Measurement of Macroeconomic Aggregates

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Chapter – 3

Measurement of

Macroeconomic Aggregates

Measurement of Macroeconomic Aggregates

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Objectives of the Session To understand the concept of National

Product To know about the eight variants of National

Product Aggregates To understand real and nominal GNP To understand price indices To understand index number of production To know about money and credit To know about the measurement and uses of

national income

Measurement of Macroeconomic Aggregates

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Introduction Economics analysis deals with those

concepts which can actually be measured like price of industrial production, stock prices, interest rates etc.

The concepts like national income and product are most significant in macroeconomic accounting.

Measurement of Macroeconomic Aggregates

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The Concept of The National Product

The GDP growth rate, the most important indicator of the nation’s economy.

GNP and national income provide the policy makers and business community with the most useful tool for analyzing an economy’s performance.

In general, GNP is the sum of all final goods and services produced during a specific time period.

When measuring GNP, or any other aggregate of national product, we are interested in the final value of goods and services.

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Relationship among Eight Variants of National Product

Aggregates

- net income from abroad

-depreciation

=NDPMP

=NNPFC

GDPMP

GNPMP

=NNPMP

=NDPFC

=GDPFC

=GNPFC

- net income from abroad

-net indirect taxes

-depreciation

-depreciation

- net income from abroad

-net indirect taxes

-net indirect taxes

-depreciation

-net indirect taxes

- net income from abroad

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Real vs. Nominal GNP Real GNP is the GNP in current rupees

deflated for changes in the prices of the items included in GNP.

Nominal GNP expresses in current rupees. It measures the value of output in a given period in the prices of that period, or as it is sometimes put , in current rupees.

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Price Indices The Consumer Price Index (CPI)

It depends upon the Cost of Living Index (CLI)

The Whole Sale Price Index National Income Deflators

Measurement of Macroeconomic Aggregates

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Index Number of Production

Among the commonly used economic indictors to monitor current trends in the economy are indices of production.

The index number of industrial production which is regularly published in “Monthly Statistics of production of Selected Industries” is a quantity index which cover mining; manufacturing; and electricity generation.

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In any modern economy, the quantity of money, aggregate volume of credit and its Sectoral composition are important variables.

They have significant influence on expenditure flows such as consumption, investment etc.

Money and Credit

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Definition: Money Stock Measures

The RBI has evolve four measures of money denoted M1, M2, M3 and M4. They are as:

M1: RBI currency notes with public + small coins + demand deposits with banks + other deposits with RBI

M2: M1+ Post Office Savings Deposits

M3: M1+ Time Deposits with banks

M4: M3+ All Post Office Deposits (savings and time)

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The Measurement of National Income

The Output MethodThe Expenditure MethodThe Income Method

Measurement of Macroeconomic Aggregates

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The Output Method It is followed either by valuing all the final

goods and services produced during a year or by aggregating the values imparted to the intermediate products at each stage of production by the industries and productive enterprises in the economy.

The sum of these values added gives the gross domestic product at factor cost.

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The Expenditure Method It aggregates all money spent by private

citizens, firms and the government within the year, to obtain total domestic expenditure at market prices.

This includes consumer spending and investment i.e. total domestic spending.

It aggregates only the value of final purchases and excludes all expenditures on intermediate goods.

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The Income Method It aggregates only those of that

residents of the nation, corporate and individual, that obtain income directly from the current production of goods and services.

It aggregates the money payment made to different factors of production.

The total of all factor of income gives total domestic income.

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Other Measures of National Output

Gross national product Net national product National income Personal income Disposable income

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Five Alternative Measures of Income

Depreciation

Net Indirect Taxes Personal

Taxes PersonalSavings

Net Export

(E-M)Consumer

Expenditure

(C)Gross Private

Domestic

Investment (I)

Government

Purchases (G)

Wages

ProprietorsIncome Interest

Rents Corporate

Profit

Minus

Corporate profits and

security insurance taxes

Plus Transfer

Payments, netInterest and Dividends

Gross National Product GNPMP

Net National Product NNPMP

National Income NNPFC

Personal Income

Disposable

Personal Income

Personal Consumptio

n

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Difficulties in Measuring National Income

Non-market Production Imputed Values The Underground Economy “Side Effects” and Economic

“Bads” Leisure and Human Costs Double Counting

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The Uses of National Statistics

As an instrument of economic planning and review

As a means of indicating changes in a country’s standard of living

To indicate changes in economic growth of a country

As a means of comparing the economic performance of different countries