
the market basket in US$.
• Problem: Judging the cost of living by the cost
of the international market basket may not be
fair if customers in the local market can buy
the types of goods which are cheaper at home.
Link
• Major project to compare prices internationally
implemented by the World Bank with the help of
UN and national statistical agencies.
• ICP has been implemented by UN Statistical
Office since 1968.
PPP’s
1. Divide expenditures into k = 1,..,K (in 2005, K
= 155) “basic heading” categories of goods.
2. All j = 1,..J countries (in 2005, J = 146) report
total expenditure in domestic currency of all
k
categories v .
j
ICP Handbook
PPP’s cont.
3. Sample prices of representative goods from
each category in each country.
4. Construct average of those prices (relative to
“anchor” economy) for each country j basic
heading type of good k .
p
k
j
p
k
ANC
Note: Measured in # of j country Currency units per
anchor country currency units. Example. If Japan = j and
anchor is USA, and 1 kg. rice is 400 yen in Japan and $2
k
in USA :
pJPN
p
k
ANC
 200
PPP in Anchor Currency.
4. Define quantity of good of type k valued
q 
k
j
v
k
j
p
k
j
5. Calculate price of j’s market basket in j’s
prices relative to price of j’s market basket in
anchor country prices.
v1j  v 2j  ...  v Kj
PPPj j: AC $ 
v1j
1
j
p
p1AC

v 2j
p
2
j
 ... 
v Kj
p 2j
2
p AC
Numerator in j currency, denominator in AC currency
2
p AC
• Conceptually PPP is the cost of the goods
purchased by consumers in their country relative
to the cost of those same goods in anchor country
terms.
PPPj
j: AC $
1

p q  p q  ...  p q
p
AC $
j
PPP
1
ANC
1 1
j j
1
j
q  p
2
j
2
ANC
2
j
K
j
 q  ...  p
2
j
K
j
K
ANC
q
K
j
1
2
K
p
p
p
2
K
ANC
ANC
 w1j ANC

w

...

w
j
j
1
2
K
pj
pj
pj
,......, wnj 
v nj
Vj
• We could also calculate relative price of anchor
countries market basket.
j: AC $
AC
PPP

1 1
j AC
1
AC
pq
1
AC
p
q
pq
p
2
j
2
ANC
2
AC
q
 ...  p q
K
j
2
AC
 ...  p
K
AC
K
AC
q
• Index number theory suggest Fisher Ideal index
(i.e. geometric average of PPPACj:AC $and PPP
represent the differences in the cost of living).
j: AC $
j
$
j: AC $
j: AC $
PPPIntlj: AC

PPP

PPP
$
AC
j
K
AC
2011
Price level ratio of PPP conversion factor
Country Name
to market exchange rate
China
0.542527
Hong Kong SAR, China 0.701644
Indonesia
0.411219
India
0.314063
Japan
1.346427
Korea, Rep.
0.771083
Lao PDR
0.307315
Myanmar
43.16115
Philippines
0.412201
Singapore
0.708778
Thailand
0.405696
PPP conversion factor
(LCU per international $)
3.505536
5.461593
3606.566
15.10943
107.4543
854.5857
2467.753
234.974
17.85372
0.891484
12.37038
Large Variations in Labor per Person
(www.ggdc.net)
Hours per Worker 2001
Taiwan
South Korea
Singapore
Hong Kong
Japan
USA
EU
0
500
1,000
1,500
2,000
2,500
3,000
Variation in Labor Force Participaton
Employment as a share of Population
52.00%
50.00%
48.00%
46.00%
44.00%
42.00%
40.00%
38.00%
Europe
U.S.A
Japan
Hong Kong
Singapore South Korea
Taiwan
Pre-Industrial Revolution
Source: Angus Madisson, Measuring the Chinese Economy
GDP per Capita
1200
1000
1990 US$
800
China
600
Europe
400
200
0
50AD
960AD
1280
1400
1820
Main Differences in Countries are Due
to Variation in Labor Productivity
GDP per Worker
50000
45000
40000
35000
30000
25000
20000
15000
10000
5000
Th
ai
la
nd
Ta
iw
an
ng
ap
or
e
Si
Ph
illi
pp
in
es
al
ay
sia
M
Ko
re
a
In
do
ne
sia
Ho
ng
Ko
ng
0
Now, China is calculating GDP based on economic activity of each quarter
to make the data "more accurate in measuring the seasonal economic
activity and more sensitive in capturing information on short-term
fluctuations", the NBS said.
Previously, China's quarterly GDP data, in terms of value and growth rates,
was derived from cumulated figures rather than economic activity of that
particular quarter, the bureau said.
The new methodology - in line with that of major developed countries will pave the way for China to adopt the International Monetary Fund's
Special Data Dissemination Standard (SDDS) in calculating GDP, it said.
Link
Labor Share of Income
Link
Determinants of Income
1600
1400
Hours per Capita
1200
1000
800
600
400
200
0
0
20
40
60
80
GDP per Capita, 1000's of US$
100
120
140
160
Determinants of Income
100.00
90.00
80.00
Labor Productivity
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
0
20,000
40,000
60,000
GDP per Capita
80,000
100,000
120,000
Productivity Catch Up: Europe
Source: Groningen Growth & Development Center
U.S.A
% of
1950 USA
% of
2003 USA
Growth
Rate
12.00 100.0%
33.97 100.0%
2.00%
France
5.63
46.9%
37.75
111.1%
3.46%
Germany
4.36
36.3%
30.01
88.3%
3.95%
UK
7.49
62.4%
28.01
82.5%
2.91%
Spain
2.60
21.7%
22.21
65.4%
4.94%
1990 US$, Average Output per Hour (Y/L)
Productivity Catch Up:
Latin America
Source: Groningen Growth & Development Center
1950
U.S.A
12.00
% of
2003
USA
100.0% 33.97
% of
Growth
USA
Rate
100.0% 2.00%
Argentina
6.16
51.4%
10.57
31.1%
1.04%
Brazil
2.48
20.7%
7.81
23.0%
2.21%
Chili
4.66
38.9%
14.07
41.4%
2.12%
Mexico
3.56
29.7%
10.24
30.1%
2.03%
Productivity Catch Up: East Asia
Source: Groningen Growth & Development Center
1950
% of USA 2003
% of USA Growth
Rate
U.S.A
12.00
100.0%
33.97
100.0%
2.00%
Japan
2.30
19.2%
24.78
73.0%
4.57%
1973
% of USA 2003
% of USA
Hong
Kong
7.49
35.0%
22.28
65.6%
4.74%
Korea
3.64
17.0%
14.25
42.0%
5.93%
Singapore 6.80
31.8%
19.63
57.8%
4.61%
Taiwan
20.4%
18.77
55.2%
6.33%
4.37
y1951
% of USA y2011
% of USA
Argentina
2.592284
15.1% 19.29067
35.3%
Australia
13.4734
1.646719
5.803535
6.578401
78.6%
9.6%
33.9%
38.4%
38.31929
9.128079
14.40455
49.28606
70.2%
16.7%
26.4%
90.2%
49.18272
90.1%
28.55739
25.5% 40.41155
12.1% 38.14028
39.8% 14.68958
52.3%
74.0%
69.8%
26.9%
Singapore
34.86622
63.8%
South Korea
26.84044
49.1%
39.9666
73.2%
100.0% 54.61435
100.0%
Brazil
Chile
France
Germany
Hong Kong
Italy
Japan
Mexico
4.366204
2.06587
6.828484
United Kingdom
9.541419
United States
17.14322
55.7%
Labor Productivity per Hour
2014 US$
Country
1950.00
2014.00
% of USA
France
Germany
Italy
United Kingdom
8.64
6.57
8.22
12.18
43.3%
33.0%
41.2%
61.1%
63.97
63.44
50.41
49.66
% of USA
96.2%
95.4%
75.8%
74.7%
Canada
United States
16.07
19.94
80.6%
100.0%
51.17
66.47
77.0%
100.0%
Australia
New Zealand
14.15
15.59
71.0%
78.2%
53.35
39.03
80.3%
58.7%
Labor Productivity per Hour
2014 US$
Economy
1950.00
2014.00
% of USA
Hong Kong
Japan
Singapore
South Korea
Taiwan
Argentina
Brazil
Chile
Mexico
Peru
3.29
3.24
7.81
1.74
1.48
16.5%
16.2%
39.2%
8.7%
7.4%
47.16
42.06
60.42
33.67
43.27
% of USA
71.0%
63.3%
90.9%
50.7%
65.1%
10.45
4.70
6.30
8.12
6.06
52.4%
23.6%
31.6%
40.7%
30.4%
22.21
16.94
27.38
19.89
15.27
33.4%
25.5%
41.2%
29.9%
23.0%
Capital Productivity
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
Brazil
France
South Korea
United States
Midterm Exam
•
•
•
•
Thursday, October 15, 2015, 2:00-4:00, LTG
Location: Lecture Theater G
Bring writing materials and calculator.
Coverage: Material (through Tuesday,
October, 13, 2015).
• Semi-open book: Bring 1 A4 size piece of
paper with handwritten notes on both sides.
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
China Capital Productivity
50.00%
45.00%
40.00%
35.00%
30.00%
25.00%