National income

accounting, price indices,

capacity utilisation and
unemployment
Mankiw Chapters 1 and 2 and ppt

Introduction

PGP Macroeconomics 2016

Introduction to Macroeconomics
Why do some countries have high rates of inflation while others
maintain stable prices?
Why do all countries experience recessions and depressions
recurrent periods of falling incomes and rising unemployment?
How can government policy reduce the frequency and severity of
these episodes?
Macroeconomics, the study of the economy as a whole, attempts
to answer these and many related questions.
Mankiw (2009) 7e p3

macroeconomists collect data on incomes, prices, unemployment,

and many other variables from different time periods and different
countries. They then attempt to formulate general theories to explain
these data.
The macroeconomists ability to predict the future course of
economic events is no better than the meteorologists ability to
predict next months weather. But, as you will see, macroeconomists
know quite a lot about how economies work.
Mankiw (2009) 7e p4

PGP Macroeconomics 2016

The 3 main
macroeconomic variables:
time series (historical)
data

PGP Macroeconomics 2016

US Real GDP since 1900

Source
:
Manki
w,
1990
PGP Macroeconomics 2016

India GDP at current and constant

prices
GDP 1950-51
current prices
Rs 104 bn
GDP 1950-51
constant prices
Rs 2,939 bn
GDP 2013-14
current prices
Rs 1,13,551 bn
GDP 2012-13
constant prices
Rs 61,958 bn
Arindam Das-Gupta
Macroeconomics 1
Measuring Macro
Aggregates

Source: Reserve Bank of India, Data Base of the

Indian Economy

Inflation rate in the US Economy

from 1900

Source
:
Manki
w,
1990
PGP Macroeconomics 2016

Arindam Das-Gupta
Macroeconomics 1
Measuring Macro
Aggregates

Source: Reserve Bank of India, Data Base of the

Indian Economy

GDP at market and PPP exchange

rates

Arindam Das-Gupta
Macroeconomics 1
Measuring Macro
Aggregates

Source: Samuelson, et. al.(2010), Economics, 19/e,

Special Indian Edition, New Delhi: Tata McGraw Hill

India: per capita income at constant

prices
1950-51: Rs
7216.40
1970-71: Rs
9505.70
1990-91: Rs
12,755.40
2013-14: Rs
36,116.80

Arindam Das-Gupta
Macroeconomics 1
Measuring Macro
Aggregates

10

Source: Reserve Bank of India, Data Base of

the Indian Economy

Unemployment in the US Economy since 1900

Source
:
Manki
w,
1990
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Unemployment in India
Developed country unemployment: Frictional, Cyclical and
Structural
Unemployment: % of labour force not having jobs
Labour force: Persons looking for work
Discouraged worker effect: Persons dropping out of labour force.

Sample based measures of unemployment by NSSO or

Labour Bureau:
Usual Principal Status (UPS) basis: not working but
seeking/available for work (i.e. in labour force) for most of the
reference year. [2010-11 estimate (labour bureau) 3.8% of
LF]
Also Usual Principal and Subsidiary Status (UPSS) [3.3%]
Current Weekly Status (CWS) basis: not worked even for one
hour but in labour force during the reference week [6.3%]
Current Daily Status (CDS) basis: total person days of
unemployment of all persons in the labour force during the
reference week. [4.6%]
Das-Guptaof unemployment in India
Arindam
Anatomy
Macroeconomics 1 Measuring Macro
12
Cyclical unemployment
Aggregates

of some concern for educated and

Capacity utilisation in India

Manufacturing/Services capacity utilisation: Unutilised capacity
is a more serious measure of economic weakness than
unemployment in developing countries
No officially accepted measure (unofficial and partial by NCAER, and
quarterly by RBI based on IIP for manufacturing)

Business Cycles (Blue line) and Capacity Utilization (Red line)

2005-Q1 to 2011-Q3. Range of CU: 85% to 100%

Arindam Das-Gupta
Macroeconomics 1
Measuring Macro
Aggregates

13

Source: Mukherjee and Misra, 2012, RBI.

Economic Models:
Introduction

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Economic Models

Source
:
Manki
w,
1990

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Example: The supply-demand

model

Qd = D(P,Y) = 60-10P+2Y,
Qs = S(P) = 2P,
Source
Y = income is exogenous = 50.
:
d
s
Manki Equilibrium Q = Q : P = 20, Q = 40
w,
1990

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The major macroeconomics

models
The macro world in short run macro theory has 4 aggregate
markets:

The
The
The
The

goods market
money market
exchange rate market (or the open economy)
labour (or factor) market

These are looked at in 4 models:

Goods market only: The Keynesian Cross model
Goods and money markets: The IS-LM Model
Subsidiary models: Models of money demand and money supply

Goods market, money market and exchange rate market (all for an
open economy): The Mundell Fleming model
Goods market, money market and labour market: Aggregate Supply
and Aggregate Demand (AS-AD) model
Glance at The Mother of all Models Appendix to Ch 13 p405.

Other models for the long run and very long run will not be
looked at in this course.
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Defining and
measuring GDP

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Stocks and Flows

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The circular flow of income

Source
:
Manki

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A more complete Circular

Flow

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Measuring National Income

DEFINITION: GROSS DOMESTIC PRODUCT is: The
value of all final goods and services produced for
the marketplace during a given time period within
a country's borders.
Key concepts:

Value: market prices or factor cost

Final vs intermediate goods
Value added
Existing versus new (produced)
For the marketplace
(problem of marketed goods: employer marries her/his
housekeeper)

Within a countrys borders vs by a countrys

nationals
22

Identities: National Income

Aggregates
Gross National Product (GNP)
less Net Factor Income Payments to
Nationals from the ROW

Gross Domestic Product

(GDPmp or Y)

less Depreciation (or Capital

Consumption Allowance)

Net Domestic Product at Market

Prices (NDPmp)

less Net Indirect Taxes (TI)

(ie Indirect Taxes less Subsidies)

NDP at Factor Cost (also called

National Income or NDPfc)

less Retained Earnings of

Corporations
plus Net Transfer Payments from
Govt and Private Organisations

Personal Income (PI)

Disposable Income (Yd).

less Personal Taxes (TP)

Note: Index of Industrial Production (IIP)

compiled monthly by CSO
quick estimate of industrial production and growth used widely for policy
planning and judging state of economy
23

Some rules for computing GDP

1. To add together goods or services of different kinds use their
market value
2. Used goods: Not included in GDP since GDP covers only
production during the year
3. Additions to inventories: These are included (as part of
investment)
4. Intermediate goods and Value Added: Intermediate goods are
goods that exist temporarily in the process of production:
1. Wheat
Flour
Bread
Since the value of wheat and flour are included in the value of bread
including both in GDP is DOUBLE COUNTING.
Two ways to proceed: Include only the VALUE ADDED at each stage
OR: Include only the value of the FINAL GOOD (bread).

5. Housing services and other imputations such as government

services: If not sold in the market, market prices do not exist:
They have to be imputed (estimated).
1. Problem: Measuring the Underground Economy not done.
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Nominal versus real GDP

Nominal GDP: GDP measured in todays prices
Real GDP (also called GDP in constant prices):
GDP measured in the prices of a chosen BASE
YEAR
Example of real GDP in 2010 in 2009 prices

The GDP Deflator is the ratio of nominal GDP to

real GDP. The %change
in the GDP deflator
is
PGP Macroeconomics 2016
25
used as one of two main measures of inflation

GDP from the expenditure side

Expenditures Income Production
So GDP from the expenditure side is the third
way to measure GDP (besides value added and
value of final goods):
Expenditure is divide into 4 categories
Consumption (C): Goods bought for current use
Investment (I): Goods bought for future use
mainly by business
Government expenditure (G): Gods purchased
by the government
Net exports (NX): The value of net sales to
foreigners (Exports less imports). Can be
negative
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Some macroeconomic identities for a simplified

economy
Y C + I + G + (NX) (Income-Expenditure Identity)
(Disposable Income Identity, T TP Yd Y - T
TR)
(Household Budget)
Yd C + S
G-T Fiscal Deficit
(Government Budget)

Above:

T Net taxes Personal Taxes (TP) Transfers (TR)

NX: Current account surplus
S Household saving
S-I : Private sector surplus

Fundamental Identity of National Income Accounting

(S-I) -NX (G-T)
If the fiscal deficit exceeds the private sector surplus, the
fiscal deficit must spill
into foreign
markets
and
PGP over
Macroeconomics
2016
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Measures of inflation
What is a Price Index: A weighted average value of prices
of different goods and services.
GDP deflator versus Consumer Price Index (CPI)
GDP deflator: Index of all goods and services produced
Weights: quantities of goods purchased in the current year (Paasche
Index)

CPI: Index of all goods and services purchased by consumers.

Weights: quantities of goods bought in a base year (Laspeyres
Index)
Example:

What is inflation: The % change in a price index over a

specified time period (usually one quarter or 1 year)
Can be the annual growth rate (compound growth)
Or

Year-on-year growth rate (growth during past full year)

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Inflation measures in India

GDP Deflator
CPI urban and rural
Index available monthly

Wholesale price index (WPI)

Index available weekly
Inflation (y-o-y) based on weekly index also called
headline inflation
Core inflation: Manufacturing sector WPI
Also food inflation

To be introduced: Producer Price Index (PPI) to

replace WPI

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Exercise

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Example 2
1.Robotland is a country which has no government and no interaction with the
rest of the world. It produces only two goods: (i) Screws which are used as
intermediate goods by car firms and also final consumer goods by Robot
households; and (ii) Cars which are a capital good for firms and also a consumer
good for households. Cars are perfectly durable and do not depreciate. The
table
below gives
industry-wise
figures
for
Robotland
2088
Production
in Robotland
in 2088
AD(All
figures
are in for
1000s
of AD.
Robotland
$)
Industry

Increase Wages,
in
Rent,
Inventori Interest
es
Paid
Screws
200
100
100
-100
150
150 on20
80goods are not
NoteCars
that, as a general 300
rule, cash outlays
by firms
investment
counted as a current cost of production of firms (only depreciation is taken as a
current cost in actual national accounting).

Gross
Value of
Output

Sales To
Househol
ds

Sales
to
Firms

a. Calculate the total amount of profit made in each sector.

b. Calculate Robotland's GDP in 2088 AD by the value added, expenditure and

income methods.
c. Calculate household saving in Robotland.

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Example 2 contd
d.Suppose that prices of Screws and Cars were $20 and
$2000 per unit respectively in 2088 AD. Assume that
production, sales, etc remained the same in physical units
in Robotland in 2089 AD but prices of Screws and Cars
rose by 10% and 5% respectively compared to 2088.
Calculate the GDP deflator and the CPI using 2088 as the
base year (for the CPI use quantities bought by
households in 2088 as your fixed bundle of goods).

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Problem 3
What is the impact of these events on GDP and
its components?
a. Miss Tina buys a personal computer.

b.

Mr Rashid buys $10,000 of Airtel stock.

c. Mrs Swamy buys a (recreational) boat from a

Goa shipyard. The shipyard had used
components bought from Japan earlier this year
to make the boat.
d. Vodafone buys $1000 worth of paper clips
which are used up by its office staff during the
year.

e. The government gives all Senior citizens a

$100 transfer. PGP Macroeconomics 2016
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