National Accounts

Measuring the Economy

• National accounts are the core statistical

measure of the economy.

• Accounts cover many features of the economy

but organizing concept is

Gross Domestic Product (GDP)

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.

+ +

+ +

=?

Gross Domestic Product (GDP)

• “GDP combines in a single figure, and with no double

counting, all the output (or production) carried out by all

the firms, non-profit institutions, government bodies and

households in a given country during a given period,

regardless of the type of goods and services produced,

provided that the production takes place within the

country’s economic territory.” L & B p. 15

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

GDP is a measure of production

• Value added at production establishment i

• GDP is the sum of VA across establishments.

i

i

i

Outputs

Intermediate Consumptions

Value Added =

Sales + Change in inventories

- raw materials, semi-processed inputs and energy costs

644444444444447 44444444444448

14444444444444444444444442 4444444444 3.44444444444444

i iGDP Value Added +Product Taxes less subsidies

Economic Concept

• Value Added is production at firm level due to

the combination of capital equipment and

workers.

• Value added is not equal to profits because the

costs of worker and capital are not deducted.

GDP is a Gross Concept

• One cost of production is depreciation of

equipment and structures used for production.

• This cost, referred to as consumption of fixed

capital, is not subtracted from sales to

construct value added.

• Net Domestic Product = GDP – Consumption

of Fixed Capital

Production Approach

Sub-aggregates

• Divide production establishments into sectors

usually along the line of

– Primary: Natural Resources (Agriculture, Forestry,

Fishing, Mining, Quarrying)

– Secondary: Goods production (Manufacturing,

Construction, Utilities)

– Tertiary: Intangibles Production

• 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

Link

2009 r

1,090

28,227

34,961

50,146

1,436,427

365,880

Import and export trade 305,458

48,787

99,048

Transportation and storage 93,936

Postal and courier services 5,112

46,808

235,581

173,583

Real estate 86,833

Professional and business services 86,749

279,453

187,286

1,550,851

55,967

1,622,322

Ownership of premises

GDP at basic prices

Taxes on products

GDP at current market prices

Import/export, wholesale and retail trades

Accommodation and food services

Transportation, storage, postal and courier services

Information and communications

Financing and insurance

Real estate, professional and business services

Public administration, social and personal services

Manufacturing

Electricity, gas and water supply, and waste management

Construction

Services

(GDP) by Economic Activity at Current Price HK$ Mn

Economic Activity

Agriculture, fishing, mining and quarrying

Table 035

Ag

ricu

ltu

re

Min

ing

Ma

nu

factu

rin

g

Utilitie

s

Co

nstr

uctio

n

Tra

de

Tra

nsp

ort

FIR

E

Se

rvic

es

La

nd

lord

19802006 #

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

Hong Kong: Value Added by Sector

Hong Kong Census and Statistics

How do we measure value-added of

non-market goods?

• Production of government bodies and non-market institutions is measured at cost (sum of labor payments plus capital consumption costs).

• Value of housing services of owner-occupied housing valued at imputed rental value, i.e. market rent of similar housing stock.

• Value of non-compensated household work valued at zero.

How do we measure financial services?

• Banking industry output includes interest

income on loans minus interest payments on

deposits (plus fee income).

• Insurance industry output is measured as

premiums net of indemnity payments (w/

minor adjustments).

Demand

• If we add up the value added at all stages of

production we derive the value to the end user.

• Sum of Final Demand Aggregates equals Sum

of Value Added

Expenditure Approach

• Purchase of Final goods by end users are

divided into two categories:

1. Consumption: Household expenditure (durables,

nondurables & services); government

(nondurables & services) expenditure; nonprofit

expenditures

2. Investment: Inventories, Fixed Investment

(equipment, structures)

Reconciliation

• Some demand for domestically produced value

added comes from abroad, some domestic

demand is satisfied by overseas goods.

GDP = Consumption + Investment + Exports –

Imports

Exports – Imports = External Balance = Trade

Balance = Net Exports <> 0

OECD National Accounts Main Economic Aggregates

http://stats.oecd.org

Dataset: 1. Gross domestic product

2010

Transaction

B1_GE: Gross domestic product (expenditure approach) 1,173

P3_P5: Domestic demand 1,137

P3: Final consumption expenditure 795

P31S14: Final consumption expenditure of households 598

P31S15: Final consumption expenditure of non-profit institutions

serving households17

P3S13: Final consumption expenditure of general government 180

P5: Gross capital formation 342

P51: Gross fixed capital formation 336

P52_P53: Changes in inventories & acquisitions less disposals of valuables 6

B11: External balance of goods and services 33

P6: Exports of goods and services 614

P7: Imports of goods and services 582

DB1_GE: Statistical discrepancy 3

Country: Korea

Measure: National currency, current prices

Trillions of Won

Dataset: 1. Gross domestic product

Country: Korea

Measure: National currency, current prices

Frequency: Annual

Trillions of Won 2009

B1_GE: Gross domestic product (expenditure approach) 1,065

P3_P5: Domestic demand 1,026

P3: Final consumption expenditure 746

P31S14: Final consumption expenditure of households 560

P31S15: Final consumption expenditure of non-profit institutions

16

P3S13: Final consumption expenditure of general government

170

P5: Gross capital formation 280

P51: Gross fixed capital formation 310

P52_P53: Changes in inventories and acquisitions less disposals of valuables

-30

B11: External balance of goods and services 39

P6: Exports of goods and services 530

P7: Imports of goods and services 490

DB1_GE: Statistical discrepancy -1

Some Asian Expenditure Shares: 2008

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

Household Government Investment Exports Imports

PRC Japan Korea

Source: United Nations Main Aggregates Database Source: United Nations Main Aggregates Database

Value Added and Income

• Production establishments are where income is

generated. Funds raised can be paid for labor

and finance costs, left over money is profit

income.

• Sum of domestic value added (GDP) is equal

to wage payments plus financial and profit

income referred to as “operating surplus and

mixed income.”

GDP Equivalence

Dataset: 1. Gross domestic productKorea

Tril. Won

2009

B1_GA: Gross domestic product (output) 1,065

B1G: Gross value added at basic prices 959

D21_D31: Taxes less subsidies on products 106

DB1_GA: Statistical discrepancy ..

B1_GE: Gross domestic product (expenditure) 1,065

P3_P5: Domestic demand 1,026

B11: External balance of goods and services 39

DB1_GE: Statistical discrepancy -1

B1_GI: Gross domestic product (income) 1,065

D1: Compensation of employees 494

B2G_B3G: Gross operating surplus & mixed income 453

D2_D3: Taxes less subsidies on production and

imports119

DB1_GI: Statistical discrepancy 0

Country

Measure

Gross Domestic Product

http://stats.oecd.org/Index.aspx

2 Compensation of employees, paid 7980.6

3 Wage and salary accruals 6417.5

8 Supplements to wages and salaries 1563.1

9 Taxes on production and imports 1054

10 Less: Subsidies /1/ 57.3

11 Net operating surplus 3673.5

12 Private enterprises 3689.2

13 Net interest and miscellaneous payments, domestic 747.6

14 Business current transfer payments (net) 136.7

15 Proprietors' income with IVA and CCA 1036.4

16 Rental income of persons with CCA 350.2

17 Corporate profits with IVA and CCA, domestic 1418.2

18 Taxes on corporate income 411.1

19 Profits after tax with IVA and CCA 1007.1

20 Net dividends 615.3

21 Undistributed corporate profits withwith IVA and CCA 391.8

22 Current surplus of government enterprises /1/ -15.7

23 Consumption of fixed capital 1874.9

24 Private 1540.9

25 Government 334

1 Gross domestic income 14525.7

  Addendum:

26 Statistical discrepancy 0.8

CCA: Capital Consumption Adjustment

Line   2010

Table 1.10. Gross Domestic Income by Type of Income

[Billions of dollars]

GNI vs. GDI

• Net Factor Income [NFI] is income earned on

overseas work or investments minus income

generated domestically but paid to foreigners.

GNI GDI

Gross National Income Gross Domestic Income

= income earned by

domestic residents.

= income created within

national borders.

GNI = GDI +NFI

(GNP = GDP+NFI)

BEA U.S. International Transactions Accounts Data

Table 1. U.S. International Transactions US $ Million

Line (Credits; debits -) 2010

12 Income receipts 663,240

13 Income receipts on U.S.-owned assets abroad 657,963

14 Direct investment receipts 432,000

15 Other private receipts 224,469

16 U.S. government receipts 1,494

17 Compensation of employees 5,278

29 Income payments (498,016)

30 Income payments on foreign-owned assets in the US (483,504)

31 Direct investment payments (151,361)

32 Other private payments (196,004)

33 U.S. government payments (136,139)

34 Compensation of employees (14,512)

35 Unilateral current transfers, net (136,095)

36 U.S. government grants/4/ (44,717)

37 U.S. government pensions and other transfers (10,365)

38 Private remittances and other transfers/6/ (81,013)

Net Factor Income 29,129

Compare Macau and the Philippines

GDP or GNI

• 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 GNI?

• Does Macau have greater GDP or GNI?

NFI/GDP 2009 UN Main Aggregates

Chad -42.68% Russian Federation -3.23% China: Hong Kong SAR3.12%

Liberia -20.14% China, People's Republic of -2.04% Switzerland 4.15%

Ireland -16.94% Brazil -2.04% Haiti 9.62%

Cambodia -15.64% India -0.13% Bangladesh 11.00%

Angola -13.95% United States 0.28% Philippines 14.73%

Chile -9.69% Bermuda 23.62%

Panama -8.97% Lesotho 35.17%

China: Macao SAR-6.03%

Australia -4.65%

Using GDP to Measure Economic

Performance

Principle Tool: Growth Rates

• For any variable, Xt, that is observed at

different points at time t, the simple net growth

rate is

• This means gross growth rate is

1

1

X t tt

t

X Xg

X

1

1 X tt

t

Xg

X

Growth Rates of Products and Ratios

1 1 1 1 1

1

11

11

(1 )(1 )

(1 )

(1 )

X Yt t t t tt t t t t

t t t t t

t tX

t tt t tYt

t t ttt

tt

Z X Y X YZ X Y g g

Z X Y X Y

X XZ YX X g

ZY Y gXZ

YY

Rule of Thumb

• The growth rate of a product is approximately

equal to the sums of the growth rates of the

elements of a product.

• The growth rate of a ratio is approximately

equal to the difference between the growth rate

of the numerator and the denominator.

Z X Y

t t t t t tZ X Y g g g

Z X Ytt t t t

t

XZ g g g

Y

• Measuring stick of value is prices of goods in

terms of money, but arbitrary changes in the

stock of money arbitrarily change prices/the

measure of value over time.

• Comparing value across time requires

abstracting from those arbitrary changes in

value.

Value vs. Volume

• Consider the sales of a hypothetical single good

(called widgets) production firms.

• Value of sales (call v) is the product of the

number or volume of goods solds (call q) and the

price of each good (call p)

• Growth of value can be decomposed into growth

of volume and growth in prices.

(1 ) (1 )(1 )v p qg g g

Aggregate Growth • Macroeconomic aggregates such as GDP and

its sub-totals are the sum of values of sales (or

purchases) from different firms.

• We also decompose the growth of the

aggregates into growth in prices (inflation) and

growth in volume (output).

t i i i

i i

V v p q

(1 ) (1 )(1 )V P Q

t t tg g g

Volume Growth • Calculate growth as if prices are unchanged.

1. Divide goods into K distinct sub-categories.

2. Construct representative market basket of each

category of goods, k.

3. Sample goods of type k to find average price of

market basket k at time t and at time t-1:

1,k k

t tp p

Example: US Non Durables

Line   2009 2010 2009 2010

25 Nondurable goods v_k P^k[2005]

26 Food and beverages purchased for off-premises consumption

27 Food and nonalcoholic beverages purchased for off-premises consumption (4) 645.3 659.4 113.948 114.267

28 Alcoholic beverages purchased for off-premises consumption (5) 100.4 106.6 110.724 111.271

29 Food produced and consumed on farms (6) 0.3 0.3 89.632 104.583

30 Clothing and footwear

31 Garments

32 Women's and girls' clothing (10) 153.7 161.2 97.647 96.743

33 Men's and boys' clothing (11) 91.1 95.5 97.835 96.378

34 Children's and infants' clothing (12) 13.1 13.7 98.038 97.776

35 Other clothing materials and footwear (13 and 17) 60.3 63.9 103.1 104.15

36 Gasoline and other energy goods

37 Motor vehicle fuels, lubricants, and fluids (59) 279.1 331.4 106.069 125.441

38 Fuel oil and other fuels (29) 20.3 22.7 114.129 133.927

39 Other nondurable goods

40 Pharmaceutical and other medical products (40 and 41) 316.8 330.6 111.241 115.239

41 Recreational items (parts of 80, 92, and 93) 132.8 141.4 100.453 97.161

42 Household supplies (parts of 32 and 36) 110.1 114.1 106.979 106.155

43 Personal care products (part of 118) 89.9 95.2 105.085 104.081

44 Tobacco (127) 87.9 94.4 144.831 160.563

45 Magazines, newspapers, and stationery (part of 90) 58.8 64.6 109.044 109.929

Value v 2159.9 2295

1+gV 1.062549

Last Revised on: August 08, 2011

Table 2.4.4. & 2.4.5. Personal Consumption Expenditures by Type of Product & Price IndexesBureau of Economic Analysis

• Note: Data does not report only

reports price indices relative to reference

price level for subtype k at a fixed reference

year (in this case, 2005).

4. Convert value of goods k at time t into time t-

1 prices

1 11 1

[ ]

[ ]

k k k kk k k k kt t t tt t t t tk k k

t t t

P Ref p p qv v p p q

P Ref p p

1,k k

t tp p

[ ] 100k

k tt k

Ref

pP Ref

p

Notes on Price Indices: New Goods

• Market baskets used to construct don’t

need to stay the same over long-periods.

• New goods can be introduced as long as

matched goods are compared in every t and t-1

period.

1

k

tk

t

p

p

Notes on Price Indices: Quality • Some categories of goods (computers, cars)

observe marked changes in quality over time.

• Price growth rates for these components often

reflect the price growth for certain

characteristics (e.g. MHz,GB HD, etc.). These

are referred to as hedonic price indices.

Line   2009 2010 2009 2010

25 Nondurable goods v_k P^k[2005] q_t*p_t-1

26 Food and beverages purchased for off-premises consumption

27 Food and nonalcoholic beverages purchased for off-premises consumption (4) 645.3 659.4 113.948 114.267 657.5591

28 Alcoholic beverages purchased for off-premises consumption (5) 100.4 106.6 110.724 111.271 106.076

29 Food produced and consumed on farms (6) 0.3 0.3 89.632 104.583 0.257113

30 Clothing and footwear

31 Garments

32 Women's and girls' clothing (10) 153.7 161.2 97.647 96.743 162.7063

33 Men's and boys' clothing (11) 91.1 95.5 97.835 96.378 96.94373

34 Children's and infants' clothing (12) 13.1 13.7 98.038 97.776 13.73671

35 Other clothing materials and footwear (13 and 17) 60.3 63.9 103.1 104.15 63.25578

36 Gasoline and other energy goods

37 Motor vehicle fuels, lubricants, and fluids (59) 279.1 331.4 106.069 125.441 280.2215

38 Fuel oil and other fuels (29) 20.3 22.7 114.129 133.927 19.34433

39 Other nondurable goods

40 Pharmaceutical and other medical products (40 and 41) 316.8 330.6 111.241 115.239 319.1305

41 Recreational items (parts of 80, 92, and 93) 132.8 141.4 100.453 97.161 146.1909

42 Household supplies (parts of 32 and 36) 110.1 114.1 106.979 106.155 114.9857

43 Personal care products (part of 118) 89.9 95.2 105.085 104.081 96.11833

44 Tobacco (127) 87.9 94.4 144.831 160.563 85.15067

45 Magazines, newspapers, and stationery (part of 90) 58.8 64.6 109.044 109.929 64.07993

Value v 2159.9 2295

Table 2.4.4. & 2.4.5. Personal Consumption Expenditures by Type of Product & Price IndexesBureau of Economic Analysis

Last Revised on: August 08, 2011

Volume Growth cont.

5. Sum the value of time t goods in time t-1

prices.

6. Divide by the value of time t-1 goods in t-1

prices.

11[ ]

kk k kt

t t t tkk kt

pQ t-1 prices v p q

p

1

1 1 1

[ ]1

k k

t tQ t kt k k

t t tk

p qQ t-1 pricesg

V p q

Candyland

GDP Volume Growth: 2005

2005 2004

P Q P Q

Kitkat 8 150 6 135

M&Ms 10 150 4 135

GDP

Volume Growth

Candyland

GDP Volume Growth: 2005

2005 2004

P Q P Q

Kitkat 8 150 6 135

M&Ms 10 150 4 135

GDP 2700 1350

Volume Growth 111.11 100

Line   2009 2010 2009 2010

25 Nondurable goods v_k P^k[2005] q_t*p_t-1

26 Food and beverages purchased for off-premises consumption

27 Food and nonalcoholic beverages purchased for off-premises consumption (4) 645.3 659.4 113.948 114.267 657.5591

28 Alcoholic beverages purchased for off-premises consumption (5) 100.4 106.6 110.724 111.271 106.076

29 Food produced and consumed on farms (6) 0.3 0.3 89.632 104.583 0.257113

30 Clothing and footwear

31 Garments

32 Women's and girls' clothing (10) 153.7 161.2 97.647 96.743 162.7063

33 Men's and boys' clothing (11) 91.1 95.5 97.835 96.378 96.94373

34 Children's and infants' clothing (12) 13.1 13.7 98.038 97.776 13.73671

35 Other clothing materials and footwear (13 and 17) 60.3 63.9 103.1 104.15 63.25578

36 Gasoline and other energy goods

37 Motor vehicle fuels, lubricants, and fluids (59) 279.1 331.4 106.069 125.441 280.2215

38 Fuel oil and other fuels (29) 20.3 22.7 114.129 133.927 19.34433

39 Other nondurable goods

40 Pharmaceutical and other medical products (40 and 41) 316.8 330.6 111.241 115.239 319.1305

41 Recreational items (parts of 80, 92, and 93) 132.8 141.4 100.453 97.161 146.1909

42 Household supplies (parts of 32 and 36) 110.1 114.1 106.979 106.155 114.9857

43 Personal care products (part of 118) 89.9 95.2 105.085 104.081 96.11833

44 Tobacco (127) 87.9 94.4 144.831 160.563 85.15067

45 Magazines, newspapers, and stationery (part of 90) 58.8 64.6 109.044 109.929 64.07993

Value v 2159.9 2295 Q[t-1 prices] 2225.8

1+gQ 1.030491

Table 2.4.4. & 2.4.5. Personal Consumption Expenditures by Type of Product & Price IndexesBureau of Economic Analysis

Last Revised on: August 08, 2011

Contribution to Growth • Each sub-component contribution to the growth

rate is the product of its importance in

expenditure at time t-1 and the size of its own

growth rate

• For each component k, this contribution can be

calculated as:

1

kk q

t tw g

1 1

11

1 1 1

1 1

% 100%

[ ]

[ ]100% 100%

kk k q

t t t

kk ktt tk k k k k

t t t t t

t t

Cg w g

P Refv v

p q p q P Ref

V V

Line   2009 2010 2009 2010

25 Nondurable goods v_k P^k[2005] q_t*p_t-1

26 Food and beverages purchased for off-premises consumption Ck gQ%

27 Food and nonalcoholic beverages purchased for off-premises consumption (4) 645.3 659.4 113.948 114.267 657.5591 0.57%

28 Alcoholic beverages purchased for off-premises consumption (5) 100.4 106.6 110.724 111.271 106.076 0.26%

29 Food produced and consumed on farms (6) 0.3 0.3 89.632 104.583 0.257113 0.00%

30 Clothing and footwear

31 Garments

32 Women's and girls' clothing (10) 153.7 161.2 97.647 96.743 162.7063 0.42%

33 Men's and boys' clothing (11) 91.1 95.5 97.835 96.378 96.94373 0.27%

34 Children's and infants' clothing (12) 13.1 13.7 98.038 97.776 13.73671 0.03%

35 Other clothing materials and footwear (13 and 17) 60.3 63.9 103.1 104.15 63.25578 0.14%

36 Gasoline and other energy goods

37 Motor vehicle fuels, lubricants, and fluids (59) 279.1 331.4 106.069 125.441 280.2215 0.05%

38 Fuel oil and other fuels (29) 20.3 22.7 114.129 133.927 19.34433 -0.04%

39 Other nondurable goods

40 Pharmaceutical and other medical products (40 and 41) 316.8 330.6 111.241 115.239 319.1305 0.11%

41 Recreational items (parts of 80, 92, and 93) 132.8 141.4 100.453 97.161 146.1909 0.62%

42 Household supplies (parts of 32 and 36) 110.1 114.1 106.979 106.155 114.9857 0.23%

43 Personal care products (part of 118) 89.9 95.2 105.085 104.081 96.11833 0.29%

44 Tobacco (127) 87.9 94.4 144.831 160.563 85.15067 -0.13%

45 Magazines, newspapers, and stationery (part of 90) 58.8 64.6 109.044 109.929 64.07993 0.24%

Value v 2159.9 2295 Q[t-1 prices] 2225.81+gQ 1.030491

3.05%

Table 2.4.4. & 2.4.5. Personal Consumption Expenditures by Type of Product & Price IndexesBureau of Economic Analysis

Last Revised on: August 08, 2011

Volume Indices

• To compare the level of aggregate quantities at different points in time, total up the growth that appears in between periods.

1. Calculate the growth rate for all periods using the prices from the immediately previous periods to adjust current values.

2. Choose a reference period, ref, preferably in a recent period and set a chained index, CI, equal to 100 in that period

Q

tg

[ ] 100Q

RefCI Ref

Chained Index

3. Define the index recursively in all periods

using the equation

The relationship between the levels of the chain

volume index at any two points t and t+T is

the product of the growth between the two

points.

1[ ] (1 ) [ ]Q Q Q

t t tCI Ref g CI Ref

1 2 3

[ ](1 ) (1 ) (1 ) .... (1 )

[ ]

QQ Q Q Qt Tt t t t TQ

t

CI Refg g g g

CI Ref

http://www.bea.gov

Real Quantities, Chained Prices

• For comparison’s sake, quantities are often

reported in $ terms using the quantity index to

determine how it stands relative to the

reference year.

[ ][ ]

[ ] 100

QChain tt RefQ

Ref

CI RefQ Ref V

CI Ref

Quantity Index 2003 94.232

Quantity Index 2005 100

Value 2005 1,953.40

Quantity 2003 1,840.73

Chained Dollars

Nondurable Goods

0

500

1000

1500

2000

2500

1995

1997

1999

2001

2003

2005

2007

2009

Bil

lion

US

$

Chained Dollars Current Dollars

• Some macroeconomic aggregates are difficult

to chain link as they are possibly negative

including net exports or change in inventories.

• Estimate real NX – Calculate chained

quantities of exports and imports and subtract

imports from exports to calculate real NX.

• Estimate real CSX – Calculate chained

quantities of GDP and GDP net of CSX.

Estimate real CSX with the difference.

Link

Implicit Price Deflator

• An estimate of the price level is the ratio of the value to

the quantity in chained dollars.

[ ]

100[ ]

Chain

t

t

Chain

t

P Ref

V

Q Ref

HK$ million HK$ million

2009=

100

1,317,650 1,168,506 112.8

1,299,218 1,174,317 110.6

1,277,314 1,195,936 106.8

1,234,761 1,231,886 100.2

1,291,923 1,336,185 96.7

1,382,590 1,430,815 96.6

1,475,357 1,531,255 96.3

1,615,574 1,629,092 99.2

1,677,011 1,666,664 100.6

1,622,322 1,622,322 100.0

1,743,858 1,735,399 100.5

2000

Year

GDP

Implicit

price

deflatorAt current

market prices

In chained (2009)

dollars

2001

2002

2003

2004

2005

2006

2007

2008

2009r

2010r

Price Growth

• The growth rate of prices is defined implicitly.

• Net aggregate price growth is the weighted

average of the price growth of individual

components.

11

1

VP tt Q

t

gg

g

1 .0.0

1 .0 0

V

t

Q

t

g 1 625491 3111

g 1 3 491

Ex.

1

1

1 1 1 1 1

1 11 1

1

1

1

[ ][ 1] [ 1] [ 1] [ 1]

k kpt t

k kk k k kVt tt t t tt kk k

k k k kQ k k

t t t tt t tk k k

k k k k kk k k k k kt t t t tt t t tP kk k t t

t kkt t t t t

w g

p qp q p qg

p q p qg p q

q p p p pp q p q p qg

Q t Q t Q t Q t p

1442 443144442 44443

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).

100t

Cost of Market Basket in year tCPI

Cost of Market Basket in Base year

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005

CPI

GDP Deflator

Hong Kong’s History of Prices

• CPI coverage is smaller than GDP deflator.

• Market basket stays constant unlike PCE

deflator so may not reflect what people are

actually buying.

• CPI can be easily measured comes much more

often.

1

1

% 100%P t tt

t

P Pg Inflation Rate

P

Hong Kong CPI

0

20

40

60

80

100

120

140

19

80

M0

1

19

81

M0

5

19

82

M0

9

19

84

M0

1

19

85

M0

5

19

86

M0

9

19

88

M0

1

19

89

M0

5

19

90

M0

9

19

92

M0

1

19

93

M0

5

19

94

M0

9

19

96

M0

1

19

97

M0

5

19

98

M0

9

20

00

M0

1

20

01

M0

5

20

02

M0

9

20

04

M0

1

20

05

M0

5

20

06

M0

9

20

08

M0

1

20

09

M0

5

20

10

M0

9

Ind

ex

[O

ct.

20

04

-Se

p.2

00

5]

CPI CPI (A) CPI (B) CPI ©

Department of Census and Statistics

• Inflation: prices are growing

• Disinflation: inflation is slowing down but still positive

• Deflation: inflation is negative and prices are actually

dropping.

Hong Kong CPI

-6

-4

-2

0

2

4

6

8

10

12

14

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

%

http://www.imfstatistics.org/imf/

Inflation

Disinflation

Deflation

Adjusting for Inflation

• We can use price indices to “adjust for inflation” - converting values measured in money into values measured in the prices 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 –

$r rt t

t

PN N

P

r$

tN

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 September 2009 : HK$173,762 /m2

– in December 1982: HK$14,742/m2

• How much did an apartment cost back then when expressed in today’s dollars?

Housing Price: Hong Kong Island

• The Hong Kong CPI (2000=100) was 35.5 in

December 1982 and 109.2 in December 2009.

• Calculate:

• In real terms, luxury housing in 2009 is

almost 4 times as expensive as in 1982!

$ 109.2$14,742 $45,347.2

35.5

r rt t

t

PN N

P

GDP per Capita

• Population

changes over

time

• To assess

income levels

over time, we

divide by

population

[ ]t

GDP per Capita

GDP Chain

Population

Singapore

Average Growth Rate 2001-2010

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

GDP Grow th GDP per Capita

%

Link

Quarterly Data • Data on national aggregates is usually

calculated quarterly, at three month intervals.

Index quarters by tq. Volume quarter-on-quarter

growth rates can be defined

• Quarterly growth rates are often reported at

annual rates.

1

1 1 1

[ 1]1

k k

tq tqtqQ ktq k k

tq tq tqk

p qQ tqg

V p q

4

[ ]% 1 1 100%Q Q

tq tqg AR g

Net Growth Rate • The net growth rate is conceptually equivalent to a

weighted average of growth rates of component

parts.

• Growth rates are usually written in % terms.

Q

tg

1

1 11 1 1

1 1 1 1 1

11 11

1 1

k

k kqt t

k k kk k k k

t t tt t t tQ kk kt k k k k

t t t t tk k

k kk kt t k qt t

t tkk kt t

w g

p q qp q p qg

p q p q V

q qp qw g

V q

1442 44314442 4443

% 100%X X

t tg g

Quarterly Series

• Quarterly volume indexes created by choosing

a reference quarter as 100 then chaining

• Chained quantity estimates are shown as

relative to the reference year so as

1[ ] (1 ) [ ]Q Q Q

tq tq tqCI Refq g CI Refq

[ ][ ]

100

Q

tqChain

tq Ref

CI RefQ Ref V

Fisher Ideal Volume Growth 4. Convert value of goods k at time t into time t-1 prices

5. Sum the value of time t goods in time t-1 prices.

6. Use weighted geometric average of two growth rates.

1 11 1

1 1

k k kk k k kt t tt t t tk k

t t

p p qv p p q

p p

1 1 1

1

[ ]k

k k ktt t t tkk k

t

pQ t prices v p q

p

1

1 1 1 1 1

[ ]1 [ ]

[ ]

k k k k

t t t tQ t t k kt k k k k

t t t t t tk k

p q p qV Q t-1 pricesg FI

Q t prices V p q p q

Constant Price Aggregates

• An easier way to compare quantity aggregates

is to measure the quantities of all goods in

terms of the prices prevailing in a single base

year.

• Not recommended anymore because growth

rates may differ greatly depending on which

base year is used.

[ ][ ]

[ ]

k k k

Ref Ref Refk k k k k k

t t t t t Ref tk k kk k k kt t t

P Ref p pQ Ref v v p q p q

P Ref p p

Contribution to Growth

Expenditures

• Sources of Demand is often the focus of

attention.

• Often important to calculate contribution to

GDP growth of k =

PCE,GCE,GFCF,CSX,NX.

11

1

[ ]

[ ]100%

kk ktt tk

t

t

P Refv v

P Ref

V

• Problem: CSX and NX are often negative.

• Solution: CSX

– Calculate the contribution of Gross Capital Formation to GDP growth;

– Calculate the contribution of Gross Fixed Capital Formation to GDP growth

– CSX is difference between GCF and GFCF so the difference between GCF contribution to growth and GFCF contribution is CSX constribution.

Example: Using UN NA data to find

contribution of CSX to GDP growth

1. Calculate Implicit Price Deflators

Gross Fixed

GDP 2008 Gross Capital Capital Changes in

14369.4 Formation Formation Inventories

GDP by Expenditure, current prices - National currency Billions$

2008 2541.4 2576.0 -34.6

2009 1926.3 2068.2 -142.0

GDP by Expenditure, at constant 2005 prices - National currency Billions$

2008 2340.1 2368.6 -28.5

2009 1812.1 1934.1 -122.0

Gross Fixed

Gross Capital Capital Changes in

Formation Formation Inventories

Implicit Price Levels

2008 108.6 108.8 121.4

2009 106.3 106.9 116.4

[ ] 100[ ]

kk t

ktt

vP Ref

q Ref

2. Calculate the contribution of Gross

Capital Formation to GDP growth

3. Calculate the contribution of Gross Fixed

Capital Formation to GDP growth

4. Contribution of CSX to GDP growth

11

1

[ ] 108.6. .

[ ] 0 .100% 100%.

kk ktt tk

t

t

P Refv v 1926 3 2541 4

P Ref 1 6 3 3.99%V 14369 4

108.80 . .0

0 .9 100%.

2 68 2 25761 6 3.29%

14369 4

3.99% 3.29% .70%