Download Comparing GDP across Countries

Measuring
Economic
Performance
Readings
• Lequiller François and Derek Blades, 2006, Under
standing NATIONAL ACCOUNTS, Organization for
Economic Cooperation and Development, Chapter 1
and 2. Link
• Bureau of Economic Analysis “Introduction to the
National Income and Product Accounts” Link
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)
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
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
GDP is a measure of production
• Value added at production establishment i
Value Addedi =Sales +  inventories
-raw materials, semi-processed inputs and energy costs.
• GDP is the sum of VA across establishments.
GDP  iValue Addedi
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.
Link
• 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
Link
the UN
Production Approach
Sub-aggregates
• Divide production establishments into sectors
usually along the line of
– Agriculture: Natural Resources (Agriculture, Forestry,
Fishing)
– Industry: Goods production (Mining, Manufacturing,
Utilities, Construction)
– Services: Trade, Transport, Communication, Services
Other Activities (ISIC J-P)
Transport, storage and
communication (ISIC I)
Wholesale, retail trade,
restaurants and hotels (ISIC
G-H)
Construction (ISIC F)
Manufacturing (ISIC D)
Mining & Utilities
Agriculture, hunting, forestry,
fishing (ISIC A-B)
Hong Kong: Value Added by Sector
60
50
40
30
20
10
0
2010
1970
UN Main Aggregates Link
Dynamics of Industrial Structure
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)
Some Asian Expenditure Shares: 2010
People’s Republic of China
1
90
0.9
80
0.8
70
0.7
60
0.6
50
0.5
40
0.4
30
0.3
20
0.2
10
0.1
0
1
0
2
Japan
3
4
5
Republic of Korea
6
7
8
9
-10
Household consumption expenditure
General government final consumption expenditure
Gross fixed capital formation
Changes in inventories
Source: United Nations Main Aggregates Database
10
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
HK Exports & Imports
250
200
150
2010
2008
% of GDP
2006
2004
2002
100
2000
1998
1996
Exports of goods and services
1994
1992
50
1990
1988
1986
1984
1982
0
1980
Imports of goods and services
1978
1976
1974
1972
1970
UN Main Aggregates Link
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.”
Income Approach to Measuring GDP
Value Added distributed as income to Employees,
Owner/Creditors, & Gov’t
1. Compensation of employees (Wages, Benefits)
2. Net operating surplus (Profits, Net Interest, Rental
Income)
Value Added 2010 1.58 Trillion HK$
3. Taxes on Production
Compensation of employees
Value Added
Compensation of employees
Gross operating surplus
Taxes on production
17
1,606,092
828,139
753,171
24,782
Gross operating surplus
Taxes on production
1%
47%
52%
•
Using GDP to Measure Economic
Performance
• 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.
What is Economic Growth in a world of
many goods?
• We need to combine the many goods produced or
consumed in an economy into one measure.
+
+
+
+
=?
Value vs. Volume
• Consider the sales of a hypothetical single good
k (for example, k = apples).
• Dollar Value of sales (called vk) is the product of
the volume of goods sold (called qk) measured in
the goods natural units (i.e. bushels of apples)
and the dollar price per good (called pk)
vk = pk*qk
• Growth of value can be decomposed into growth
of volume and growth in prices.
Share of Value
• We could measure total value for the economy.
• Divide our economy into K categories of goods
indexed by k = 1,…, K.
• Value of sales of good k, vk. GDP is represented
as the sum of value across goods
GDPt  Vt  v  v  v ...  v
1
t
2
t
3
t
K
t
Value weignts and Inflation Vectors
k
t
• The weight of k in the economy v could be
k
v
defined as wk 
which add up to 1 across
V
sectors.
• For every type of good at time t, an inflation vector
representing the growth rate of prices.
k
pt
pk
k  1  gt
pt 1
Real GDP Growth
• Growth of value can be decomposed into growth of
volume and growth in prices.
(1  g )  (1  g )  (1  g )
vk
t
pk
t
 (1  g ) 
q
t
k
qk
t
(1  g )
vk
t
(1  g )
pk
t

k
t
k
t
v
p
vtk1
ptk1
• Instead we could construct a weighted average
gt
REALGDP

w  gt  w  gt  w  gt  ...  w  gt
1
t 1
q1
2
t 1
q2
3
t 1
q3
K
t 1
qK
Notes on Price Indices: New Goods
• Weights change as production structure of the
economy changes
k
pt
k
t 1
• Market baskets used to construct p don’t
need to stay the same over long-periods.
• K categories of goods 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.
GDP Growth
14
12
A
v
10
e
r
a
g
8
e
%
G
r
o
w
t
h
6
4
2
0
1971-1975
1976-1980
1981-1985
1986-1990]
Hong Kong
1991-1995
USA
World
1996-2000
2001-2005
2006-2010
Inflation
• We also decompose the growth of the aggregates
into growth in prices (inflation) and growth in
V
P
Q
volume (output). (1  gt )  (1  gt )(1  gt )
(1  g ) 
P
t
(1  g )
V
t
(1  g )
Q
t
Midterm Exam
• Thursday, October 24th, 2013
– When: 1:30-2:50 p.m.
– Where: TBA
• Bring writing materials and calculator.
• Coverage: Globalization-Human Development
• Semi-open book: Bring 1 A4 size piece of
paper with handwritten notes on both sides.
Comparing GDP across Countries
We want to compare output in two countries
though those are measured in different currencies.
Exchange Rates
• Exchange Rate: S - # of domestic
currency units purchased for 1 US$.
• An increase in S is a depreciation of
domestic currency and a decrease in
S is an appreciation.
Atlas Conversion Method
• Exchange rates are volatile, so convert to US
dollars using SATLAS= 3 year average.
GDP pe Capita, US$
60000
50000
Axis Method
40000
30000
20000
10000
0
2000
2001
2002
2003
2004
2005
2006
Hong Kong SAR, China
2007
Singapore
2008
2009
2010
2011
2012
Link
• Major project to compare prices internationally
implemented by the World Bank with the help of
UN and national statistical agencies.
• ICP has been implemented by UN Statistical
Office since 1968.
PPP’s
1. Divide expenditures into k = 1,..,K
categories of goods.
2. All j = 1,..J countries (in 2005, J = 146)
report total expenditure in domestic
k
currency of all categories
v
j
.
3. Sample prices of representative goods
from each category in each country.
4. Construct average of those prices
(relative to “anchor” economy) for each
country j basic heading type of good k .
p
k
j
p
k
ANC
WDI provides PPP data for many countries
using US$ as anchor currency
Hong Kong PPP per Category
PPP
Xrate
Classification Name
2005
1101 Food and non-alcoholic beverages
8.81547906
1102 Alcoholic beverages and tobacco
10.1680743
1103 Clothing and footwear
6.11435997
1104 Housing, water, electricity, gas and other fuels
9.09847987
1105 Furnishings, household equipment and household maintenance 7.61334163
1106 Health
2.9312812
1107 Transport
9.40016616
1108 Communication
6.83789147
1109 Recreation and culture
5.24897067
1110 Education
3.25951882
1111 Restaurants and hotels
8.98215569
1112 Miscellaneous goods and services
5.61784877
1501 Machinery and equipment
7.5934365
1502 Construction
4.15019416
7.78
7.78
7.78
7.78
7.78
7.78
7.78
7.78
7.78
7.78
7.78
7.78
7.78
7.78
PPP Conversion Factor
• PPP is a value weighted average of relative
prices of all K goods.
PPPjAC $  w1j
p1j
p1ANC
 w2j
p 2j
2
p ANC
 ...  wKj
p Kj
K
p ANC
,......, w 
n
j
v nj
Vj
PPP 2010
China
Hong Kong
Korea
Japan
Singapore
PPP
3.94638098
5.34545752
827.345987
111.389068
1.04012836
PPP/XR
0.582922
0.688032
0.71566
1.268959
0.762831
XR
6.770269
7.769167
1156.061
87.77988
1.363508
One benchmark for thinking about whether a currency is undervalued or overvalued. If
PPP < XR, then domestic goods are relatively cheap, currency is undervalued.
GDP in Intl$
• PPP’s are used to construct comparable
measures of GDP for multiple countries by
converting them into international dollars.
GDPj [ Intl $] 
Per capita GDP in
international dollars is
headline way of
comparing living
standards.
GDPj
PPPjINTL $
GDP per capita, PPP (current international $)
2005
Hong Kong SAR, China
$35,677.92
China
$4,114.57
India
$2,299.76
Indonesia
$3,216.81
Malaysia
$11,754.53
Korea, Rep.
$22,783.27
Thailand
$6,750.94
Singapore
$45,374.24
• Use real GDP growth rates to construct path of
constant price International $GDP for comparisons
of production levels across time and space.
GDP per Capita, PPP
Constant 2005 International $
60,000.00
50,000.00
40,000.00
30,000.00
20,000.00
10,000.00
0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Singapore
Hong Kong
• Developing countries tend to be relatively cheap with
PPP’s being lower than exchange rates.
• OECD countries tend to have more similar price
structures, though they tend to be relatively more
expensive.
• High income, non-OECD countries tend to be
relatively cheap.
• Compare values measured in different currencies
using the PPP and exchange rate method.
Is China the Biggest Economy in the
World?
• Discuss Subramanian Link
Country NameIndicator Name
2005
2006
2007
2008
2009
2010
2011
2012
China
GDP (current LCU)
18493.7369 21631.4426 26581.0306 31404.5427 34090.2813
40281.65
47261.92
52760.77
China
PPP conversion factor, GDP (LCU per international 3.447589843
$)
3.46627859
3.6247 3.82281305 3.76702264 3.97864056 4.18192048 4.23068287
United States GDP (current LCU)
12564.3
13314.5
13961.8
14219.3
13898.3
14419.4
14991.3
15684.8
5364.250895 6240.53782
7333.305 8215.03492 9049.66191 10124.4758 11301.487 12470.982
Exchange Rate Method
• Exchange Rate Method can be a useful measure if you
are going to convert income in one area and spend it in
another.
– Ex. Your Swiss food company projects that it can at most get
a 20% share of the market for Mexican processed foodstuffs.
Converting the size of Mexico’s processed food expenditures
from Pesos to Swiss Francs is useful info for estimating
profits. .
• But macro aggregates are often used to give an idea of
living standards, here exchange rates are not as useful
because they are highly variable and not so
representative..
PPP vs. Exchange Rate Conversion
• Exchange rates are easily available so exchange rate
is a “quick and dirty” comparison.
– Measures how many US dollars someone could buy with
average income.
• However, money goes farther in some countries as
many types of goods are relatively cheap (especially
in developing countries).
– PPP conversion measures how much the goods purchased
by the average person would cost in the US. Better measure
of living standards.
GDP in US$ by Conversion Method
2005 GDP per Capita
$7,000
40000
$6,000
35000
$5,000
30000
25000
$4,000
US/Intl$
US/Intl$
2005 GDP per Capita
$3,000
20000
15000
$2,000
10000
$1,000
5000
$0
Low income
Lower middle
income
Middle income
Exchange Rate
PPP
Upper middle
income
0
High income: OECD
High income: nonOECD
Exchange Rate
PPP