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
Economic Growth
• Rate of Increase of Production.
• If Qt is a measure of production, the simple net
growth rate is
qt  qt 1
q
gt 
qt 1
qt
• Implying 1  g 
qt 1
q
t
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.
+
+
+
+
=?
(Simple) Average Growth
• If there are K goods then we could calculate the
average growth rate of each type of good.
g
q AVERAGE
g  g  g  ...  g

K
q1
q2
q3
qK
• Problem: Taking the simple average of the
growth of different types of goods may give a
distorted picture of average growth, since
different goods are of different importance in
the economy.
Weighted Average Growth
• Instead we could construct a weighted average
g

qWGTD _ AVGE
w  g  w  g  w  g  ...  w  g
1
q1
2
q2
3
q3
K
qK
where the weights add to 1.
w  w  w  ...  w  1
1
2
3
K
• An even weight is wk =1/K but we could adjust the
weights to be indicate the importance of each
good in the economy.
g
qWGTD _ AVGE
K
 w g
k
k 1
qk
K
w
k 1
k
1
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
– Primary: Natural Resources (Agriculture, Forestry,
Fishing, Mining, Quarrying)
– Secondary: Goods production (Manufacturing,
Construction, Utilities)
– Tertiary: Intangibles Production
by
Sector
Hong Kong Census and Statistics
Other Activities (ISIC J-P)
Transport, storage and
communication (ISIC I)
Wholesale, retail trade,
restaurants and hotels (ISIC
G-H)
Construction (ISIC F)
Added
Manufacturing (ISIC D)
Value
Mining & Utilities
Kong:
Agriculture, hunting, forestry,
fishing (ISIC A-B)
Hong
60
50
40
30
20
10
0
2010
1970
Table 035
(GDP) by Economic Activity at Current Price
HK$ Mn
Economic Activity
2009 r
Agriculture, fishing, mining and quarrying
1,090
Manufacturing
28,227
Electricity, gas and water supply, and waste management
34,961
Construction
50,146
Services
1,436,427
Import/export, wholesale and retail trades
Import and export trade
365,880
305,458
Accommodation and food services
48,787
Transportation, storage, postal and courier services
99,048
Transportation and storage
Postal and courier services
Information and communications
93,936
5,112
46,808
Financing and insurance
235,581
Real estate, professional and business services
173,583
Real estate
Professional and business services
86,833
86,749
Public administration, social and personal services
279,453
Ownership of premises
187,286
GDP at basic prices
Taxes on products
GDP at current market prices
1,550,851
55,967
1,622,322
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
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
http://stats.oecd.org/Index.aspx
Dataset: 1. Gross domestic product
Country Korea
Measure Tril. Won
Gross Domestic Product
B1_GA: Gross domestic product (output)
B1G: Gross value added at basic prices
D21_D31: Taxes less subsidies on products
DB1_GA: Statistical discrepancy
B1_GE: Gross domestic product (expenditure)
P3_P5: Domestic demand
B11: External balance of goods and services
DB1_GE: Statistical discrepancy
B1_GI: Gross domestic product (income)
D1: Compensation of employees
B2G_B3G: Gross operating surplus & mixed income
D2_D3: Taxes less subsidies on production and
imports
DB1_GI: Statistical discrepancy
2009
1,065
959
106
..
1,065
1,026
39
-1
1,065
494
453
119
0
Table 1.10. Gross Domestic Income by Type of Income
[Billions of dollars]
Line
2
3
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
1
26
Compensation of employees, paid
Wage and salary accruals
Supplements to wages and salaries
Taxes on production and imports
Less: Subsidies /1/
Net operating surplus
Private enterprises
Net interest and miscellaneous payments, domestic
Business current transfer payments (net)
Proprietors' income with IVA and CCA
Rental income of persons with CCA
Corporate profits with IVA and CCA, domestic
Taxes on corporate income
Profits after tax with IVA and CCA
Net dividends
Undistributed corporate profits withwith IVA and CCA
Current surplus of government enterprises /1/
Consumption of fixed capital
Private
Government
Gross domestic income
Addendum:
Statistical discrepancy
CCA: Capital Consumption Adjustment
2010
7980.6
6417.5
1563.1
1054
57.3
3673.5
3689.2
747.6
136.7
1036.4
350.2
1418.2
411.1
1007.1
615.3
391.8
-15.7
1874.9
1540.9
334
14525.7
0.8
•
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.
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.
(1  g )  (1  g )(1  g )
vk
pk
qk
Aggregate Growth
• Growth of volume measures true/real growth
in the production of goods as opposed the
change in the arbitrary measure of value.
• To measure economy wide growth we could
average the growth of production across all
the different goods produced.
Growth Rates of Products and Ratios
Zt
X tYt
X t Yt
Z t  X tYt 


 (1  gtX )(1  gtY )
Z t 1 X t 1Yt 1 X t 1 Yt 1
1  gtZ  1  gtX  gtY  gtY gtX  gtZ  gtX  gtY
Xt
Zt 
Xt
Zt
Yt



Yt
Z t 1 X t 1
Yt 1
Xt
X t 1
Yt

Yt 1
(1  gtX )
(1  gtY )
(1  gtX )  (1  gtZ )(1  gtY )  1  gtZ  gtY  gtY gtZ  gtZ  gtX  gtY
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
• The weight of k in the economy could be defined
as k v k
which add up to 1 across sectors.
w 
K
V
k
Vt   vt
k 1
Aggregate Growth
• Macroeconomic aggregates such as GDP and
its sub-totals are the sum of values of sales (or
purchases) from different firms.
Vt   vi   pi  qi
i
i
• We also decompose the growth of the
aggregates into growth in prices (inflation) and
growth in volume (output).
(1  g )  (1  g )(1  g )
V
t
P
t
Q
t
How statistical agencies calculate
volume growth.
1. Construct representative market basket of each
category of goods, k. For example, if k were
apples, the market basket could consist of a
certain number of Red apples, Green apples, Fuji
apples depending on how many of each of these
are purchased.
2. Sample goods of type k at time t and at time t-1
to assess the price level of the market basket at
each time period.
k
k
pt , pt 1
Example
• If for category k = the typical family purchases 2
bushels of red apples, 1 bushel of green apples and 1.5
bushels of Fuji apples in a given year, the statistical
agency could price this market basket
t-1
t
Price/Bushel:
Red Apples
Price/Bushel:
Green Apples
Price/Bushel:
Fuji Apples
100
80
140
490
100
90
160
530
p
Apples
Building Blocks for Volume Growth
Value and Inflation Vectors
k
t
3. For every type of good at time t, measure v
and construct an inflation vector representing
the growth rate of prices. ptk
pk
k  1  gt
pt 1
4. Convert the dollars spent on good k into their
purchasing power measured at time t-1 prices.
vtk
k

p
t 1 
k
pt
vtk
k
t
k
t 1
p
p
• Conceptually, if we think of value of good k as
the product of price and quantity vk = pk*qk
we can think of value divided by the inflation
vector as the quantity of goods produced at
time t measured at the value in terms of the
previous period prices.
k
t
k
t
k
t
k
t
v
p q
k
k
k
k
 pt 1  k  pt 1   pt 1qt
p
pt
Volume Growth≡ gtQ
5. Sum the inflation adjusted values across the
types of goods and divide by value in
Q
previous period
1  gt 
vt1 
ptk1
2

v
1
t 
pt
pt21
3

v
2
t 
pt
pt31
K

....

v
3
t 
ptK1
pt
K
t
p
Vt 1
K
1  gtQ 
k
v
t
k 1
ptk1
ptk
Vt 1
Volume Growth cont.
• Conceptually, the numerator of volume growth
is the sum of goods produced at time t valued
at the price prevailing at time t-1 while the
denominator is the sum of goods produced at
time t-1 valued at the price prevailing at time t1. The yardstick of value, dollar prices in time
t-1 prices, are the same in the numerator and
denominator.
1
1
2
2
3
3
K
K
p
q

p
q

p
q

....

p
q
t 1 t
t 1 t
t 1 t
t 1 t
1  gtQ 
Vt 1  pt11qt11  pt21qt21  pt31qt31  ....  ptK1qtK1
Volume Growth cont.
• Conceptually, we can also think net volume
growth as a weighted average of the growth
rate of quantities of each type of good.
p q  p q  p q  ....  p q
g 
1
K
K
Vt 1  p q  p q  p q  ....  pt 1qt 1
1
1
t 1 t
1
1
t 1 t 1
Q
t
2
2
3
3
t 1 t
t 1 t
2
2
3
3
t 1 t 1
t 1 t 1
K
K
t 1 t
p q  p q  p q  ....  p q
Vt 1


Vt 1
Vt 1
1
1
t 1 t
2
2
t 1 t
3
3
t 1 t
K
K
t 1 t
p q  p q  p q  ....  p q  Vt 1
Vt 1
1
1
t 1 t
2
2
t 1 t
3
3
t 1 t
K
K
t 1 t
• We can rewrite the numerator as
gtQ 
1
1
2
2
K
K
1
1
2
2
K
K
p
q

p
q

....

p
q

p
q

p
q

....

p
q
 t 1 t t 1 t
t 1 t   t 1 t 1
t 1 t 1
t 1 t 1
• Collect terms
Vt 1
1
1
1
2
2
2
K
K
K
p
(
q

q
)

p
(
q

q
)

....

p
(
q

q
Q
t 1
t
t 1
t 1
t
t 1
t 1
t
t 1 )
gt 
Vt 1
• Rewrite
gtQ 
1
1
2
2
K
K
(
q

q
)
q

q
q

q
pt11qt11 t 1 t 1  pt21qt21 ( t 2 t 1 )  ....  ptK1qtK1 ( t K t 1 )
qt 1
qt 1
qt 1
Vt 1
• Note that g
by Vt-1 .
q
t
k
(q  q )
and divide through

k
qt 1
k
t
k
t 1
1
1
2
2
K
K
1
2
p
q
p
q
p
q
Q
q
q
qK
t 1 t 1
t 1 t 1
t 1 t 1
gt 
gt 
gt  .... 
gt
Vt 1
Vt 1
Vt 1
• Define as a weight
k
t 1
w
k
k
t 1 t 1
p q

Vt 1
• By construction, the weights add up to one, so
volume growth is a weighted average of the
growth of production of each type of good
g  w g  w g  w g ....  w g
Q
t
1
q1
t 1 t
2
q2
t 1 t
3
q3
t 1 t
K
qk
t 1 t
Notes on Price Indices: New Goods
• Weights change as production structure of the
economy changes
k
t
p
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.
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.
Candyland 2010
2010
2009
vk
pk
qk
vk
pk
qk
KitKat
1200
8
150
810
6
135
M&M
1500
10
150
540
4
135
Inflation vector Volume Growth
Weight
k
ptk ptk1
gtq
KitKat
1⅓
10
M&M
2.5
10
9
.6
9
.4
wtk1
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
k
qk
growth rate
wt 1 gt
• For each component k, this contribution can be
calculated as:
Cg %  w g 100%
k
t 1
k
qk
t 1 t
ptk1qtk  ptk1qtk1

100% 
Vt 1
vtk 
ptk1
ptk
Vt 1
 vtk1
100%
Volume Levels
•
To compare the level of aggregate
quantities at different points in time, total
up the growth that appears in between
periods.
Q
1. Calculate the growth rateg t 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 constant price
series equal to value in that period
QREF  VREF
Chained Index
3. Define the constant price series recursively in
all periods using the equation
Qt  (1  g )  Qt 1
Q
t
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.
Qt T  QREF  (1  gtQ1 )  (1  gtQ 2 )  (1  gtQ3 )  ....  (1  gtQT )
Nondurable Goods
2000
1500
1000
500
Chained Dollars
Current Dollars
20
09
20
07
20
05
20
03
20
01
19
99
19
97
0
19
95
Billion US$
2500
Implicit Price Deflator
• An estimate of the price level is the ratio of the value to
the quantity in chained dollars.
Implicit
GDP
Pt
Vt
REF $

REF $  100
Qt
price
At current
In chained (2009)
market prices
dollars
deflator
2009=
Year
HK$ million
HK$ million
100
2000
1,317,650
1,168,506
112.8
2001
1,299,218
1,174,317
110.6
2002
1,277,314
1,195,936
106.8
2003
1,234,761
1,231,886
100.2
2004
1,291,923
1,336,185
96.7
2005
1,382,590
1,430,815
96.6
2006
1,475,357
1,531,255
96.3
2007
1,615,574
1,629,092
99.2
2008
1,677,011
1,666,664
100.6
2009r
1,622,322
1,622,322
100.0
2010r
1,743,858
1,735,399
100.5
GDP per Capita
Singapore
Average Growth Rate 2001-2010
7.00%
6.00%
5.00%
4.00%
%
• Population
changes over
time
• To assess
income levels
over time, we
divide by
population
Link
3.00%
GDP per Capita
2.00%
GDPt [Chain]

Population
1.00%
0.00%
GDP Grow th
GDP per Capita
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$.
• An increase in S is a depreciation of
domestic currency and a decrease in
S is an appreciation.
Convert sums into another economy’s
currency
• Nj is a number measured in country j’s currency (e.g.
GDP) that you want to convert it into the reference
country’s currency.
Link
Exchange Rate Conversion
Sr
N  Nj 
Sj
r$
j
China (RMB)
Hong Kong (HK$)
RMB
HKG
GDP
GDP per Capita
12,120.52
210,006.31
S
8.19
7.78
S RMB
 GDPHKG 
S HKG
 HK $210, 006.31
8.19
=RMB221,265.39
7.78
Exchange Rate Method
• Exchange Rate Method can be a useful measure if you
are going to convert income in one area and spend it in
another.
– Ex. Your Swiss food company projects that it can at most get
a 20% share of the market for Mexican processed foodstuffs.
Converting the size of Mexico’s processed food expenditures
from Pesos to Swiss Francs is useful info for estimating
profits. .
• But macro aggregates are often used to give an idea of
living standards, here exchange rates are not as useful
because they are highly variable and not so
representative..
Link
GDP per Capita (Current Prices) Exchange Rate Conversion
350000
330000
310000
290000
HK$
270000
250000
230000
210000
190000
170000
150000
2003
2004
2005
2006
Hong Kong
2007
Singapore
2008
2009
2010
Big Mac Index
• Economist magazine
reports big differences
in the x-rate converted
prices of McDonalds in
different countries.
• Big Mac is a bundle of
different goods and
services which can be a
reasonable sample.
Economist Magazine
PPP: Purchasing Power Parities
• PPP is the relative price of goods in one
country measured in its own currency
compared to the price of a reference country.
• Example: If Big Macs were only good and cost
HK$18.90 in HK and US$3.71 in USA, then
PPPHK =5.0943HK$/US$
• Problem: Many goods
Market Basket Index?
• Construct an international market basket of
goods produced and purchased around the
world. For country j, PPPj could be the relative
price of the market basket relative to price of
the market basket in US$.
• Problem: Judging the cost of living by the cost
of the international market basket may not be
fair if customers in the local market can buy
the types of goods which are cheaper at home.
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 (in 2005, K
= 155) “basic heading” categories of goods.
2. All j = 1,..J countries (in 2005, J = 146) report
total expenditure in domestic currency of all
k
categories v .
j
ICP Handbook
PPP’s cont.
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
Note: Measured in # of j country Currency units per
anchor country currency units. Example. If Japan = j and
anchor is USA, and 1 kg. rice is 400 yen in Japan and $2
k
in USA :
pJPN
p
k
ANC
 200
PPP in Anchor Currency.
4. Define quantity of good of type k valued
q 
k
j
v
k
j
p
k
j
5. Calculate price of j’s market basket in j’s
prices relative to price of j’s market basket in
anchor country prices.
v1j  v 2j  ...  v Kj
PPPjAC $ 
v1j
1
j
p
p1ANC

v 2j
p
2
j
2
p ANC
Numerator in j currency, denominator in
 ... 
v Kj
p 2j
2
p ANC
• Conceptually PPP is the cost of the goods
purchased by consumers in their country relative
to the cost of those same goods in anchor country
terms.
AC $
j
PPP
1

p q  p q  ...  p q
p
AC $
j
PPP
1
ANC
1 1
j j
1
j
q  p
2
j
2
ANC
2
j
K
j
 q  ...  p
2
j
K
j
K
ANC
q
K
j
1
2
K
p
p
p
2
K
ANC
ANC
 w1j ANC

w

...

w
j
j
1
2
K
pj
pj
pj
,......, wnj 
v nj
Vj
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
• Constructing accurate PPP’s takes a long time.
Last completed project from 2005.
Link
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
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.
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
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
Is China the Biggest Economy in the
World?
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