MACROECONOMIC

ENVIRONMENT
2. THE DATA OF
MACROECONOMICS

Introduction

Why do we study the national income accounts?

1. National income accounting provides structure for
our macroeconomic theory models.
2. Introduces statistics that characterize the economy.

Output defined in two ways

1. Production side: output produced which also
involves payments to workers in wages, capital in
interest and dividends, and profits.
2. Demand side: output = purchases by different
sectors of the economy.
- As per accounting, output measured via demand and
production equal in equilibrium.

Aggregate Output
National income and product accounts are
an accounting system used to measure
aggregate economic activity.
The measure of aggregate output in the
national income accounts is gross domestic
product, or GDP.
Output typically measured as GDP = value of all
final goods and services produced within a
country over a particular period of time (a year).

The Components Of
The Macroeconomy
The circular flow
diagram shows the
income received and
payments made by
each sector of the
economy.

The Components Of The Macroeconomy

Everyones
expenditure is
someone elses
receipt. Every
transaction must
have two sides.

The Components Of
The Macroeconomy
Transfer payments are payments made
by the government to people who do not
supply goods, services, or labor in
exchange for these payments.

GDP : Meaning
GDP is the value of the final goods and
services produced in the economy during
a given period (of one year).
A final good is a good that is destined for final
consumption.
An intermediate good is a good used in the
production of another good.

Different Approaches For Calculating

GDP (at Market Price)
1. Expenditure Approach
2. Production (or Value Added) Approach
3. Income Approach

The three methods yield the same result

because total expenditures on goods and
services is equal to the value of goods and
services produced which is equal to the total
income paid to the factors that produced the
goods and services.

GDP: Expenditure Approach

There are three ways of computing GDP
1. Expenditure Approach
It measures GDP (at market prices) using final
sales approach
GDPMP = C + Ig + G + NX
C = consumption spending of individuals
Ig = investment spending by business
G = government expenditures
NX= net exports (exports imports)

GDPmp = C + Ig + G + NX
Total demand
for domestic
output (GDP)

is composed
of

Consumption
spending by
households.

Investment
spending by
businesses.

Government
purchases of goods
and services.

Net exports
or net foreign
demand.

This is the called the national income accounts identity.

1) To compute the total value of different goods and

services, the national income accounts use market prices
(GDP at market prices).
2) Used goods are not included in the calculation of
GDP.
3) Change in inventories is added to GDP. If the goods
are stored, their value is added in GDP. If they spoil,
GDP remains unchanged. When the goods are finally
sold out of inventory, they are considered used goods and
the negative change in inventories is added to GDP.

4) Intermediate goods are not counted in GDP only

the value of final goods. Reason: the value of
intermediate goods is already included in the market
price.
5) Some goods are not sold in the marketplace and
therefore dont have market prices and are not counted
in GDP. For example, a housewife doing household
chores and not charging anything for it.

2. GDP: Value Added Approach (Production

Approach)
2. GDP is the sum of value added in the economy
during a given period.
Value Added = Value of output Value of Intermediate
consumption.
VA is the extra value created at each stage of the
production process.
Value of Output = Value of the total sales of goods and
services + Value of changes in the inventories.
The sum of Value Added in various economic
activities (minus production taxes plus production
subsidies) is known as GDP at factor cost.
GDP at factor cost plus indirect taxes less subsidies
on products is GDP at Market Price.

3. GDP: Income Approach

3. GDP is the sum of the incomes in the economy during a given period.
This method measures NDP by adding incomes that firms pay households for factors of
production they hire. This is equal to :
Labor Income (W) + Rental Income (R) + Interest Income (i) + Profits (PR)
Labor Income (W): Salaries, wages, and fringe benefits such as health or retirement. This
also includes unemployment insurance and government taxes for Social Security.
Rental Income (R): This is income received from property received by households. Royalties
from patents, copyrights and assets as well as imputed rent are included.
Interest Income (i): Income received by households through the lending of their money to
corporations and business firms.
Profits (PR):
The amount firms have left after paying their rent, interest on debt, and employee
compensation.

These four income components sum to net domestic income (NDP) at factor cost.

Two adjustments must be made to get GDP (at market price):

1. Indirect taxes minus subsidies are added to get from factor cost to
market prices.
2. Depreciation is added to get from net domestic product to gross
domestic product.

Three Ways To Compute GDP

1.
2.
3.
4.

Consider a simple economy in which one good is produced

and sold.
Raj finds a seed and plants it. Sometimes later, an orange tree
appears.
Raj pays Hari Rs.50 in wages to pick and box the oranges.
Next, Raj sells the oranges to Suresh for Rs.80.
Suresh turns the oranges into orange juice and sells the orange
juice to Sarita for Rs.100. Sarita drinks the juice.

GDP (expenditure approach) Sarita is the final buyer in this economy.

GDP = Rs. 100.
GDP (income approach) Haris wages=Rs 50; Rajs profit=Rs30;
Sureshs profit=Rs20. GDP = 50+30+20 = Rs. 100.
GDP (value added approach) Value added by Raj=Rs80; value added
by Suresh=Rs20. GDP = 80+20 = Rs. 100.

Recent Changes In GDP Computation In India

Real GDP growth will now be measured by growth rate of
GDPmp (at constant prices). International practice. Earlier
growth was measured in terms of growth rate in GDPfc (at
constant prices).
Base year shifted from 2004-05 to 2011-12.
To calculate GDPmp, sectorwise GVA estimates are required.
Sectorwise estimates of GVA will now be given at basic prices
instead of factor cost. Intl practice.
Comprehensive coverage of the corporate sector both in mfg
and services by incorporation of annual accounts of companies
filed with MCA under their e governance initiative MCA21.

Relationship Between GVAfc, GVAbp and

GDPmp
GDPmp product taxes + product
subsidies = GVAbp
GVAbp production taxes plus production
subsidies = GVAfc

GDP, GNP, NNP, NI

GDP includes only that output which is produced within
an economys geographical borders.

GNP consists of the output produced either inside or

outside the country by economic resources owned by
residents of that country.
A nation's GDP is one of the ways of measuring the size
of its local economy whereas the GNP measures the
overall economic strength of a country.
GNP is greater than GDP when residents of that country
employ their resources to produce more output outside
that country than what foreigners produce inside the
country.
NNP equals GNP less the allowance made for capital
which has worn out during the year.

GDP, GNP, NNP, NI

GNPMP = GDPMP payments of factor incomes to rest of the world +
receipts of factor income from rest of the world.
GNPMP depreciation = NNPMP
NNPMP product taxes + product subsidies = NNPBP
NNPBP production taxes + production subsidies = NNPFC
NNPMP indirect taxes + subsidies = NNPFC = NI {Y}
NI IEBNR + IRBNE = PI
PI direct taxes = YD
NI direct taxes + transfers = YD (disposable income).
YD = C + S
YD is the amount of money that households have available for
spending and saving after income taxes have been accounted for.

GDP, GNP, NNP, NI (Our Model)

GNPMP = GDPMP payments of factor incomes to rest of
the world + receipts of factor income from rest of the
world.
GNPMP depreciation = NNPMP
NNPMP indirect taxes + subsidies = NNPFC = NI {Y}
NI direct taxes + transfers = YD (disposable income).
YD = C + S
YD is the amount of money that households have
available for spending and saving after income taxes
have been accounted for.

Income, Expenditure And the Circular Flow

There are 2 main ways
of viewing GDP

Total income of everyone in the economy

Total expenditure on the economys
output of goods and services
Income Rs
Labor

Households

Firms
Goods
Expenditure Rs

For the economy as a whole, income must equal expenditure.

GDP measures the flow of rupees in this economy.

Income, Expenditure And the Circular Flow

(Two sector model)
i.e Y (i.e NNPFC) = C + I
Compensation for services
of economic resources
(NNPFC)

Business
sector

Household
Sector

Consumption spending
(C)
Household saving = Investment spending
(I)

Income, Expenditure And the Circular Flow

(Three sector model)
Compensation for services of economic
resources (NNPFC)
Indirect taxes

Household
sector

Direct taxes
on income

Business
sector

Govt
sector
Govt expenditure (G)

Consumer spending(C)
Household saving=investment spending(I)

NNPMP = NNPFC (i.e Y) + indirect taxes = C + In + G

GDP And GNP

Shareholding Pattern - Maruti Suzuki India Ltd.
Holder's Name

No of Shares

% Share Holding

Other Companies
Foreign Promoter
Foreign Institutions
NBanks Mutual Funds
Financial Institutions
General Public
Others
Foreign NRI
Foreign Industries

14795549
169788440
65830983
22337623
22047450
6244243
716825
318797
150

4.9%
56.21%
21.79%
7.39%
7.3%
2.07%
0.24%
0.11%
0%

GDP, GNP, NNP, NI

NI = payments made to factors of
production owned by residents of that
economy (compensation of employees +
rent + interest + profit). Also called NNP at
factor cost.
In India, depreciation and taxes give
national income as approximately 80%
of GDP.

Components of Demand
Total demand for domestic output is
made up of four components:
1.
2.
3.
4.

Consumption spending by households (C)

Investment spending by firms (I)
Government spending (G)
Foreign demand for our net exports (NX)

- The fundamental national income accounting

identity is - Y C I G NX

Consumption
Consumption = purchases of goods and services by the
household sector.
Includes spending on durable (eg. Cars), non-durable
(eg. Food), and services (eg. Medical services).
Consumption is the primary component of demand.
Consumption as a share of GDP varies by country.
In India, it comprises approximately 60-65% of GDP.
In China, it is 50% of GDP, in USA it is 85% of GDP
approximately.

Government
Includes Government purchases of goods and services
such as national defence expenditures, costs of road
paving by state and local governments, and salaries of
government employees.
Government also makes transfer payments = payments
made to people without their providing a current service
in exchange.
Eg. Social security, unemployment benefits.
Transfer payments are NOT included in GDP since
they are not a part of current production.
i.e total Government expenditure = transfers +
purchases (but transfers are not included in GDP
computation).

Investment
Investment = additions to the physical stock of
capital (i.e. building machinery, construction of
factories, additions to firms inventories).
In the national income accounts, investment is
associated with business sectors adding to the
physical stock of capital, including inventories.
Households building up of inventories is
considered consumption, although new home
constructions are considered part of I, not C.
Gross investment is included in GDP measure,
which is net investment plus depreciation.

Net Exports
Accounts for domestic purchases of foreign goods
(imports) and foreign purchases of domestic goods
(exports) : NX = Exports Imports.
We subtract imports from GDP since we are
accounting for total demand for domestic
production.
NX can be >, <, or = 0
India NX has always been negative trade deficit.
Its CAB/GDP was -0.4% in 2004-05, -2.3% in 200809, -2.8% in 2009-10, -2.8% in 2010-11, -4.2% in
2011-12, -4.6% in 2012-13, -1.7% in 2013-14, -1.7%
in 2014-15.

Economic survey, 2014-15

Economic survey 2013-14

Eco survey, 2013-14 : key indicators

Nominal and Real GDP

Nominal GDP is the sum of the quantities of final goods
produced times their current price.
Nominal GDP increases over time because:
1. The production of most goods increases over time.
2. The prices of most goods also increase over time.
Real GDP is constructed as the sum of the quantities of
final goods times constant (rather than current) prices.

Nominal and Real GDP

Nominal GDP is also called rupee GDP or GDP in
current rupees.
Real GDP is also called GDP in terms of goods, GDP in
constant rupees, GDP adjusted for inflation, or GDP
in 2004-05 rupees.

This conversion from nominal to real units allows us to

eliminate the problems created by having a measuring
stick (rupee value) that essentially changes length over
time, as the price level changes.
Eg: price index of base year (2004-05) = 100
price index of current year (2005-06) = 110
Real GDP(2005-06) = nominal GDP of 2005-06 x 100
110

Calculating Real GDP

Lets see how real GDP is calculated in a simple apple & orange
economy. For example, if we wanted to compare output in 2002
and output in 2003, we would obtain base-year prices, such as
2002 prices.
Real GDP in 2002 would be:
(2002 Price of Apples 2002 Quantity of Apples) +
(2002 Price of Oranges 2002 Quantity of Oranges).
Real GDP in 2003 would be:
(2002 Price of Apples 2003 Quantity of Apples) +
(2002 Price of Oranges 2003 Quantity of Oranges).
Real GDP in 2004 would be:
(2002 Price of Apples 2004 Quantity of Apples) +
(2002 Price of Oranges 2004 Quantity of Oranges).

GDP : Expansions And Recessions

GDP growth equals:
(Yt Yt 1 )
X 100
Yt 1
Periods of positive GDP growth are called
expansions.

Periods of negative GDP growth are called

recessions.

What GDP REVEALS

It tells us whether average citizen is better
off or worse off.

What GDP Does Not Reveal

It does not tell us anything about environmental
damage &/or depletion of non renewable natural
resources.
It does not tell us anything about health, education,
standard of living of residents or anything about
gender equality.

It does not capture equality/inequality of distribution

of GDP among residents.

The Other Major

Macroeconomic Variables
GDP is obviously the most important
macroeconomic variable. But two
other variables tell us about other
important aspects of how an economy
is performing:
1. Unemployment
2. Inflation

Unemployment
Unemployment is a state in which a person does not
have a job but is available for work, willing to work, and
has made some effort to find work within the previous
four weeks (ILO definition).
The labor force is the total number of people who are
employed and unemployed.
The unemployment rate is the percentage of the people
in the labor force who are unemployed.

A discouraged worker is a person who is available for

work, willing to work, but who has given up the effort to
find work.

Unemployment Data, India

Source: RBI First Qtr Review, 2011-12

CDS unemployment rate was 5.6% in 2011-12 (68th round

of NSSO).
72nd round of NSSO currently on (2014-15).

Unemployment Data, India, 2011-12, NSSO, 68th Round

Unemployment Data, India, 2009-10, NSSO, 66th Round

Definitions

Types Of Unemployment
a) Cyclical Unemployment
b) Structural Unemployment
c) Classical Unemployment
Total Unemployment in a country= a+b+c

The Inflation Rate

Inflation is a sustained rise in the
general level of pricesthe price level.
The inflation rate is the rate at which
the price level increases.
Deflation is a sustained decline in the
price level, or a negative inflation rate.

The GDP Deflator

Pt =

nominal GDP x 100

real GDP

The GDP deflator is what is called an index

numberset equal to 100 in the base year.
The rate of change in the GDP deflator equals
the rate of inflation: ( Pt Pt 1 )
Pt 1

The Consumer Price Index

The GDP deflator measures the average
price of output, while the consumer price
index (CPI) measures the average price
of consumption, or equivalently, the cost
of living.
The CPI and the GDP deflator move
together most of the time.

CPI Versus The GDP Deflator

The GDP deflator measures the prices of all goods produced,
whereas the CPI measures prices of only the goods and
services bought by consumers. Thus, an increase in the price
of goods bought by firms or the government will show up in the
GDP deflator but not in the CPI.
Also, another difference is that the GDP deflator includes only
those goods and services produced domestically. Imported
goods are not a part of GDP and therefore dont show up in the
GDP deflator.
The final difference is the way the two aggregate the prices in
the economy. The CPI assigns fixed weights to the prices of
different goods every year, whereas the GDP deflator assigns
changing weights.

Inflation Rates, India

2014-15

2015-16

2.0

-2.8

5.9

4.9

Economic survey, 2014-15

Inflation Rates, India

2014-15

3.4%*
6.2%*

* Refers to April Dec 2014

Exchange Rate

Each country has its own currency in which prices are quoted. In the U.S.,
prices are quoted in U.S. dollars, in Japan in yen, in most of Europe prices are
quoted in euro, in India in rupees.

Exchange rate = the price of one countrys currency in relation to another

countrys currency. It is needed for international trade, foreign travel etc.
In India 1$ = 65.6Rs; 1Euro = 74.1Rs; 1Pound=101.7Rs (Sept 2015).
- The pound is worth U.S. $1.5; 1 Euro = $1.13.
- 1$=6.37CNY, Sept 2015).

Floating (or flexible) exchange rate: when two countries agree to let
international market forces of supply and demand determine their ex. rate. It
fluctuates depending on exports and imports of a country.

Most countries today use floating ex. rates within relatively fixed limits.

Fixed exchange rate: when two countries agree to keep their ex. rate fixed
through use of monetary policy.
Bermuda dollar fixed at 1USD=1.0 BMD (Sept 2014).
Namibia (N dollar), Lesotho (Loti), Swaziland (Lilangeni) (part of common
currency area) have their currency fixed to SA rand.

National Accounting System In India

The Central Statistical Organisation is responsible for coordination
of statistical activities in the country, and evolving and maintaining
statistical standards.
Its activities include National Income Accounting; conduct of Annual
Survey of Industries, Economic Censuses and its follow up surveys,
compilation of Index of Industrial Production, as well as Consumer
Price Indices for Urban Non-Manual Employees, Human
Development Statistics, Gender Statistics, imparting training in
Official Statistics, Five Year Plan work relating to Development of
Statistics in the States and Union Territories; dissemination of
statistical information, work relating to trade, energy, construction,
and environment statistics, revision of National Industrial
Classification, etc.
It has a well-equipped Graphical Unit. The CSO is headed by the
Director-General who is assisted by 2 Additional Director-Generals
and 4 Deputy Director-Generals, Directors & Joint Directors and
other supporting staff.
The CSO is located in Delhi. Some portion of Industrial Statistics
work pertaining to Annual Survey of industries is carried out in
Calcutta.

National Accounting System In India

National Sample Survey Office (NSSO) {under
Ministry Of Statistics And Programme Implementation}
conducts nationwide sample surveys on various socioeconomic issues in successive rounds, each round
covering subjects of current interest in a specific survey
period. The organisation has four divisions :

(i) Survey Design and Research Division (SDRD)

(ii) Field Operations Division (FOD)
(iii) Data Processing Division (DPD) and
(iv) Co-ordination and Publication Division (CPD)
NSS 66th round (2009-10)
Latest NSS 72nd round (2014-15).

Other Sources Of India Data

RBI : money supply, roi, BOP data, exchange rates.
Ministry Of Finance, DEA; CSO; RBI; Planning
commission : GDP data.
Dept Of Industrial Policy and Promotion : WPI.
Dept Of Industrial Policy and Promotion, Labour Bureau :
CPI-IW; CPI-AL
CSO : CPI-UNME
NSSO, Ministry Of Labour & Employment : employment,
unemployment data
Ministry of Finance, Planning commission : budget
documents, economic survey.
DGCIS, Kolkata : exports, imports data (directorate
general of commercial intelligence & statistics).
Office of the Registrar General Of India; Ministry of
Home Affairs : Population data