Download GDP Deflator - the ITC-ILO E

Economic Aspects of Wage
Negotiation
Dr Gustavo Rinaldi
ITC ILO Consultant
(University of Turin, ESCP –Europe)
[email protected]
1
The accountant's
profit and loss account
+Revenues (price X quantity)
- cost of raw materials, labour, suppliers
- depreciation
= OPERATING PROFIT
- interest
= PRE TAX PROFIT
- Tax
= AFTER TAX PROFIT
- dividends
= RETAINED EARNINGS
Inflation
Standard of Life
Depends on the ability of people in
acquiring goods.
Depends on how much they earn.
Depends on how much goods are expensive.
Standard of Life
It can be measured by the real income.
Income
Level of Prices
.
.
= Real Income
Standard of Life
Income
Level of Prices
.
.
= Real Income
The real income indicates the purchasing
power of the recipient of that income.
It indicates how many goods she/he can
acquire.
Level of Prices
We measure it by observing the total price
of a set (basket) of goods.
We usually compare the price of the basket
of goods today with the price of that
basket of goods at a different date.
The ratio between the two prices gives an
index.
Price Index Today
Price of a set of goods today
Price of a set of goods at the reference time
.
Sometimes they are multiplied by 100.
.
Price Index:
P
t+1
P
t
9
Consumer Price Index -
CPI

It is about what we consume.
Ii is based on a basket of goods made either
domestically or abroad.
Different goods are included in the basket with different
weights.
It is usually defined by the statistical authority of the
country.
Politics plays a role.

Usually available every month.
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Politics in the CPI

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Sometimes governments like to underestimate the
inflation in their country.
This can be done with different techniques.
They can exclude or under represent some goods.
They can over-represent the weight of certain goods.
Technology goods have prices which increase slowly or
sometimes decrease.
11
GDP Deflator
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It is about what we produce domestically.
It is based on a basket of goods made domestically.
In our country we may produce goods that we do not
consume and we may consume foreign goods.
Different goods are included in the basket with weights
corresponding to their share in the national GDP.
Available every 3 months.
It is a measure of the competitiveness of a country.
12
Nominal GDP
The sum of final goods produced in the country at current
prices.
13
Real GDP = GDP

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Constant prices GDP
In terms of goods
Quantities of this year, prices of a different year
(the reference year).
14
GDP Deflator:
Nominal GDP
Real GDP
15
GDP Deflator 1998 - 2016
GDP Deflator 1998 - 2016
GDP Deflator steepness = growth rate
GDP Deflator 1998 - 2016
BIH (GDP Deflator) and BIHC (Consumer Price Index)
CHN (GDP Deflator) and CHNC (Consumer Price Index)
Other Price Indexes exist
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They may not include some goods.
They may exclude certain goods on purpose.
Sometimes they are the result of a political agreement,
e.g. Planned Price Index
In Italy for many years workers recovered the planned
inflation not the actual one.
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Inflation
It is a generalized increase of prices.
Some inflation is natural and necessary.
Too much is a problem.
It redistributes income from those with fixed
income to those with adjusted income.
It takes money from creditors and it gives
them to debtors.
Rate:
A ratio between two measurements
Very often it is the ratio between a
difference and a reference value
25
Rate of variation
x = a variabie (e.g. GDP, Consumption, Investments,
etc.)
This variable at time t
This variable at time t+1
26
Rate of variation
x  xt 1  xt
27
The variation of x
between t and t+1
The variation rate
Xt
28
An Index
H
Xt
H is some variable
A ratio between two variables or between two different values of the
same variable
29
An Index of variation
X t 1
Xt
30
GDP Deflator
Pt = Nominal GDP
Real GDP
€ Yt
Pt = ----------Yt
31
Inflation Rate
P
P
t
Inflation rate = (Price Index - 1)
32
Inflation

Decreasing inflation

Disinflation

Deflation
33
Productivity
Productivity (average)
A measure of efficiency
The ability of transforming input into output
Productivity =
Output
Input
35
Average Labor Productivity
A measure of Efficiency of Labor (or of the company?)
Productivity =
Output
.
Units of Labor
36
Units of Labour
Heads an easy measure, but what if workers
are kept with reduced working hours?
Worked Hours more difficult to find, but
more precise.
37
Measures of Output
Physical units.
Monetary terms
•
Total sales
•
Value Added
38
Physical Measures of Output
They are not affected by prices.
They seem objective.
Problems arise when different workers produce
different goods, e.g. different type of cars or
different cloths.
We may actually end up comparing totally
different things.
39
One Car
One Car
Monetary Measures of Output
They are affected by prices.
They take into account the value of goods.
Prices may be an indicator of quality.
Prices may be an effect of good management.
Prices may also be an indicator of monopolistic
power of the firm.
42
Monetary Measures of Output
Sales are easy to find and to calculate.
Sales do not only represent the effects of work but also of
other inputs, e.g. expensive components.
Value Added is probably a more precise measurement.
Gross Value Added = (Sales
43
–
Intermediate Consumption)
Intermediate consumption:
Things and services that
the firm buys from
external sources
(do not
include those goods which do not
disappear during production, i.e.
equipment, durable production goods).
Intermediate consumption:
approximately
corresponds to the
value of the sum of all
the received
invoices.(does not include
those goods which do not
disappear during production,
i.e. equipment, durable
production goods, patents,).
Intermediate consumption includes:
raw materials
partly finished goods
sub-assemblies
services you buy outside
Banking costs
Services of outsourcees.
Intermediate consumption does not
include:
Equipment
Real estate
Intangible Assets
Wages to employees
Compensation of equity
Indirect taxes
Interests
Rents to families
Value Added: represents the contribution of labour and
capital to the production process.
Gross value added =
+ Gross output
- intermediate consumption
Net value added
=
gross value added
- consumption of fixed capital (or depreciation charges)
Net value added
=
gross wages
+ pre-tax profits net of depreciation
+ indirect taxes
- subsidies.
+ Interests
+ Rents to families
Marginal Productivity
The output created by an additional worker or by an additional
investment.
It is used to explain differences in wages.
It is used in more sophisticated analyses.
It is easy to measure with simple technologies, but not with
complex technologies.
49
What about the other production
factor?
Does Gross Value Added really and
only represent the work of
employees?
No.
It also depends on the invested capital and on management.
Workers may have low productivity because the equipment is
very old or because the company is not well managed.
And vice-versa.
51
Production depends on:
Labour
Invested Capital
Type of raw materials and components.
Management
The productivity of one factor
depends on the others
Good investments make labour more productive.
Bad or little capital may heavily affect labour
productivity.
Good management and good marketing may
improve the sale price of the product.
Sometimes international conditions affect the
price of the product.
Profitability
If you need to attract capital,
capital must receive some
compensation
This is measured in different ways.
Some Measures of Profitability
•
•
•
•
•
Net Profit Margin
EBITDA Margin
Operating Profit Margin
Return on Equity
Return on Assets
Net Profit Margin:
Net Income/ Sales
Net Income = After Tax Net Profit
EBITDA MARGIN:
EBITDA / Sales
EBITDA= earnings before interest, taxes,
depreciation (and amortization)
Operating Profit MARGIN:
Operating Profit / Sales
Operating Profit = Sales – Non Financial Costs
Return On Equity :
Net Income/ Equity
Net Income = After Tax Net Profit
Return On Assets :
Net Income/ Assets
Net Income = After Tax Net Profit
Assets
In some cases people calculate:
(net income + interest) / Assets
Financial cost
Companies may make money with their
core activity and then have heavy
financial costs.
The cost of obtaining money.
Equity is only compensated when there
are profits.
Loans must be paid back.
The higher the interest on loans, the
heavier the financial burden.
Financial cost
If a company is financed by a lender of
the same shareholder, interests will
remain in the same group.
If the lender is in a tax haven, it will pay
low or no taxes.
Unit Labour Cost
Cost of labour in different countries 10 years ago
Is German labor too expensive?
Cost of input per unit of production:
Unitary cost of input
Average productivity of this input
67
Cost of input per unit of production: In the case of Labor
Unit Labor Cost
=
w
Q/L
=
wage
average productivity of L
.
68
Cost of input per unit of production: In the case of Labor
Unit Labor Cost
=
wL
Q
=
Wage Bill
Production
.
Production may be expressed in physical or monetary terms.
69
The role of Public Authority
It provides the respect of the law and the certainty of
rules.
It regulates (e.g. the utilities) and eventually subsidizes
the private sector.
It provides some services that the private sector either
could not produce (e.g. police, defense, justice) or
would not produce in the right quantity (e.g. education
and health).
Purchases goods and services.
Redistributes income with taxes, social contributions and
transfers to people.
It regulates business cycles.
In our income statement we can
also observe:
The tax rate.
The level of social contribution.
The price of utilities.
Outside the income statement:
The
The
The
The
The
certainty of law.
quality of public services.
quality of regulation.
size and the management of public procurement.
good management of the whole economy.
Wages:
Do not depend only on economic considerations.
Economics matters.
The End