09-10-2023

Errol D’Souza

Macroeconomics – What is it about?

Labour force statistics classify individuals into one
Errol D’Souza of three categories -
• Employed and being in the work force
• Unemployed
• Out of the labour force
The classification into one of the above three
categories depends on the reference period
used that ranges from a year, week and half
day.

Email: errol@iima.ac.in

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Errol D’Souza Errol D’Souza

Yes Not surveyed in the Usual Principal Status (UPS) – A person is counted as
Under age 16?
statistics being in the labour force on UPS basis if he/she
was engaged in economic activity (work) or was
No
seeking or was available for work for the major
L part of the preceding 365 days.
Worked at all in reference
period for pay or profit? A
Employed B Those classified as being in the labour force on this
Yes to O
Worked 15 hours or more in either basis are further classified as employed or
a family business? U
question R unemployed depending on whether the majority
No to both questions of the days in the labour force were spent in
F economic activity or in seeking/being available
Been actively searching for Yes to O for work.
work? both Unemployed R
Available to start a job? questions C
E

No to either question NOT IN THE

LABOUR FORCE

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Errol D’Souza Errol D’Souza

When the reference period is a year the usual

status of an individual is determined on the Labour Force = Number of people employed
major time criterion. + Number of people unemployed

For an individual who is employed on the usual

status their principal activity in terms of Labour force size
Labour force participat ion rate =
industry of employment is also determined Population
(LFPR)
on the basis of major time criterion.

Their “subsidiary” economic activity is also Labour force employed

Work force participat ion rate =
recorded in the survey in the remainder (WPR) Population
time.
Number unemployed
Unemployme nt rate =
(UR) Labour force size

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Labour Workforce LFPR WPR UR NEET

Force (mn.) (Age 18 (Age 18
(mn.) – 64) – 64)
2004-05 327 322 74 73 1.6 24.8 Striking aspect of India’s labour market is its
2011-12 328 323 65 64 1.5 30.7 relatively low labour participation rate –
Rural
2017-18 333 316 58 55 5.1 38.4
Labour participate rate aged
2018-19 340 324 59 56 4.7 37.5 15 years and above in 2012

India 56%
2004-05 100 95 59 56 4.3 37.2 China 71%
2011-12 124 120 55 53 3.3 38.0 Brazil 70%
Urban
2017-18 140 129 54 50 7.7 41.0
This was mainly on account of low level of female
2018-19 148 137 55 50 7.5 40.9 participation in the labour force. – In 2012
among females the participation rate was
Source: NSSO data, usual & subsidiary status combined
64% in China and just 29% in India.
NEET – share of “Not in Employment, nor in Education, nor in Training”
in total population

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8%

5.98%

5.27%

India Unemployment Rate: 1991 to 2022

<a href='https://www.macrotrends.net/countries/IND/india/unemployment-rate'>India Unemployment Rate 1991-2022</a>

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Quality of Employment - Shares of Employment by status

Self Employed Casual Labour Regular Work
1983 57.31 29.34 13.35
1993-94 54.62 31.75 13.63
1999-00 55.45 29.03 15.52
2004-05 56.22 28.08 15.70
2009-10 50.79 32.97 15.24
2011-12 50.26 30.46 19.28
2018-19 51.05 24.40 24.55

Bulk of employment is of self employment.

Decline in proportion of self-employed has led to a signif-

-icant increase in casual employment till 2009-10 &
thereafter from casual to regular work.

Fall in self employment due to decline in size of land-holding

and rise in small and marginal land-holdings.

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Segmentation of Informal Employment
Poverty Average
Quality of Employment - Per cent share of employment by status Risk Earnings Segmentation by Sex
Organized Employment Unorganized Low High
Employment
Employers Predominantly Men
Public Private Total
1983 5.44 2.49 7.93 92.07 Informal Wage
1993-94 5.19 2.12 7.31 92.69 Workers: Regular
1999-00 4.85 2.17 7.01 92.99
Men & Women
2004-05 3.93 1.85 5.78 94.22 Own account operators
2009-10 3.82 2.35 6.17 93.83

Informal Wage Workers: Casual

Bulk of India’s workforce is still in unorganized sector. Low Predomin-
E antly
High Industrial Outworkers/Homeworkers Women
Decline in organized sector is entirely due to slowdown
in employment in public sector.
Contributing Family Workers

Source: Chen et al, 2005

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Reasons –
• Many jobs have been added in construction
which is a low productivity sector.

• Few jobs are being created in the formal

sector

• Few jobs are being created in large firms.

India’s share of value added in industry has not kept pace

with its share of employment – contrast to China,
Indonesia, & Korea where share of value added in
industry has always increased with share of emp-
loyment.

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Real and Nominal Incomes -

Table 1.8: Per Capita GDP (Rupees)
Year Per Capita Percentage
Income Increase (per
decade)
1960-61 395.6 42.9
1970-71 844.3 113.4
1980-81 2,117.3 150.8
1990-91 6,778.0 220.1
2000-01 20,650.6 204.7
2010-11 54,835 165.5

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Errol D’Souza Errol D’Souza

Real and Nominal Incomes -

Even if rupee incomes increased by almost 10 times
Table 1.8: Per Capita GDP (Rupees)
the rupees are only as valuable as the goods
Year Per Capita Percentage we purchase with them.
Income Increase (per
decade) The previous table showed data on nominal incomes
- incomes measured in terms of current rupee
1960-61 395.6 42.9
values.
1970-71 844.3 113.4
What is important is our real incomes – incomes
1980-81 2,117.3 150.8 measured in physical terms, i.e., in terms of
1990-91 6,778.0 220.1 the quantities of goods and services in the
2000-01 20,650.6 204.7 economy.

Decade of 1990s: Average income increased by 3 times

Decade of 1980s: Average income increased by 3.2 times
Between 1980 and 2001 average income ↑ by 9.8 times

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Errol D’Souza
Errol D’Souza

Suppose there is only one good in the economy - pizzas Suppose there is only one good in the economy - pizzas

Table 1.9: Real Incomes with One Good Table 1.9: Real Incomes with One Good
Year 0 Year j Year 0 Year j
Nominal Income INR 5,000 INR 5,625 Nominal Income INR 5,000 INR 5,625
Price (of pizza) INR 100 Price (of pizza) INR 100 INR 125
Real Income 50 pizzas per year Real Income 50 pizzas per year 45 pizzas per year

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Errol D’Souza Errol D’Souza

Suppose there is only one good in the economy - pizzas

If there were more than 1 good (we can’t live only on
Table 1.9: Real Incomes with One Good pizzas!) we calculate the real income by procee-
ding as follows -
Year 0 Year j
Nominal Income INR 5,000 INR 5,625 • Pretend that prices in the current year are the
Price (of pizza) INR 100 INR 125 same as in the base year
Real Income 50 pizzas per year 45 pizzas per year • Calculate the value that the output would have in
the current year at these constant prices of the
Even though in the current year (Year j) rupee income base year.
has increased by 12.5%, real income measuerd
in terms of no. of pizzas has declined by 10%.

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Errol D’Souza Errol D’Souza

Suppose a student has an income (pocket money) of In a subsequent year the competition increases and
INR 5,000 which he spends on two goods – pizzas the price of pizzas declines to INR 85. The price of
(of course), and books. books goes up to INR 615 as paper costs have gone
Table 1.11: Real Incomes with Two Goods (1 and 2) up.
Pizzas Books Students income and expenditure goes up to INR
Quantity Price Quantity Price 5,625 and he purchases same quantity of pizzas
but purchases an additional book.
Year 0 30 100 4 500
Table 1.11: Real Incomes with Two Goods (1 and 2)
Student spends on 30 pizzas a year and on 4 books Pizzas Books
Quantity Price Quantity Price
Year 0 30 100 4 500
Year 1 30 85 5 615

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Nominal expenditure is the sum of the quantities of

Nominal expenditure is the sum of the quantities of
goods produced times their current price.
goods produced times their current price.
Nominal expenditure in Year 1 is denoted C11 Nominal expenditure in Year 1 is denoted C11
C11 = (30  85) + (5  615) = 5625
C11 = (30  85) + (5  615) = 5625
Real expenditure is the expenditure in a year
Table 1.11: Real Incomes with Two Goods (1 and 2) measured in the prices of the base year,
Year 0.
Pizzas Books
Quantity Price Quantity Price Real expenditure in Year 1 is denoted C10
Year 0 30 100 4 500 C10 = (30  100) + (5  500) = 5500
Year 1 30 85 5 615
Table 1.11: Real Incomes with Two Goods (1 and 2)
Pizzas Books
Quantity Price Quantity Price
Year 0 30 100 4 500
Year 1 30 85 5 615

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Errol D’Souza Errol D’Souza

Table 1.11: Real Incomes with Two Goods (1 and 2)
Pizzas Books
Quantity Price Quantity Price
Inflation rate in the economy is found by deriving the
Year 0 30 100 4 500
implicit GDP deflator which is the current price Year 1 30 85 5 615
estimate divided by the constant price estimate.
Share of expenditure devoted to pizzas in real terms is

C11   Nominal GDP 
GDP Deflator =  C 100 =  Real GDP 100 given by w1
 10 
30  100 3000
w1 = = = .545455
For the example above, with two goods – pizzas and (30  100 + 5  500) 5500
books – the deflator is given by
Share of expenditure devoted to books in real terms is
 C11  given by w2
100 = 
5625 
 100 = 102.27
 C10   5500  5  500 2500
w2 = = = .454545
(30  100 + 5  500) 5500
This indicates that inflation was of the order of
2.27% in the economy.

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Table 1.11: Real Incomes with Two Goods (1 and 2)
Table 1.11: Real Incomes with Two Goods (1 and 2)
Pizzas Books
Pizzas Books
Quantity Price Quantity Price
Quantity Price Quantity Price
Year 0 30 100 4 500
Year 0 30 100 4 500
Year 1 30 85 5 615
Year 1 30 85 5 615

Price of pizza declined to 85% of its original price Price of pizza declined to 85% of its original price
Price of books increased by 23% from INR 500 to INR Price of books increased by 23% from INR 500 to INR
615. 615.
Weighted average of price increase in the overall
economy is then given by -

.545455(.85) + .454545(1.23)100 = .463636 + .559091100 = 1.022727100

= 102.27

This is exactly what the GDP deflator had calculated.

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Errol D’Souza Errol D’Souza

GDP at constant & market prices, 2019-20(Rs. Trillion)
GDP Deflator is the only measure of inflation that GDP current GDP constant
prices prices
takes into account the inflation in all the goods
Private Final Consumption Exp.
and services produced in the economy. 123,090.19 83,217.01
Govt. Final Consumption Exp.
Consumer Price Index is a weighted sum of prices of 22,850.16 15,417.42
a standard basket of goods and services cons- Gross Fixed Capital Formation
umed by a typical domestic consumer. 58,513.13 47,304.16
Changes in Stocks
Wholesale Price Index is a price index of goods and 1,944.41 1,583.85
services that are sold by producers. Valuables
1,947.00 1,645.27
The WPI measures price changes from the Exports of Goods & Services
perspective of the seller. 37,505.67 28,266.39
Imports of Goods & Services
If producers are receiving higher prices from
42,650.40 33,171.65
their sales to wholesalers we can expect
Discrepancies
that retailers would have to charge high- 309.97 1,430.23
er prices soon that gets reflected in a GDP
higher CPI. 203,510.13 145,692.68

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17.9%
GDP current prices GDP constant GDP deflator
prices
15.7%
Year 2018-19 188,869.57 140,033.16 1.3487 13.8%
Year 2019-20 203,510.13 145,692.68 1.3968
10.5%
9.6%

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Weighting diagram of WPI and CPI

WPI CPI
Primary Products 20.12 Food & beverages 45.86
Food Articles 14.34 Pan, Supari, Tobacco
Non Food Articles 4.26 & Intoxicants 2.38
Minerals 1.52
Fuel Group 14.91 Fuel & light 6.84
Coal Mining 2.09
6.7%
Electricity 3.45
Mineral Oils 9.37
Manufactured Products 64.97 Housing 10.07
5.1%
Of which Clothing, Bedding &
Food Products 9.97 footwear 6.53
Textiles 7.33 Miscellaneous 28.32
Chemicals 12.02 of which Health 5.89
Basic Metals 10.75 Education 4.46
Machinery & machine tools 8.93 Transport & Comm 8.59
Transport equipment & parts 5.21

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Errol D’Souza Errol D’Souza

Differences between WPI and CPI

WPI CPI
Fuel group gets a much Food gets maximum
higher weight weightage
Services not included Miscellaneous group
includes services such as
transport, education,
health, etc.

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Errol D’Souza Errol D’Souza

Price indices overstate true inflation due to 2 factors - Price indices overstate true inflation due to 2 factors -

• Price indices cannot account for price changes in
newly-invented goods as the indices are calculated on
a bundle of fixed goods and undergo revision with a
lag. For example, the prices of new computers tend to
start high and come down rapidly as output expands
and so the price index in the initial years would
overstate inflation.
• Price indices cannot account for price changes in
newly-invented goods as the indices are calculated on
a bundle of fixed goods and undergo revision with a
lag. For example, the prices of new computers tend to
start high and come down rapidly as output expands
and so the price index in the initial years would
overstate inflation.
• Existing goods change in quality over time. For
example, automobiles attributes over time have
improved significantly - improved engine performance,
innovations in luxury, comfort, and safety features.
The price index overstates inflation in the price
because it records a higher price which is the sum of
the old, unimproved good plus the premium for higher
improved quality.

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Errol D’Souza

Average real incomes are surely much higher today

but there are also many more goods available.

In 1980 people were using type writers instead

of computers and they were lucky if they got
to watch just one channel on a black & white
television set.

There are a greater variety of ways of spending incomes

today and by correcting for inflation we will not
be able to capture that very important transform-
ation in our lives.

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Errol D’Souza Errol D’Souza

Inequality The coefficient of variation is a commonly used

index of inequality.
The most common measure of inequality is the Gini
coefficient Var(y )  y
CV (y ) = =
Given that there is a known number of income rece- Mean(y )  y
ivers n and that person i has income yi the where,
income distribution is the vector - 1 n
2
1 n
Var(y ) =  y =   yi −  (y ) Mean(y ) =  y =  yi
n i =1 n i =1
y = ( y1 , y2 ,....yi ,...., yn )
An index of inequality for a particular income distr-
ibution y gives a real number that depicts
the amount of inequality exhibited by the
distribution.

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Errol D’Souza Errol D’Souza

The coefficient of variation is a commonly used Suppose that y = (1,1,2) , i.e., there are n = 3 persons
index of inequality.
n n
Calculate Gini (y ) = 1
Var(y )  y  yi − y j
2n 2  (y ) i =1 j =1
CV (y ) = =
Mean(y )  y
where,
2
1 n 1 n
Var(y ) =  y =   yi −  (y ) Mean(y ) =  y =  yi
n i =1 n i =1

The most commonly used index of inequality is the

Gini coefficient defined as -
n n
1
Gini (y ) =  yi − y j
2n 2  (y ) i =1 j =1

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Errol D’Souza Errol D’Souza

Suppose that y = (1,1,2) , i.e., there are n = 3 persons Suppose that y = (1,1,2) , i.e., there are n = 3 persons

yi yj yi − y j yi yj yi − y j

i =1 1 1 0 i =1 1 1 0
1 2 1 1 2 1
1 1 0
i=2
1 2 1
2 1 1
i=3
2 1 1
n n

 y − y
i =1 j =1
i j 4

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Errol D’Souza Errol D’Souza

Suppose that y = (1,1,2) , i.e., there are n = 3 persons Suppose that y = (1,1,2) , i.e., there are n = 3 persons

yi yj yi − y j yi yj yi − y j
1 n 1 4 1 n 1 4
Mean(y ) =  y =  yi = 3 (1 + 1 + 2) = 3 Mean(y ) =  y =  yi = 3 (1 + 1 + 2) = 3
i =1 1 1 0 n i =1
i =1 1 1 0 n i =1

1 2 1 1 2 1 Hence,
1 1 0 1 1 0 n n
i=2 i=2 1
Gini (y ) =  yi − y j
1 2 1 1 2 1 2n 2  (y ) i =1 j =1

2 1 1 2 1 1 1
i=3 i=3 =  (4 )
2  32  43
2 1 1 2 1 1
n n n n 1
=
 y − y
i =1 j =1
i j 4  y − y
i =1 j =1
i j 4 6

= 0.1667
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Errol D’Souza Errol D’Souza

Suppose that y = (1,2,2) , i.e., there are n = 3 persons Suppose that y = (1,2,2) , i.e., there are n = 3 persons

yi yj yi − y j

i =1 1 2 1
1 2 1
2 1 1
i=2
2 2 0
2 1 1
i=3
2 2 0
n n

 y − y
i =1 j =1
i j 4

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Errol D’Souza Errol D’Souza

Suppose that y = (1,2,2) , i.e., there are n = 3 persons Welfare Consequences of economic growth -

yi yj yi − y j
1 n 1 5 Judgments are often made that social welfare depends
Mean(y ) =  y =  yi = 3 (1 + 2 + 2) = 3
1 2 1 n i =1 positively on the level of national income and
i =1
growth, and negatively on the inequality in the
1 2 1 Hence, distribution of income.
2 1 1
Welfare = f  Y , I 
n n
i=2 1
Gini (y ) =  yi − y j
2 2 0 2n 2  (y ) i =1 j =1  ( + ) ( −) 
Y : national income or its growth
2 1 1 1
i=3 =  (4 )
2  32  53 I : Inequality or Gini coefficien t
2 2 0
n n 2 Suppose there are two identical countries whose
=
 y − y
i =1 j =1
i j 4 15 distribution of income initially is given by -
y = (1, 1, 1, 1, 1, 1, 1, 1, 1, 2)
= 0.1333
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Errol D’Souza Errol D’Souza

y = (1, 1, 1, 1, 1, 1, 1, 1, 1, 2) y = (1, 1, 1, 1, 1, 1, 1, 1, 1, 2)
n n n n
1 1
Then, Gini (y ) =  yi − y j = .082 Then, Gini (y ) =  yi − y j = .082
2n 2  (y ) i =1 j =1 2n 2  (y ) i =1 j =1

Suppose after the elapse of some time the distribution

of income in the two countries is given by -

Country 1 later: y = (1, 1, 1, 1, 1, 1, 1, 1, 2, 2)

Country 2 later: y = (1, 1, 1, 1, 1, 1, 1, 2, 2, 2)

Calculate the rate of growth of national income

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Rate of growth Rate of growth Gini Coefficient

of National of National
Income (%) Income (%) Level Percent change

Both countries
Country 1 9.09 initially .082

Country 1 9.09 .133 + 62

Country 2 18.18

Now calculate the Gini coefficients initially and at the Country 2 18.18 .162 + 97
end of the period.
So then is the higher rate of growth in Country 2 worth-
while in terms of income distribution ?
If you give a high weight to inequality you might choose
to give favour to the policies that Country 1 chose
rather than Country 2.

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Another welfare judgment that is often made is that Another welfare judgment that is often made is that
welfare is promoted if the income received by welfare is promoted if the income received by
a predetermined share of the population, e.g., a predetermined share of the population, e.g.,
the poorest 40% increases. the poorest 40% increases.
Income of poorest 40%
Both countries initially: y = (1, 1, 1, 1, 1, 1, 1, 1, 1, 2) of population

Country 1 later: y = (1, 1, 1, 1, 1, 1, 1, 1, 2, 2) Both countries initially 4

Country 1 later 4
Country 2 later: y = (1, 1, 1, 1, 1, 1, 1, 2, 2, 2)
Country 2 later 4

Find the absolute income of the poorest 40 per cent In this case one might ask: Why grow if the poor do
of the population not share in the benefits of growth ?
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