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MACROECONOMIC MEASURES WHAT THEY ARE & HOW TO USE THEM

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.

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MACROECONOMIC MEASURES WHAT THEY ARE & HOW TO USE THEM

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  1. MACROECONOMIC MEASURESWHAT THEY ARE & HOW TO USE THEM Chapter 21, 22, 26

  2. The Age of Macro Link

  3. Outline • GDP • Comparing GDP across Time • Inflation • Real Interest Rates • Balance of Payments

  4. Gross Domestic Product

  5. 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. + + + + =?

  6. All goods sold in an economy share a common unit of measure: the price at which they are sold. Gross Domestic Product (GDP) Sum up the value of goods • 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

  7. 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

  8. Three Methods for Calculating GDP • Expenditure Method - The sum of the domestic spending on final goods (less domestic demand satisfied by imports). • Production Method - The value added created in all the sectors of the economy. • Income Method – The Wage, Rent, Interest and Profit Income generated by the domestic economy.

  9. 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)

  10. Expenditure Approach GDP = Consumption + Investment + Exports – Imports Purchase of Final goods by end users are divided into two categories: • Consumption: • Personal Consumption Expenditure (durables, nondurables & services); • Government Consumption Expenditure (nondurables & services); • Investment: • Gross Fixed Capital Formation (structures & equipment both public & private) • Change in Inventories

  11. Some Asian Expenditure Shares: 2010 People’s Republic of China Source: United Nations Main Aggregates Database Source: United Nations Main Aggregates Database

  12. Reconciliation GDP = Consumption + Investment + Exports – Imports Exports – Imports = Net Exports <> 0 Hong Kong Census and Statistics

  13. Hong Kong Census and Statistics

  14. Hong Kong Census and Statistics

  15. Hong Kong Census and Statistics

  16. Hong Kong Census and Statistics

  17. 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.

  18. HK: VA by Sector Source: United Nations Main Aggregates Database

  19. Table 035

  20. Income Approach to Measuring GDP Value Added distributed as income to Employees, Owner/Creditors, & Gov’t Compensation of employees (Wages, Benefits) Net operating surplus (Profits, Net Interest, Rental Income) Taxes on Production 20

  21. Comparing GDP levels across time

  22. 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.

  23. 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.

  24. Calculating Real GDP • Divide GDP into k = 1….K categories. • Survey dollar value of goods produced at time t for each of k categories • Survey average prices of goods of type k relative to a base year. • Divide value of each good by the relative price

  25. Solved ProblemReal GDP: 2010 (2009 Base Year)

  26. Real GDP vs. Nominal GDP Source: United Nations Main Aggregates Database

  27. Inflation

  28. 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).

  29. 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).

  30. Hong Kong’s History of Prices

  31. Q: What is Inflation?A: The Growth Rate of Price Level • What is the CPI inflation rate in Candyland in 2010 using 2009 as the base year?

  32. Inflation: prices are growing • Disinflation: inflation is slowing down but still positive • Deflation: inflation is negative and prices are actually dropping. Inflation Disinflation Deflation http://www.imfstatistics.org/imf/

  33. 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 – Adjusting for Inflation

  34. 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 2013 : HK$242,500 /m2 • in June 1982: HK$15,078/m2 • How much did an apartment cost back then when expressed in today’s dollars?

  35. Housing Price: Hong Kong Island • The Hong Kong CPI (2010=100) was 32.3 in June 1982 and 115.2 in June 2013. • Calculate: • In purchasing power terms, luxury housing in 2013 is almost 5 times as expensive as in 1982! Link Hong Kong Department of Census and Statistics.

  36. Adjusting Interest Rates For INFLATION

  37. 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

  38. 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.

  39. The real interest rate on the loan is defined as the future goods received relative to current goods foregone Real Interest Rate

  40. Looking Backward HKMA, Hong Kong Department of Census and Statistics.

  41. Looking Forward • Borrowing and lending decisions must be based on forecast of future inflation: Ex Ante Real Rate Forecasts • Ibond Yields • Consensus Forecasts • Central Bank Forecasts

  42. Balance OF PAYMENTS

  43. National Income vs. Domestic Income • Net Factor Income [NFI] is income earned on overseas work or investments minus income generated domestically but paid to foreigners.

  44. Source: United Nations Main Aggregates Database

  45. 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?

  46. NFI Across Countries Source: United Nations Main Aggregates Database

  47. Current Account Balance Census and Statistics Department • Current Account: NX +NFI • NFI = Primary Income (Overseas Wage & Investment Income) + Secondary Income (Transfers)

  48. Link Global Imbalances World Current Account equals zero!

  49. 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

  50. 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

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