The foundations of economic statistics

The Gross Product• Definition of Gross Product : The total value of all final goods and services produced within a country, that is, the production of the whole country.. • The unit pric

Macroeconomics for Public Policy

The Foundations of Economic Statistics

Tran Lam Anh Duong 5-6 February 2018

The Gross Product

• Definition of Gross Product :

The total value of all final goods and services produced within a country, that is, the production of the whole country.

• Definition of GDP (Gross Domestic Product)

GDP is a statistic index used to measure gross product from available

data.

• We assume that there is one type of good in the economy.

Total amount of newly produced goods which is traded in the country’s market during a given period.

 We only take into account newly produced goods.

 Targeting goods are trading goods in the market

• There are several types of goods and services

 How to add up different goods and services?

 Example 1: Country X produced 100 hamburgers, 100-liter Oolong Tea, and 100-kilogram potato in one year

⇒ The measure of unit is different

⇒ It is impossible to do the addition

 Example 2: Country A produced 1-ton scrap iron and 100-ton gold bar last year Country B produced 100-ton scrap iron and 1-ton gold bar last year

⇒ The sum of production is 101 tons for both countries

⇒ However, the values of scrap iron and gold bar are different

• Let’s refine the definition of GDP.

GDP is the sum of market value of the newly produced goods and

services in the economy during a given period.

Nominal GDP

• The set of example 1:

⇒ The nominal GDP of country X is

200 × 100 + 300 × 100 + 400 × 100 = 90,000 𝑦𝑦𝑌𝑌𝑛𝑛

Hamburger 200 yen per one unit 100 unitsOolong Tea 300 yen per liter 100 litersPotato 400 yen per kilogram 100 kilograms

Nominal GDP

• The set of example 2:

⇒ Country A’s nominal GDP＝ 10 billion and 1 yen

Country B’s nominal GDP＝ 0.1 billion and 100 yen

⇒ Country A produced many goods with high market values, thus the nominal GDP is high.

Price (𝑷𝑷) A’s production (𝑸𝑸𝑨𝑨) B’s production (𝑸𝑸𝑩𝑩)

 Case 2: the price from 𝒕𝒕 to 𝒕𝒕 + 𝟏𝟏 increases

by twice and the production is unchanged

⇒ Nominal GDP of 𝒕𝒕 + 𝟏𝟏:

400 × 100 + 600 × 100 + 800 × 100

= 180,000 𝑦𝑦𝑌𝑌𝑛𝑛

• Problem point: take example 1

Case 1: the price from 𝒕𝒕 to 𝒕𝒕 + 𝟏𝟏 is unchanged

and the production increases by twice

⇒ Nominal GDP of 𝒕𝒕 + 𝟏𝟏:

200 × 200 + 300 × 200 + 400 × 200

= 180,000 𝑦𝑦𝑌𝑌𝑛𝑛

Real GDP

• Real： The meaning of “Evaluation based on the unit of goods”

• Base year: We can freely choose a base year, but usually that year is

convenient to be "a base".

• The unit price of goods and services used to calculate the real GDP in year 𝒕𝒕

is not the price in year 𝒕𝒕 , but the price of base year.

Real GDP in year 𝒕𝒕 = 𝐺𝐺1base𝑄𝑄1𝑡𝑡 + 𝐺𝐺2base𝑄𝑄2𝑡𝑡 + ⋯ + 𝐺𝐺𝑁𝑁base𝑄𝑄𝑁𝑁𝑡𝑡

Remark: To calculate real indicators in other years, we use the same unit

price of the base year

Real GDP

• Case of example 1: From year 𝒕𝒕 to year 𝒕𝒕 + 𝟏𝟏, the productions of all goods and

services are increased by twice ⇒ Real GDP will be increased by twice

• Case of example 2: From year 𝒕𝒕 to year 𝒕𝒕+𝟏𝟏, the productions of all goods and

services are unchanged, and the prices of those are increased by twice ⇒

What will the real GDP be?

Real GDP is a measurement that reflects the change of the production, but doesn’t reflect the price

The treatment of intermediate goods

• Intermediate good: A good or service used in production of another good before the final stage of production.

• Final good: A good or service which is sold directly to consumers and enterprises after the final stage of production

⇒ The value of intermediate goods is included as a part of the market price of the final goods that they are constituted.

⇒ A problem: adding the intermediate goods to the final goods would

be double counting

The treatment of intermediate goods

• Value-add: A value addition to the good at one stage of its production.

• Example:

Value of production Value added

The treatment of intermediate goods

• Refine the definition of GDP:

GDP is the sum of value added of newly produced goods and services in the

economy during a given period.

• Take the example of hamburger, the sum of value added is 50+80+20+50=200 (yen)

⇒ The sum of value added is consistent with the value of final goods.

• Next we can also define GDP as the following:

GDP is the sum of the value of final goods and services in the economy during a given period.

Equivalence of three approaches

• Three approaches: product approach, income approach, and expenditure approach

• The index from income approach: Gross income

Gross income is the income from the production of goods and services in the economy during a given period.

• The index from expenditure approach: Gross expenditure

Gross expenditure is the expenditure on the goods and services produced in the economy during a given period.

Equivalence of three approaches

• The example of the economy with one transition: a small country in a day

⇒ Gross product＝ Gross income＝ Gross expenditure＝200 yen

• Principles of Equivalence of Three Approaches：Gross product, gross income, and gross expenditure are always identical

• Treatment of inventory (unsold items): Aren’t product, income and expenditure

identical?

⇒ Regard it as “I sold to myself”

⇒ Confirmation of principles of equivalence of three approaches

Student Farmer 200 yen of banana

GDP Statistics

• The following principles are established to get the GDP statistics:

We just take into account the produced goods and services which are traded at the market when calculating the gross product

• What about housework and babysitting?

⇒ Housework and babysitting are not included

• How about imputed rent of owned-house ？

⇒ It is not traded in the market, thus it is not included in GDP?? → Exception

⇒ The method to calculate GDP： “I sold to myself”（refer to rental rate of

neighborhood）

Vietnamese GDP Statistics

• Data Source:

Website of General Statistics Office of Vietnam

• When we look at the real Vietnamese GDP,

 Is it nominal or real GDP?

 If it is real GDP, what is the base year?

 The common mistake: compare GDP statistics or use time series data in

terms of different base year

An example of what leads to the common mistake

0 100 200 300 400 500 600

Principles of equivalence of three approaches

• Review of principles of equivalence of three approaches

• There are three approaches to classify GDP.

 Gross production

 Gross income

 Gross expenditure

Macroeconomics from product approach

• Review of Gross Domestic Product – GDP

• Components of GDP in terms of purposes:

 Investment goods: Goods used for production

 Intermediate goods: Goods regarded as materials which are used to produce other goods

 Consumer goods: Goods purchased by households, final consumption

• Depreciation of fixed capital: a part of used goods that becomes

unusable or destroyed.

• Net Domestic Product – NDP: GDP minus the depreciation of fixed

Macroeconomics from expenditure approach

• Gross Domestic Expenditure - GDE

 Agents in the economy can be divided into four groups: households, firms,

government, and foreign

 GDE can be divided into four categories: Consumption(C), Investment(I),

Government Purchases(G), Net Exports (NX=Exports―Imports)

GDE＝Consumption＋Investment＋Government Purchases＋Net Exports

(𝐺𝐺𝐺𝐺𝐸𝐸 = 𝐶𝐶 + 𝐼𝐼 + 𝐺𝐺 + 𝑁𝑁𝑁𝑁)

※ There are nominal and real items in each one.

• It is easy to misunderstand the word “Investment”⇒ Attention

Example 1: Firm A thought that the stock of firm B would rise soon, and

bought 1 billion yen of firm B's stock from firm C

Example 2: Agent E bought an ancient building for 100 million USD, aiming for

an increasing in value

• Components: 3 categories

① Equipment Investment: the purchase of production equipment by firms

② Housing Investment: the purchase of housing by households

③ Private Inventory Investment: the increase and decrease of firms’

inventories of goods

• Why is inventory not expenditure but investment?

 Example: There are farmers and college students in one country.

1, May: Farmers produce one banana worth 200 yen and don’t sell to students, so it is

stored in warehouse.

FixedInvestment

Government Purchases

• Definition: Goods and services purchased by the government.

※ Remark: Not only the central government, but also the state and local

government.

• Components: 3 categories

① Government Purchases(𝐺𝐺𝑐𝑐): the expenditure of the government

② Public Investment (𝐺𝐺𝐼𝐼)：the investment of the government

③ Public Inventory Investment(𝐺𝐺𝑆𝑆)：the increase and decrease of the inventory of the government

• Government transfers: the payment of pension, medicare or social security, unemployment insurance and etc.

 It will directly affect a country financial deficit and so on.

 It is not included in government purchases in GDP statistics or in macroeconomic

Net Exports

• Definition: Exports minus imports.

Net Exports NX = Exports 𝑁𝑁 − Import(𝐼𝐼𝐼𝐼)

• The identity of gross product and gross expenditure:

𝐺𝐺𝐺𝐺𝐺𝐺 = 𝐺𝐺𝐺𝐺𝐸𝐸

𝑌𝑌 = 𝐶𝐶 + 𝐼𝐼 + 𝐺𝐺 + 𝑁𝑁 − IM

• Why is import deducted?

import export

Macroeconomics from income approach

• Four agents for production: labor, landlord, investor, and entrepreneur.

• Corresponding to the above, there are four categories of gross income:

GDP vs GNP

• GNP (Gross National Product): adding to GDP

・ the profits raised by Japanese companies overseas,

・ the interests and dividends earned by Japanese citizens from overseas investment

and subtracting from GDP

・foreigners' gain from production and investment activities in Japan

GNP = GDP + factor payments from abroad - factor payments to abroad

Capital stock

• Capital goods: ① the production equipment of firms, ② the housing

of households.

• Capital stock: the total value of capital goods in one country for a

given point of time.

• Notation: 𝐾𝐾

Flow and Stock

• Flow variable: a quantity measured within a certain period of time.

• Stock variable: a quantity measured at a given point of time.

Gross savings

• Gross savings(𝑆𝑆) : Gross income minus consumptions(𝐶𝐶) and government purchases(𝐺𝐺𝐶𝐶)

𝑆𝑆 = 𝑌𝑌 − 𝐶𝐶 − 𝐺𝐺𝐶𝐶

⇒ Is this stock variable? Or flow variable?

• The gross savings consist of private savings and government savings

• Private savings can be divided into household savings and firm savings

• Be careful with the word “savings”

Example: “This person has lots of savings” ⇒ The saving here means all of his wealth

⇒ Is this stock variable? Or flow variable?

Price level

• Definition: The average price of trading goods and services in the economy.

Price measured in terms of currency unit (VND, yen, US dollar and so on)

Another name: nominal price

• Notation: Capital 𝐺𝐺

 It is different from small 𝑝𝑝 in microeconomics

 Meaning of increasing of 𝑝𝑝 in microeconomics

 Meaning of increasing of 𝐺𝐺 in macroeconomics

 Example: Prices of related products due to rising in oil price

GDP deflator

• Example: One country only produces

machines, cereals and clothes.

 The output of 2005 and 2010:

 The price of 2005 and 2010:

• Let’s calculate the following index:

Nominal GDP of 2005

Nominal GDP of 2010

Real GDP of 2010 (2005 is the base year)

GDP deflator of 2010 (2005

is the base year)

Machines Cereals Clothes

Machines Cereals Clothes

2005 100 million/piece 1 million/ton 60,000/piece

2010 150 million/piece 0.8 million/ton 70,000/piece

Other statistics about price level

• The advantage and disadvantage of GDP deflator:

 Advantage: The cover of the scale is pretty large

 Disadvantage: ① It takes time to get the result

② Quarterly statistics ⇒ We cannot answer the question about the price

index of last month

• Other statistics about price level:

① “Consumer Price Index”, (ＣＰＩ, monthly statistics): calculated by the average price of

consumption of goods and services

② “Corporate Good Price Index”, (CGPI, monthly statistics): The average price of goods

traded between firms

Price Index

• Paasche index：

Paasche index for current year

= ∑ current yearʹs production × current yearʹs price

∑ current yearʹs production × base yearʹs price

• Laspeyres index:

Laspeyres index for current year

= ∑ base yearʹs production × current yearʹs price

∑ base yearʹs production × base yearʹs price

• Comparison of these two types of price index

The influence of import price on GDP deflator

• Question: If the import price raises, what is the influence on domestic price?

• Hint:

Nominal GDE = Price of consumption goods × Consumption volume

＋ Price of equipment investment goods × Equipment investment volume

＋ Export price × Export volume

－ Import Price × Import volume

Inflation rate

• Inflation rate: the increasing rate

of price level.

• Calculation:

The price level in year 𝑡𝑡: 𝐺𝐺𝑡𝑡

The price level in year 𝑡𝑡 + 1: 𝐺𝐺𝑡𝑡+1

The inflation rate from 𝑡𝑡 to 𝑡𝑡 + 1: 𝜋𝜋

𝜋𝜋 = 𝐺𝐺𝑡𝑡+1𝐺𝐺− 𝐺𝐺𝑡𝑡

𝑡𝑡 × 100

Inflation: inflation rate is positive

Deflation: inflation rate is negative

Source: Vietnam GSO

99 99.5 100 100.5 101 101.5 102

199519961997199819992000200120022003200420052006200720082009201020112012201320142015

Vietnamese CPI

Goods & services

Labor conditions

• Categories of Labor conditions:

Own Business Under the age of 15 Employed Family Member’s Business

Age 15 and older (54.4m) Unemployed (40.4 k) (71.5m) Not labor force

Source: Vietnam GSO

Source: Ministry of Public Management 「 Labor Survey 」 , March, 2014

Labor conditions

• Categories of employed people:

 Own business: Person who runs his own business

 Family member’s business: Person who is working for family business

 Employees: Person who is hired and paid by firms

• Labor survey:

 GSO does survey quarterly

 The survey aims for age 15 and older people living in Vietnam The survey is about the employment time, field, job features and so on

Unemployment rate

• Problems of unemployment:

 Personally, individual has no salary, cannot utilize his/her ability, and loses the

opportunity to connect with society

 Socially, the labor resource cannot be used effectively

• Unemployed people:

Definition: People who is hunting for a job

Conditions for statistics:

1 Person who did not work, or at least during the investigation period has no work.

2 If there is a suitable work, he/she will be eager to take it immediately.

3 During the investigation period, he is hunting for a job, or preparing to start his own business.

Unemployment rate

• Definition: The percentage of completely unemployment in the labor force

Unemployment Rate = No of UnemployedLabor Force × 100

= No of Unemployed + No of Employed × 100No of Unemployed

• Data

Jobs-to-applicants ratio

• Definition: The number of employer to one unit of job hunter

 Job hunter: Labor who is seeking for the job

 Employer: The company who has vacancy job

 If the jobs-to-applicants ratio is greater than 1, then it will be easy for labor to find a job

 Vietnamese jobs-to-applicants ratio in the 3rd quarter in 2016 is 75.1%

Working hours

• Why do we have to consider working hours:

① Even doing the same job, working hours are different across employees.

⇒ The productivity is different.

⇒ “Length of working time” is a necessary index to measure the labor resource in the whole economy.

② “Length of working time” has high correlation with people’s lives.

• The statistics of working time investigation: surveys to firms and surveys to

workers

⇒ The numbers are quite different.

⇒ Unpaid overtime work