MACROECONOMIC MEASURES
WHAT THEY ARE & HOW TO USE THEM
Chapter 21, 22, 26
The Age of Macro
Link
Outline
• GDP
• Comparing GDP across Time
• Inflation
• Real Interest Rates
• Balance of Payments
Gross Domestic Product
Quantity Aggregates
• To understand the macroeconomy, we need to
measure it.
Chief measure of economy is the level of production: GDP
• We need to combine the many goods produced or
consumed in an economy into one measure.
+
+
+
+
=?
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 is the sum of the value of new, final goods
produced within the domestic borders of an
economy.
Final goods are goods sold to their end-users
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 the UN
Link
Three Methods for Calculating GDP
Expenditure Method - The sum of the
domestic spending on final goods (less
domestic demand satisfied by imports).
2. Production Method - The value added created
in all the sectors of the economy.
3. Income Method – The Wage, Rent, Interest
and Profit Income generated by the domestic
economy.
1.
Income=Expenditure=Value Added
• Value of final good expenditure is equal to
value added at each stage of production.
(Expenditure = Value Added)
• Value Added would be paid to workers,
creditors, or kept as profits.
(Income = Value Added)
Expenditure Approach
GDP = Consumption + Investment + Exports – Imports
Purchase of Final goods by end users are divided into two categories:
Consumption:
A. Personal Consumption Expenditure (durables,
nondurables & services);
B. Government Consumption Expenditure
(nondurables & services);
2. Investment:
A. Gross Domestic Fixed Capital Formation
(structures & equipment both public & private)
B. Change in Inventories
1.
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
Reconciliation
GDP
Exports of goods (f.o.b.)
1,935,195
Private consumption expenditure
3,411,364
Exports of services
1,237,872
Government consumption expenditure
952,336
Imports of goods (f.o.b.)
167,729
Gross domestic fixed capital formation
3,848,200
Imports of services
435,511
438,449
Changes in inventories
Net Export
17,032
GDP = Consumption + Investment + Exports – Imports
Exports – Imports = Net Exports <> 0
Hong Kong Census and Statistics
77,051
Hong Kong Consumer Spending
(by Category) 2011
Food
Durables
Non Durables
Services
13%
12%
53%
22%
Hong Kong Census and Statistics
PCE by Category Hong Kong 2011
Education
2%
Other Services
20%
Food & Non-alcoholic
Beverages
13%
Recreation &
Entertainment
7%
Alcoholic Beverages
1%
Tobacco
1%
Clothing, Footwear & Other
Personal Effects
16%
Rent, Rates, Water &
Housing Maintenance
14%
Transport &
Communications
8%
Medical Care & Health
Expenses
Personal Care
4%
4%
Household Operation
2%
Furniture, Furnishings &
Household Equipment
7%
Fuel & Light
1%
Hong Kong Census and Statistics
GCE by Category 2011
Sales by Non Trading
Govt Dept
10%
Purchases of Goods &
Services
33%
Compensation of
Employees
57%
Hong Kong Census and Statistics
GFCF by Category 2011
Machinery, Equipment and
Computer Software: Public
4%
Building and Construction:
Private
24%
Machinery, Equipment and
Computer Software: :
Private
50%
Building and Construction:
Public
14%
Costs of Ownership
Transfer
8%
Hong Kong Census and Statistics
Production Method
• At the plant level,
Value added = Sales + Change in inventories
- materials, intermediate inputs and energy costs.
• GDP is the sum of VA across establishments.
• The value of a final good is equal to the value
added at each stage of production.
Source: United Nations Main Aggregates Database
Other Activities (ISIC J-P)
Transport, storage and
communication (ISIC I)
Wholesale, retail trade,
restaurants and hotels (ISIC
G-H)
Construction (ISIC F)
Sector
Manufacturing (ISIC D)
by
Mining & Utilities
VA
Agriculture, hunting, forestry,
fishing (ISIC A-B)
HK:
60
50
40
30
20
10
0
2010
1970
Table 035
Economic Activity
Agriculture, fishing, mining and quarrying
HK$ Mn
2011 p
944
Manufacturing
31,095
Electricity, gas and water supply, and waste management
33,336
Construction
64,527
Services
1,771,154
Import/export, wholesale and retail trades
484,338
Import and export trade
N.A.
Wholesale and retail trades
N.A.
Accommodation and food services ^
Transportation, storage, postal and courier services
68,598
119,576
Transportation and storage
N.A.
Postal and courier services
N.A.
Information and communications
63,078
Financing and insurance
314,446
Real estate, professional and business services
213,864
Real estate
N.A.
Professional and business services
N.A.
Public administration, social and personal services
310,752
Ownership of premises
196,502
GDP at basic prices
1,901,056
Taxes on products
69,656
Statistical discrepancy (%) @
-1.8
GDP at current market prices
1,935,195
Income Approach to Measuring GDP
Value Added distributed as income to Employees,
Owner/Creditors, & Gov’t
1. Compensation of employees (Wages, Benefits)
2. Net operating surplus (Profits, Net Interest, Rental
Income)
3. Taxes on Production
Value Added 2010 1.58 Trillion HK$
Compensation of employees
Gross operating surplus
Taxes on production
1%
Value Added
Compensation of employees
Gross operating surplus
Taxes on production
20
1,581,310
828,139
753,171
24,782
47%
52%
Comparing GDP levels across time
• GDP measures the value of the goods produced by
an economy by using the market price of each
good to assign it a value.
• Problem: Prices of goods in terms of money are
changing overtime making comparisons in overall
value difficult.
• Bias: Money prices are growing over time as
money supply grows.
• Solution: Choose a Base Year’s prices as a fixed
yardstick of value for different goods.
Real GDP: Yt
• GDP aka Nominal GDP aka Current
Dollar GDP is the weighted sum of the
number of goods produced using their
current prices as the weight.
• Real GDP aka Constant Dollar GDP aka
GDP adjusted for inflation is the weighted
sum of the number of goods produces
using the Base Year prices as yardsticks.
Calculating Real GDP
• Divide GDP into k = 1….K categories.
• Survey dollar value of goods produced at time t for
each of k categories vtk  Pt k  qtk
Pt k
k
• Survey average prices of goods of type k relative
PBASE
to a base year.
• Divide value of each good by the relative price
k
Base
k
t
P
Yt   k v 
P
k
t
 k P
k
k
Base t
q
Solved Problem
Real GDP: 2010 (2009 Base Year)
2010
P
Kitkat
M&Ms
Nominal GDP
Real GDP
q
2009
P
q
8
150
6
135
10
150
4
135
Real GDP vs. Nominal GDP
HK GDP
$2,000,000,000,000
$1,800,000,000,000
$1,600,000,000,000
$1,400,000,000,000
$1,200,000,000,000
$1,000,000,000,000
$800,000,000,000
$600,000,000,000
$400,000,000,000
$200,000,000,000
$0
Constant 2005 Prices
Current Prices
Source: United Nations Main Aggregates Database
Inflation
Price Indices: Pt
• Two most commonly used price indices are GDP
Deflator and Consumer Price Index (CPI)
• The GDP deflator is the ratio of nominal GDP to Real
GDP (multiplied by 100).
Nominal GDP
P  GDP Deflator 
100
Real GDP
GDP
P
100
Y
Consumer Price Index
• The CPI is the price of a representative market
basket of goods relative to the price of that same
basket during a benchmark/base year (multiplied by
100).
Cost of Market Basket in year t
CPIt 
100
Cost of Market Basket in Base year
140.0
120.0
100.0
80.0
CPI
GDP Deflator
60.0
40.0
20.0
0.0
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005
Hong Kong’s History of Prices
Q: What is Inflation?
A: The Growth Rate of Price Level
Pt  Pt 1
 t %  Inflation Rate 
x100%
Pt 1
•What is the CPI inflation rate in Candyland in
2010 using 2009 as the base year?
• Inflation: prices are growing
• Disinflation: inflation is slowing down but still positive
• Deflation: inflation is negative and prices are actually
dropping.
Hong Kong CPI
Inflation
14
Disinflation
12
10
8
4
Deflation
2
20
08
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
-4
19
86
-2
19
84
0
19
82
%
6
-6
http://www.imfstatistics.org/imf/
Adjusting for Inflation
•
•
•
•
•
We can use price indices to “adjust for
inflation” - converting values measured in
money into values measured in terms
purchasing power of some reference year, r.
Measured in $, observed at time t: Nt
Price level at time t: Pt
Price level in reference year: Pr
Measure adjusted for inflation – N r$
t
N
r$
t
Pr
 Nt 
Pt
Housing Price: Hong Kong Island
• Compare the price of housing in HK average
price of an apartment on HK Island with an area
between 100m2 and 160m2
• in June 2012 : HK$273,767 /m2
• in June 1982: HK$15,078/m2
• How much did an apartment cost back then
when expressed in today’s dollars?
Housing Price: Hong Kong Island
• The Hong Kong CPI (2010=100) was 32.3 in June 1982 and
110.6 in June 2012.
• Calculate:
N
r$
t
CPI r
110.6
 Nt 
 $15,078 
 $51,629.31
CPIt
32.3
• In purchasing power terms, luxury housing in 2012 is more
than 5 times as expensive as in 1982!
Link
Hong Kong Department of Census and
Statistics.
ADJUSTING INTEREST
RATES FOR INFLATION
Interest Rates
• Hong Kong HKMA
• HIBOR
• Exchange Fund Bill &
Note Yields
• Best Lending Rate
• Government Bond Rates
• USD FRED
• LIBOR
• T-Bills
• Prime
• Treasury Constant
Maturity
• Corporate Bonds
Adjusting Interest Rates for Inflation
• Nominal rate represents how much money you
will receive after 1 year for giving up 1 dollar
of money today
• Real rate represents how many goods you can
buy if you give up the opportunity to buy 1
good today.
• Nominal interest rate is money interest rate.
Real interest rate is goods interest rate.
Real Interest Rate
• The real interest rate on the loan is defined as the
future goods received relative to current goods
foregone
$1  i
$1  i
Pt+1
1
1  rt 

$1
Pt+1
Pt
Pt
1  it
1  rt 
 rt  it   t 1
1   t 1
1/1991
7/1991
1/1992
7/1992
1/1993
7/1993
1/1994
7/1994
1/1995
7/1995
1/1996
7/1996
1/1997
7/1997
1/1998
7/1998
1/1999
7/1999
1/2000
7/2000
1/2001
7/2001
1/2002
7/2002
1/2003
7/2003
1/2004
7/2004
1/2005
7/2005
1/2006
7/2006
1/2007
7/2007
1/2008
7/2008
1/2009
7/2009
1/2010
7/2010
1/2011
7/2011
%
Looking Backward
HK Interest Rates
20
15
10
5
0
-5
-10
Ex Post Real 12 Month HIBOR (CPI Adjusted)
12 Month HIBOR
HKMA, Hong Kong Department of Census and Statistics.
Looking Forward
• Borrowing and lending decisions must be
based on forecast of future inflation: Ex Ante
Real Rate
IMF World Economic Outlook
Forecast
Forecasts
• Ibond Yields
• Consensus Forecasts
• Central Bank Forecasts
6
5
Hong Kong SAR
4
%
Korea
3
Singapore
2
Taiwan Province of
China
1
0
2010
2011
2012
2013
2014
BALANCE OF PAYMENTS
National Income vs. Domestic Income
GNI
Gross National Income
GDI
Gross Domestic Income
= income earned by
= income created within
national residents
domestic borders.
GNI = GDI +NFI
• Net Factor Income [NFI] is income earned on overseas
work or investments minus income generated
domestically but paid to foreigners.
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Hong Kong Net Factor Income
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
-1.00%
-2.00%
-3.00%
-4.00%
NFI (% of GDP)
Source: United Nations Main Aggregates Database
Compare Macau and the Philippines GDP or
GNP
• Macau produces a lot of profits paid to
overseas owners of casinos.
• Philippines workers earn a lot of income
overseas.
• Which is larger Philippines’ GDP or
Philippines GNP?
• Does Macau have greater GDP or GNP?
NFI Across Countries
NFI/GDP
2009
Chad
-42.68%
Liberia
-20.14%
Ireland
-16.94%
Cambodia
-15.64%
Angola
-13.95%
Chile
-9.69%
Panama
-8.97%
China: Macao SAR
-6.03%
Australia
-4.65%
UN Main Aggregates
Russian Federation
China, People's Republic of
Brazil
India
United States
-3.23%
-2.04%
-2.04%
-0.13%
0.28%
China: Hong Kong SAR
3.12%
Switzerland
4.15%
Haiti
9.62%
Bangladesh
11.00%
Philippines
14.73%
Bermuda
23.62%
Lesotho
35.17%
Source: United Nations Main Aggregates Database
Current Account
Balance
• Current Account: NX +NFI
Census and Statistics Department
• NFI = Primary Income (Overseas Wage & Investment
Income) + Secondary Income (Transfers)
Current Account (CA) (Hong Kong)
Current Account: Credit (Hong Kong)
Current Account: Debit (Hong Kong)
Goods (Hong Kong)
Goods: Credit (Hong Kong)
Goods: Debit (Hong Kong)
Services (Hong Kong)
Services: Credit (Hong Kong)
Services: Debit (Hong Kong)
Primary Income (PInc) (Hong Kong)
Investment: Credit (Hong Kong)
Investment: Debit (Hong Kong)
Compensation of Employees: Credit (Hong Kong)
Compensation of Employees: Debit (Hong Kong)
Secondary Income (SInc) (Hong Kong)
110,086
5,199,130
-5,089,044
-71,087
3,411,260
-3,482,347
148,138
721,661
-573,523
52,826
1,056,615
-1,002,210
2,737
-4,315
-19,791
Global Imbalances
Link
World Current Account equals zero!
International Capital Flows
• Capital Outflows: domestic acquisition of foreign
assets.
• Capital Inflows: foreign acquisition of domestic assets
Net Capital Outflows = Capital Outflows – Capital Inflows
Money is an asset. Most international financial transaction
are swaps of one asset for another and have zero net effect
on capital flows. Only net trade of foreign assets for goods
or services creates opportunity for net capital flows.
Current Account = Net Capital Outflows
Savings & Current Account
• Gross National Savings: GNS
• GNS = GNI – Consumption (PCE + GCE)
• GNI = GDP + NFI
• GDP = Consumption + Gross Capital Formation + Net
Exports (Exports – Imports)
• GNS – GCF = NX + NFI = Current Account
Capital & Financial Account
• Current Account is gross capital outflows (i.e. national
savings less national investment).
• Capital & Financial Account measures the allocation of
gross inflows.
• Capital Account: Transfer of Real Assets
• Financial Account: Transfer of Financial Assets
• Reserve Assets: Central Bank Holdings of Liquid Foreign Assets
• Non-reserve Assets
• Direct Investment: (Taking Controlling Stakes in Foreign Entities)
• Portfolio Investment: (Stocks, Bonds)
• Financial Derivatives (Futures, Swaps)
• Other (Mostly Bank Loans and Deposits)
Capital &
Financial
Account 2011
Increases in
financial assets,
and decreases in
liabilities should
be shown as
debits.
Decreases in
financial assets,
and increases in
liabilities should
be shown as
credits.
Salient Feature of Balance of Payments
Capital & Financial Account (CFA) (Hong Kong)
Capital Account (Hong Kong)
Financial Account (FA) (Hong Kong)
Financial Non Reserve Assets (Hong Kong)
Direct Investment (DI) (Hong Kong)
-113,242
-2,021
-111,220
-24,437
1,868
Assets (AS) (Hong Kong)
Liabilities (LB) (Hong Kong)
Portfolio Investment (PI) (Hong Kong)
Assets (AS) (Hong Kong)
Liabilities (LB) (Hong Kong)
Financial Derivatives (FD) (Hong Kong)
Assets (Hong Kong)
Liabilities (Hong Kong)
Other investment (OI) (Hong Kong)
Assets (Hong Kong)
Liabilities (Hong Kong)
Reserve Assets (Hong Kong)
Net Errors and Omissions (Hong Kong)
Overall Balance (Hong Kong)
-746,372
748,240
-10,979
-155,818
144,839
20,884
359,707
-338,823
-36,210
-780,960
744,749
-86,783
3,156
86,783
Learning Outcomes
Students should be able to:
• Explain the different methods of calculating GDP
• Calculate simple real aggregates like real GDP.
• Use price indices to calculate inflation rates.
• Adjust nominal series for inflation.
• Define and calculate real ex post and ex ante real interest rates.
• Define the elements of the Balance of Payments Tables