When we talk about economic growth, we commonly focus on GDP. Implicitly, we think of an economy with rapid GDP growth as doing well, and one with only slow GDP growth is doing poorly. We do so because we associate rapid GDP growth as implying that living standards are improving.
But in a world in which some countries have rapid population growth (India and Brazil), others have very slow population growth (China, Europe) and others have falling populations (Japan, Russia), this may be a poor way of viewing the world. Once we adjust for population growth rates, by focusing on per capita GDP growth, India, Brazil, and Australia look a lot less impressive, while tardy Japan is actually doing just fine. See this link for more.
Showing posts with label Measurement. Show all posts
Showing posts with label Measurement. Show all posts
Wednesday, March 19, 2008
Thursday, January 24, 2008
Discouraged Workers and Unemployment...
According to the text, if discouraged workers are not counted as unemployed, the unemployment rate will be understated during recessions. Why is this? - Jane
The unemployment rate = 100* unemployment / (unemployment + employment). An increase in the number of discouraged workers decreases both the numerator and the denominator by the same amount. But because the numerator (unemployment) is much smaller than the denominator (unemployment + employment), in percent terms the numerator declines by more. Hence the measured unemployment rate falls.
The unemployment rate = 100* unemployment / (unemployment + employment). An increase in the number of discouraged workers decreases both the numerator and the denominator by the same amount. But because the numerator (unemployment) is much smaller than the denominator (unemployment + employment), in percent terms the numerator declines by more. Hence the measured unemployment rate falls.
Wednesday, January 23, 2008
Zimbabwe Inflation, again....
Tuesday, January 22, 2008
Measuring GDP...
1. GDP can be measured as total income in the economy. Is that before tax? If yes, are all kinds of taxes included?
2. Why are inventories included in final goods? -Guo
To answer your questions, remember that GDP is a measure of the total value of all production in the economy. When we measure this production by adding up income, we want to include all income earned in the production process, including that earned by the Government via taxes. So yes, we wish to include all taxes. Typically we do this by including income before taxes are deducted (i.e. gross income rather than net income), except for indirect taxes paid by firms which we add back to correctly calculate GDP.
Inventories are included as a way to match production correctly. Recall that Y=C+I+G+NX. If a good is produced in year1 but consumed in year 2, it is included in I (inventories, a part of investment) in year 1. When it is consumed in year 2, inventories decline by the value of the good, while consumption increases by the value of the good; these cancel out, so there is no net effect on GDP.
Of course if the good is sold for more than its value as inventory, then GDP will also increase in year 2, but only by the increased value of the good when it was sold. We can think of this as the value of the service of selling the good, which rightly belongs in year 2's GDP, not year 1's.
2. Why are inventories included in final goods? -Guo
To answer your questions, remember that GDP is a measure of the total value of all production in the economy. When we measure this production by adding up income, we want to include all income earned in the production process, including that earned by the Government via taxes. So yes, we wish to include all taxes. Typically we do this by including income before taxes are deducted (i.e. gross income rather than net income), except for indirect taxes paid by firms which we add back to correctly calculate GDP.
Inventories are included as a way to match production correctly. Recall that Y=C+I+G+NX. If a good is produced in year1 but consumed in year 2, it is included in I (inventories, a part of investment) in year 1. When it is consumed in year 2, inventories decline by the value of the good, while consumption increases by the value of the good; these cancel out, so there is no net effect on GDP.
Of course if the good is sold for more than its value as inventory, then GDP will also increase in year 2, but only by the increased value of the good when it was sold. We can think of this as the value of the service of selling the good, which rightly belongs in year 2's GDP, not year 1's.
Real vs. Nominal
"What is the real price (for example of oil)? What is the difference between the real and nominal price? Do real prices change over time?" - Phillip
A nominal price is measured in terms of units of money- for example, oil is currently $88USD per barrel. A real price is adjusted for changes in the value of a unit of money- for example, if prices had risen by 20% since 2000, we'd say that the real price of a barrel of oil is (88 x 0.8) USD per barrel in year 2000 USD. Real prices changes over time, but generally by smaller magnitudes than nominal prices.
A nominal price is measured in terms of units of money- for example, oil is currently $88USD per barrel. A real price is adjusted for changes in the value of a unit of money- for example, if prices had risen by 20% since 2000, we'd say that the real price of a barrel of oil is (88 x 0.8) USD per barrel in year 2000 USD. Real prices changes over time, but generally by smaller magnitudes than nominal prices.
Wednesday, January 16, 2008
Taxes and GDP
"We can calculate GDP by summing total wages, interests, rent and profits received by householders. Should we include taxes as well?" - Mandy
Yes- we should include all sources of income that are derived from the production of goods and services, and that includes income received by the Government. Normally we capture this by summing up gross, or before tax, sources of income when we calculate GDP.
Yes- we should include all sources of income that are derived from the production of goods and services, and that includes income received by the Government. Normally we capture this by summing up gross, or before tax, sources of income when we calculate GDP.
Thursday, November 29, 2007
Multipliers...
When there is a shock to the economy, it is generally thought to have a multiplied effect on the economy. Some households enjoy higher income, they spend it, increasing the income for other households, who in turn spend it, and so on. The size of the multiplier is finite because there are leakages: some of the increase in income may be saved, used to pay taxes, or used to buy imports, and is therefore not available as income to others.
How big are these multipliers? Menzie Chinn provides some estimates at Econbrowser.
How big are these multipliers? Menzie Chinn provides some estimates at Econbrowser.
Causality vs correlation....
When we look at economic outcomes, we observe correlations: event "x" happened along with event "y". There are several possible interpretations of this. First, "x" may have caused "y". Alternatively, "y" may have caused "x". Finally, some other variable "z" may have caused both "x" and "y". Without knowing the causality involved, we cannot answer most relevant policy questions available data.
One specific example from my own research: we observe that members of currency unions trade a lot more than other countries. That's the correlation. If being a member of a currency union induces people to trade more, this might make a compelling case for countries to form currency unions. But if countries trading more tend to form currency unions, then the correlation is reversed, and countries may not see an increase in trade from forming a currency union.
Economists spend a lot of time trying to find "natural experiments," where we can be sure of the direction of any possible causality. Often this is based on an unexpected change in "x" which was clearly exogenous- i.e. was not caused by "y".
One interesting application is to the effects of female leadership rather than male leadership. Read this slate article for more. (Thanks to Marginal Revolution for the link).
One specific example from my own research: we observe that members of currency unions trade a lot more than other countries. That's the correlation. If being a member of a currency union induces people to trade more, this might make a compelling case for countries to form currency unions. But if countries trading more tend to form currency unions, then the correlation is reversed, and countries may not see an increase in trade from forming a currency union.
Economists spend a lot of time trying to find "natural experiments," where we can be sure of the direction of any possible causality. Often this is based on an unexpected change in "x" which was clearly exogenous- i.e. was not caused by "y".
One interesting application is to the effects of female leadership rather than male leadership. Read this slate article for more. (Thanks to Marginal Revolution for the link).
University Rankings....
Earlier this month, the Times Higher Education Supplment came out with its latest university ranking. And if you live in Hong Kong, you would have had to turn off all news media to have failed to learn that my employer, HKU, ranked 18th worldwide! That's an impressive performance by any means, and the University is rightly trumpeting its performance.
But university rankings are inherently problematic. In this case, the THES takes a series of relevant indicators (peer review, employer review, international staff, international students, staff/student ratio, and citations), combines them with a formula, and comes out with a number that can be compared between universities.
In general, these indicators are proxies for latent variables that cannot be accurately measured, and may be poor proxies at that. For example, I suspect the "international" variables are trying to capture the extent to which the university encourages its students to think outside the box, and take into account other viewpoints and perspectives. But just having international students and international staff is neither necessary nor sufficient for this to occur.
There are likely to be significant measurement issues as well. Who exactly are the peers and employers who are asked about their views of different universities? Is the sample biased towards one country, or one demographic? How do we count international students, and international staff? Are mainland students in HK domestic or international? Are exchange students, who come to HKU for one semester or one year, treated identically to international students who come for their complete degree program? Is "international" determined by passport, or birthplace? In the staff count for the staff-student ratio, who is included? Only permanent, tenured staff? Gardeners and cleaners? I could go on....
There are two reasonable responses to these problems. One would be to dismiss these rankings as noisy indicators of very little. The other is to treat the noise in the ranking as sampling error, and try to increase the sampling size, by considering more university rankings.
Unfortunately there's only one other well-known global university ranking, by Shanghai Jiao Tong University. And where does HKU rank here? Somewhere between 203rd and 304th.
Oops.... I guess we need a lot more rankings than two to get any accurate idea of where HKU really stands!
But university rankings are inherently problematic. In this case, the THES takes a series of relevant indicators (peer review, employer review, international staff, international students, staff/student ratio, and citations), combines them with a formula, and comes out with a number that can be compared between universities.
In general, these indicators are proxies for latent variables that cannot be accurately measured, and may be poor proxies at that. For example, I suspect the "international" variables are trying to capture the extent to which the university encourages its students to think outside the box, and take into account other viewpoints and perspectives. But just having international students and international staff is neither necessary nor sufficient for this to occur.
There are likely to be significant measurement issues as well. Who exactly are the peers and employers who are asked about their views of different universities? Is the sample biased towards one country, or one demographic? How do we count international students, and international staff? Are mainland students in HK domestic or international? Are exchange students, who come to HKU for one semester or one year, treated identically to international students who come for their complete degree program? Is "international" determined by passport, or birthplace? In the staff count for the staff-student ratio, who is included? Only permanent, tenured staff? Gardeners and cleaners? I could go on....
There are two reasonable responses to these problems. One would be to dismiss these rankings as noisy indicators of very little. The other is to treat the noise in the ranking as sampling error, and try to increase the sampling size, by considering more university rankings.
Unfortunately there's only one other well-known global university ranking, by Shanghai Jiao Tong University. And where does HKU rank here? Somewhere between 203rd and 304th.
Oops.... I guess we need a lot more rankings than two to get any accurate idea of where HKU really stands!
Wednesday, November 28, 2007
The Zimbabwe CPI is now Undefined....
According to this article, the Zimbabwe state statistical agency is no longer calculating the CPI, as there are too many empty shelves, and not enough goods left to include in the calculation.
Following from my earlier discussions of Zimbabwe's inflation (the latest being here), I think this new development highlights a potential bias in the CPI that I haven't seen discussed elsewhere. What is the price of a good that is no longer available at any price? The only answer to this question is that it is undefined, or infinite. If even one component of the CPI is no longer available at any price, then regardless of how trivial that component is within the CPI, Zimbabwe inflation now equals infinity!
(This is part of the reason why price controls are such a bad idea: they lower the prices for some consumers but inevitably create shortages, and therefore infinite prices, for others).
But life is not actually quite as bad as infinite inflation would imply. Recall that we often use the CPI as a measure of the "cost of living." To an economist, the cost of living is the lowest cost of attaining a given standard of living, or utility. The CPI is an imperfect measure of this because it ignores substitution effects (consumers substitute away from relatively expensive goods towards cheaper ones), new goods (the weights are only updated occasionally, so ignores the rapid price declines usually associated with new goods), and improvements in quality over time. These three biases tend to result in the CPI overstating rises in the true cost of living.
If we ignore goods that are no longer available at any price due to a collapsing, corrupt, crime-ridden economy, then that introduces a bias that works the other way. It will not in fact result in infinite inflation (since a rational consumer would substitute away from the unavailable goods to those that are still available), but in the case of Zimbabwe is likely to result in measured inflation significantly understating the true rise in the cost of living. True infinite inflation can only arise when there is nothing left available for sale at any price.
So the poor people of Zimbabwe who have been arguing that the prices they pay are rising faster than official CPI figures indicate have a point.
And what is the source of this hyper-inflation? The money supply is growing at 18000% per year! as Friedman said, "Inflation is always and everywhere a monetary phenomena."
Following from my earlier discussions of Zimbabwe's inflation (the latest being here), I think this new development highlights a potential bias in the CPI that I haven't seen discussed elsewhere. What is the price of a good that is no longer available at any price? The only answer to this question is that it is undefined, or infinite. If even one component of the CPI is no longer available at any price, then regardless of how trivial that component is within the CPI, Zimbabwe inflation now equals infinity!
(This is part of the reason why price controls are such a bad idea: they lower the prices for some consumers but inevitably create shortages, and therefore infinite prices, for others).
But life is not actually quite as bad as infinite inflation would imply. Recall that we often use the CPI as a measure of the "cost of living." To an economist, the cost of living is the lowest cost of attaining a given standard of living, or utility. The CPI is an imperfect measure of this because it ignores substitution effects (consumers substitute away from relatively expensive goods towards cheaper ones), new goods (the weights are only updated occasionally, so ignores the rapid price declines usually associated with new goods), and improvements in quality over time. These three biases tend to result in the CPI overstating rises in the true cost of living.
If we ignore goods that are no longer available at any price due to a collapsing, corrupt, crime-ridden economy, then that introduces a bias that works the other way. It will not in fact result in infinite inflation (since a rational consumer would substitute away from the unavailable goods to those that are still available), but in the case of Zimbabwe is likely to result in measured inflation significantly understating the true rise in the cost of living. True infinite inflation can only arise when there is nothing left available for sale at any price.
So the poor people of Zimbabwe who have been arguing that the prices they pay are rising faster than official CPI figures indicate have a point.
And what is the source of this hyper-inflation? The money supply is growing at 18000% per year! as Friedman said, "Inflation is always and everywhere a monetary phenomena."
Tuesday, November 20, 2007
How Rich is China?
A recent article in the Financial Times (thanks to Marginal Revolution for the pointer) suggests that some soon-to-be released numbers will show that living standards in China are 40% lower than had previously been believed.
Of course it remains to be seen what is really in the data when it is released, but let me clarify what this news is about. When we measure GDP across countries, we do so at market prices. We're left with nominal GDP, which is a measure of the market value of production in the economy over a period of time (typically a quarter or a year).
But to make that number meaningful, we need to adjust it to real terms. So we also construct real GDP, where we measure the total value of production if prices had remained at the same level as in some base year.
But what if we wish to compare GDP across countries, as a means of comparing the standard of living across countries? We have real GDP in China measured in Chinese RMB, against US GDP measured in USD, for example, which are not directly comparable.
One simple approach would be to just use the market exchange rate, but that may not be ideal for several reasons. First exchange rates are highly volatile. It is not uncommon for nominal exchange rates to fluctuate by 10-30% in a single year, while underlying living standards change very little! But more importantly, the cost of living can vary radically across countries. Some countries may experience high incomes (and therefore high GDP: total income = total output), but also high costs, while other countries may experience the reverse. We therefore need to filter out any systematic differences in the cost of living to get an accurate idea of comparable living standards.
How do we do that? Well, we need detailed price data on similar items sold in different countries. We compare GDP not at market exchange rates, but at PPP (or "purchasing power parity") rates, that seek to adjust for differences in the cost of living.
And that's where this revision in mainland GDP is reputed to come from. Apparently prices in mainland China that have been used for making the PPP adjustment have been poorly measured in the past, and the result is a systematic understatment of the cost of living.
I'll be following this story with interest....
Of course it remains to be seen what is really in the data when it is released, but let me clarify what this news is about. When we measure GDP across countries, we do so at market prices. We're left with nominal GDP, which is a measure of the market value of production in the economy over a period of time (typically a quarter or a year).
But to make that number meaningful, we need to adjust it to real terms. So we also construct real GDP, where we measure the total value of production if prices had remained at the same level as in some base year.
But what if we wish to compare GDP across countries, as a means of comparing the standard of living across countries? We have real GDP in China measured in Chinese RMB, against US GDP measured in USD, for example, which are not directly comparable.
One simple approach would be to just use the market exchange rate, but that may not be ideal for several reasons. First exchange rates are highly volatile. It is not uncommon for nominal exchange rates to fluctuate by 10-30% in a single year, while underlying living standards change very little! But more importantly, the cost of living can vary radically across countries. Some countries may experience high incomes (and therefore high GDP: total income = total output), but also high costs, while other countries may experience the reverse. We therefore need to filter out any systematic differences in the cost of living to get an accurate idea of comparable living standards.
How do we do that? Well, we need detailed price data on similar items sold in different countries. We compare GDP not at market exchange rates, but at PPP (or "purchasing power parity") rates, that seek to adjust for differences in the cost of living.
And that's where this revision in mainland GDP is reputed to come from. Apparently prices in mainland China that have been used for making the PPP adjustment have been poorly measured in the past, and the result is a systematic understatment of the cost of living.
I'll be following this story with interest....
Monday, November 19, 2007
Benford's Law... and Testing Economics Data
I earlier posted a link on Benford's law, the idea that most data series are likely to have many more observations starting with the digit "1" than "2", and more starting with "2" than "3", etc. The idea was that to get from "1" to "2" requires a 100% increase in magnitude, while getting from "2" to "3" requires only a 50% increase in magnitude.... and so on.
Well, the undercover economist has more... the same principle can be used to assess whether economic statistics are accurate.
Suspician of the accuracy of statistics has a long history. Benjamin Disraeli famously commented that there are three kinds of lies.... "lies, damned lies, and statistics." But maybe this is not fair. At a minimum, most statistics should satisfy Benford's law.
I can think of an excellent application. Many people are suspicious of the macroeconomic numbers generated by Mainland China, especially at the state level. A simple test of whether they're made-up or not would be to see whether the series satisfy Benford's Law.
Of course this would not be a fall-proof test. What if the numbers really were made up, but by statisticians who knew about Benford's law?
Well, the undercover economist has more... the same principle can be used to assess whether economic statistics are accurate.
Suspician of the accuracy of statistics has a long history. Benjamin Disraeli famously commented that there are three kinds of lies.... "lies, damned lies, and statistics." But maybe this is not fair. At a minimum, most statistics should satisfy Benford's law.
I can think of an excellent application. Many people are suspicious of the macroeconomic numbers generated by Mainland China, especially at the state level. A simple test of whether they're made-up or not would be to see whether the series satisfy Benford's Law.
Of course this would not be a fall-proof test. What if the numbers really were made up, but by statisticians who knew about Benford's law?
Monday, November 5, 2007
Good or bad news about the economy?
Just a few days back, the latest employment data for the US was released, and the data was surprisingly good, as this Bloomberg story reports. But how exactly should we interpret a single piece of evidence? The data is volatile, and as a result, there are lots of conflicting pieces of evidence, as Nouriel Roubini discusses here. The rational thing to do is to take moving averages through the data, to drop out some of the volatility (and if we have 12 month moving averages, drop out any distortions caused by seasonal factors or- more likely- poor adjustment for seasonality), and then interpret the smoothed data, as James Hamilton proposes here. The conclusion? The news is not good.
Thursday, October 25, 2007
Measuring The Contribution of Labour and Capital to Growth
"When we analyse the source of economic growth, we include the capital stock (K) and the labour supply (N), and total factor productivity (A). Sometimes adjustments are made to K and N, reflecting changes in quality or prices. Should such adjustments be made?" - Candy
You're referring to growth accounting- using a simple production function to figure out how much of economic growth is due to growth in the labour supply, how much is due to growth in the capital stock, and how much cannot be explained by growth in these most basic factors of production. This final left over part may be thought of as a measure of how efficient the economy is, and it is variations in this variable (A) that explain the huge variation in economic wealth between poor and rich countries.
Often we do adjust measures of the capital stock and measures of the labour supply. Whether this is a good idea or not depends on the source of the adjustment, and what exactly we're trying to measure. Sometimes the adjustments are due to measurement problems, and should rightly be made. For example, when we measure the capital stock, ideally we want a measure of the total physical quantity of capital that is used in production. We can't easily measure this; instead we measure the market value of the capital stock. But the market value can change because of a change in the quantity of capital, or a change in the price of capital. Clearly correcting our measures of capital for changes in the price of capital is a good idea.
Similar adjustments in the labour supply may also be warranted. For example, as the demographic structure of the economy changes, measuring the total number of workers or the total number of hours worked may be a poor measure of the total contribution of the labour force to production. If more experienced workers are replacing less experienced ones, then ignoring this fact will exaggerate the rate growth rate of A, the part of economic growth that is not due to labour or capital.
But some adjustments might not be a good idea, because the quality of labour or capital is itself an endogenous variable that responds to the growth of the economy. For example, as the economy's growth rate increases, workers are induced to increase their level of education and learn new skills to take advantage of new job opportunities. Is this an increase in the level of the labour supply (N) or an increase in productivity (A)? In truth, it is both. A similar argument can be made for capital. There are greater incentives to buy better quality capital the more developed the economy is, and the greater are the possible returns to using high quality capital.
So I end up sitting on the fence. If you want to know how much of the growth of the economy cannot be explained by labour and capital, maybe you should adjust away to your heart's content. If instead you want to know how much of the growth of the economy is "endogenous" - i.e. not directly due to changes in the quantity of the factors of production, you should limit adjustments to correcting more meaurement errors, and not quality changes.
You're referring to growth accounting- using a simple production function to figure out how much of economic growth is due to growth in the labour supply, how much is due to growth in the capital stock, and how much cannot be explained by growth in these most basic factors of production. This final left over part may be thought of as a measure of how efficient the economy is, and it is variations in this variable (A) that explain the huge variation in economic wealth between poor and rich countries.
Often we do adjust measures of the capital stock and measures of the labour supply. Whether this is a good idea or not depends on the source of the adjustment, and what exactly we're trying to measure. Sometimes the adjustments are due to measurement problems, and should rightly be made. For example, when we measure the capital stock, ideally we want a measure of the total physical quantity of capital that is used in production. We can't easily measure this; instead we measure the market value of the capital stock. But the market value can change because of a change in the quantity of capital, or a change in the price of capital. Clearly correcting our measures of capital for changes in the price of capital is a good idea.
Similar adjustments in the labour supply may also be warranted. For example, as the demographic structure of the economy changes, measuring the total number of workers or the total number of hours worked may be a poor measure of the total contribution of the labour force to production. If more experienced workers are replacing less experienced ones, then ignoring this fact will exaggerate the rate growth rate of A, the part of economic growth that is not due to labour or capital.
But some adjustments might not be a good idea, because the quality of labour or capital is itself an endogenous variable that responds to the growth of the economy. For example, as the economy's growth rate increases, workers are induced to increase their level of education and learn new skills to take advantage of new job opportunities. Is this an increase in the level of the labour supply (N) or an increase in productivity (A)? In truth, it is both. A similar argument can be made for capital. There are greater incentives to buy better quality capital the more developed the economy is, and the greater are the possible returns to using high quality capital.
So I end up sitting on the fence. If you want to know how much of the growth of the economy cannot be explained by labour and capital, maybe you should adjust away to your heart's content. If instead you want to know how much of the growth of the economy is "endogenous" - i.e. not directly due to changes in the quantity of the factors of production, you should limit adjustments to correcting more meaurement errors, and not quality changes.
Tuesday, October 23, 2007
You're not as old as you think....
As many of my students know, one of my pet concerns is the demographic transition that is affecting most of the developed world, and some of the developing world (China) as well. For the first time, we're facing a rapidly aging population, and in the fullness of time a shrinking population as well. This may have profound implications for asset markets (see, for example, this paper on the effects of demographics on real estate prices), aggregate savings, and therefore interest rates. Higher interest rates in turn may reduce investment, lowering the capital stock, and future economic growth. You can't get much more of a profound chain of events in economics than that.
The big unknown in all my doomsdaying is how our aging population will respond to their predicament. If people start working longer, and remain economically productive later in life, in principle this could offset a large part (or all) of the negative effects. And indeed, as marginal revolution and the Economist point out, this paper by John Shoven at Stanford suggests that there is room for some optimism on these fronts.
See the links for more....
The big unknown in all my doomsdaying is how our aging population will respond to their predicament. If people start working longer, and remain economically productive later in life, in principle this could offset a large part (or all) of the negative effects. And indeed, as marginal revolution and the Economist point out, this paper by John Shoven at Stanford suggests that there is room for some optimism on these fronts.
See the links for more....
Sunday, October 14, 2007
Mis-measuring Trade
While we're on the subject of mis-measurement, what do Mongolia, Papua New Guinea, Angola, and Libya all have in common? According to the World Trade Organisation they all trade a greater value of goods and services than they produce- see this link, for example.
This is news to me. The only way a country is likely to trade in excess of production is if it is a major re-exporter, like Hong Kong or Singapore. Yes it is possible for other countries to enjoy a trade:GDP ratio exceeding 100%- if you export every good and service you produce, and import every good and service you consume, the ratio could theoretically hit 200% without any re-exports- but I hardly think that is likely for the countries listed here.
If the ratio is incorrect, it is most likely due to mis-measurement of GDP, with the countries concerned exporting goods produced in the informal sector that slip under the radar of the statistics agency beancounters, and paying for imports with income earned in that same informal sector.
Thanks to Lolita for the pointer.
This is news to me. The only way a country is likely to trade in excess of production is if it is a major re-exporter, like Hong Kong or Singapore. Yes it is possible for other countries to enjoy a trade:GDP ratio exceeding 100%- if you export every good and service you produce, and import every good and service you consume, the ratio could theoretically hit 200% without any re-exports- but I hardly think that is likely for the countries listed here.
If the ratio is incorrect, it is most likely due to mis-measurement of GDP, with the countries concerned exporting goods produced in the informal sector that slip under the radar of the statistics agency beancounters, and paying for imports with income earned in that same informal sector.
Thanks to Lolita for the pointer.
Mis-measuring GDP....
"The different approaches to measuring GDP (income approach, product approach, etc) are supposed to all give the same answer. But some activities are hard to measure- for example drug dealing- and are likely to be excluded from the product approach for lack of data. Might this explain why the different approaches give different answers?" - Chen
This shouldn't be too much of a problem, as we likely miss-measure both the income approach and the product approach by a similar amount. We don't measure the consumer's purchases of illegal drugs, but we don't measure the income earned by the drug dealer either! Since the amounts are identical, ignoring parts of the economy should not systematically bias one measure of GDP relative to another.
This shouldn't be too much of a problem, as we likely miss-measure both the income approach and the product approach by a similar amount. We don't measure the consumer's purchases of illegal drugs, but we don't measure the income earned by the drug dealer either! Since the amounts are identical, ignoring parts of the economy should not systematically bias one measure of GDP relative to another.
Saturday, September 29, 2007
Sky High Oil....
So the oil price is at all time high levels- as the following graph shows (although this data series stops in March 2007: the price is now over $80/Barrel).
But is it really? First, here's the real price of oil- still significantly below the level attained in 1980, shortly after the Iranian Revolution.
But there's another reason to downplay the massive growth in the price of oil. It just happens to be reported in US dollars, which have been losing value against almost all other currencies in recent months.
Here is the real price of oil faced by consumers in the United Kingdom, by comparison. Yes, the price of oil is up, but hardly by the spectacular levels we'd imagine when we read the headline figures- especially for countries with exchange rates that have appreciated against the USD. in fact, because oil happens to be priced in USD, a fall in the value of the greenback will naturally increase the price of oil irrespective of the supply and demand for "black gold."
But is it really? First, here's the real price of oil- still significantly below the level attained in 1980, shortly after the Iranian Revolution.
But there's another reason to downplay the massive growth in the price of oil. It just happens to be reported in US dollars, which have been losing value against almost all other currencies in recent months.
Here is the real price of oil faced by consumers in the United Kingdom, by comparison. Yes, the price of oil is up, but hardly by the spectacular levels we'd imagine when we read the headline figures- especially for countries with exchange rates that have appreciated against the USD. in fact, because oil happens to be priced in USD, a fall in the value of the greenback will naturally increase the price of oil irrespective of the supply and demand for "black gold."
Friday, March 30, 2007
Real Share Prices
A few months ago, we heard in the news media that many share price indices around the world were at record levels. But were they? A share price index is measured in domestic currency, and is simply a nominal variable. If the index has increased over time, that simply means that the average investor selling their shares today will receive more money than they paid for then. Whether their real wealth has increased is not clear.
Michael Mandel (thanks to Newmark's Door for the pointer) corrects that with a real S&P 500 index, deflating it by the CPI, and shows that the S&P 500 is significantly lower today than it was in 1999.
How about Hong Kong? The HSI has grown from 8,800 during SARS in 2003 to highs of over 20,000 recently. It is 12% higher than its previous peak in 1999.
How about the real value of the HSI? That is also at an all-time peak, and is almost 17% higher than its previous peak, due to the persistent deflation (falls in the CPI) between 1999 and 2004.
How about the real value of the HSI? That is also at an all-time peak, and is almost 17% higher than its previous peak, due to the persistent deflation (falls in the CPI) between 1999 and 2004.
The more important question is whether shares in Hong Kong are now too expensive. That's a more difficult question, since the fundamental underlying value of the HSI is the discounted expected future profits of the underlying companies. Hong Kong company profits are, in turn, heavily dependent on the growth rate of Mainland China, and it's anybody's guess as to how fast and for how long China will continue it's remarkable growth path. Hong Kong shares might still be a bargain.... we cannot know for sure.
Wednesday, March 28, 2007
Measuring Potential Output
Measuring potential GDP is inherently difficult. As we have demonstrated in class, in the short run, the outcomes we observe in the economy are based on short-run supply and aggregate demand, and these variables may move in ways that are counter to the long run ability of the economy to generate output (i.e. potential GDP). But all is not lost. There are a number of variables that are helpful in working out what is happening to potential output:
- the labour market. If the gap between the unemployment rate and the natural rate is falling, then the actual level of output will be moving closer to potential output. This is not entirely informative, since the natural rate of unemployment is unknown, and varies through time (see previous post).
- investment. If firms are increasing their level of investment, then potential GDP should be increasing, as workers have more capital to work with.
- productivity. If the level of output per worker is increasing, the rate of increase in productivity times the rate of growth in the labour force should give us a good estimate of changes in potential output.
- capacity utilisation. There are various ways of trying to measure the extent to which firms are operating at their maximum capacity.
In general, we have a better idea of potential output after the fact. Partly this is because some economic data (for example investment and productivity) is only released with a lag, so it is impossible to know how these are varying in real time. But there is an additional reason: with time we simply have more data that might be informative for determining potential output today, for the following reason.
We normally think of potential output as changing relatively smoothly over time (at least more smoothly than actual output), and moving towards potential output, as firms and workers adjust wages/prices/expectations in response to shocks. If workers and firms are rational (in that they set prices and wages based on all available information), then the difference between actual output and potential output is due to shocks that could not be anticipated by workers and firms. Then the level of actual output should be equal to the level of potential output on average. So if we put a smooth line through actual output, we can argue that we have an estimate of potential output. There's no exact science to doing this, but the most common method involves the HP filter (http://economics.about.com/library/glossary/bldef-hodrick-prescott-filter.htm).
If we want to construct a smooth line over some data to work out the level of potential output today, we only have the data up to today to use. As time passes, we will have more data points, and so the level of that smooth line today will be estimated more precisely.
No matter how we construct potential output, it will always be an imperfect measure of the ability of the economy to produce output.
- the labour market. If the gap between the unemployment rate and the natural rate is falling, then the actual level of output will be moving closer to potential output. This is not entirely informative, since the natural rate of unemployment is unknown, and varies through time (see previous post).
- investment. If firms are increasing their level of investment, then potential GDP should be increasing, as workers have more capital to work with.
- productivity. If the level of output per worker is increasing, the rate of increase in productivity times the rate of growth in the labour force should give us a good estimate of changes in potential output.
- capacity utilisation. There are various ways of trying to measure the extent to which firms are operating at their maximum capacity.
In general, we have a better idea of potential output after the fact. Partly this is because some economic data (for example investment and productivity) is only released with a lag, so it is impossible to know how these are varying in real time. But there is an additional reason: with time we simply have more data that might be informative for determining potential output today, for the following reason.
We normally think of potential output as changing relatively smoothly over time (at least more smoothly than actual output), and moving towards potential output, as firms and workers adjust wages/prices/expectations in response to shocks. If workers and firms are rational (in that they set prices and wages based on all available information), then the difference between actual output and potential output is due to shocks that could not be anticipated by workers and firms. Then the level of actual output should be equal to the level of potential output on average. So if we put a smooth line through actual output, we can argue that we have an estimate of potential output. There's no exact science to doing this, but the most common method involves the HP filter (http://economics.about.com/library/glossary/bldef-hodrick-prescott-filter.htm).
If we want to construct a smooth line over some data to work out the level of potential output today, we only have the data up to today to use. As time passes, we will have more data points, and so the level of that smooth line today will be estimated more precisely.
No matter how we construct potential output, it will always be an imperfect measure of the ability of the economy to produce output.
Subscribe to:
Posts (Atom)
Since April 19, 2007