Are the Germans really small spenders?

After the discussion on the Germany case today, I would like to address a couple of questions on the consumption behavior of the Germans who belong to an industrialized, well-developed and progressive state. The MPCs of people in such countries tends to be relatively low - reasons being they have already achieved a high level of consumption and their incremental consumption needs are not high value. They tend to be more savings (investment) oriented after their consumption needs are well satisfied. Comparing Germany's low spending behavior to the high spending Chinese or Indians may not be fair comparison whatsoever.

The second issue to ponder over would be if taxing the people's income and reducing their spending power is being compensated in the form of subsidized spending on education and healthcare. Does it make sense for the State to get money out of the hands of spenders to compensate the unproductive non-spenders? Consumption follows in a business cycle. It is production and improved productivity that will lead the movement out of stagnant growth periods.

Germany seems to be in a state of what is 'steady-state growth' where growth in specific leading sectors has already reached a high point and marginal growth is sort of inconsequential. Do they need a shift in focus? If so for a country with 70% of GDP coming out of services, a nation that is highly industrialised (30% from industry), what do you think is the way forward? What should be Germany's focus for the next decade based on what you have read in the case? Do you think it is the end of the road and that they would need another war to bring that "Aufklarung"?

Will look forward to your views......

Measuring Happiness - the Economics Way

I am sure by now all of you have gone through the Bhutan Happiness story - one question to all who think happiness is not an economics variable....We have debated in class as to why GDP may or may not be a good measure of growth and progress. Wangchuk's thoughts on happiness and its link to GDP inspired a series of variables and concepts to measure well-being. If human welfare is the purpose of the state's economic activities, then why shouldn't it be important to measure that well-being.

The case discusses some contrast between income and happiness. Is it really a decision variable? Do we measure happiness by the number and quality of goods we can buy? Are we confusing being satiated with being happy? Does it make sense for a country like Bhutan to brag about being happy when the Americans have spent millions of dollars to find ways to improve their national well being (even if that meant fighting wars)?

I would like a debate on why happiness is definitely an economic variable and why measuring it is part of measuring the growth of a nation. Also keep in mind the seven areas of wellness of GNH when you articulate your view....

Archana

Index of Industrial Production

IIP is a quantitative measure of status of Industrial production in an economy for a given period of time as compared to a reference period. It details out the growth in various sectors in the economy. The Indian IIP focuses on sectors namely Mining, Manufacturing, electricity and general. The current base year used for IIP is 1993-1994. It is published monthly by CSO (Central Statistical Organization).

The index is computed using the weighted arithmetic mean of quantity relatives with weights being allotted to various items in proportion to value added by manufacture in the base year by using Laspeyre’s Index.

General scope of IIP as recommended by the United Nation’s Statistical Organization (UNSO) includes mining, manufacturing, electricity, construction and gas sectors. The present composition of Indian IIP has only three of these due to constraints in data availability on construction and gas sectors. There is an alternate classification also on the basis of use called as Use-Based Classification which classifies sectors into following categories i.e. Basic goods, Capital goods, Intermediate goods, Consumer non-durables and Consumer durables.

The first official attempt to compute and release IIP was made by the office of economic advisor, Ministry of Commerce and Industry with base year of 1937 covering 15 important industries, accounting for 90% of total production of the selected industries. The structure of industry has changed manifold since then and hence there was always a requirement to revise the base year. The successive base years since 1937 have been 1946, 1951, 1956, 1960, 1970, 1980-81 and 1993-94. This is further expected to be revised to2004-05.

It suffers with problems related to quality, availability and compilation of data.

Base Revision

It is expected that the base of IIP will be revised to year 2004-05 which would lead to a new improved series containing improved datapoints, updated product portfolio and revised weights. This revision is a part of government’s move to shift the base year of all the key statistics to a common base. The base year for WPI is currently 1993-94, GDP is 1999-2000 while that of IIP is 1993-94. The new IIP series is expected by the end of the year. In this revision mobile manufacturing will not be included in IIP as it started in India post 2006. There are many issues that can arise due it. Telecommunications sector in India contributes around 2% to GDP (including services). Moreover, mobile phone penetration is on a rise in India which is expected to further increase the scope of mobile manufacturing. In 2006 India produces 31 million mobile phones while it rose to 100 million in 2008. Thus, it forms a significant part of the manufacturing sector and its inclusion would lead to better representation of the sector in the index.
Therefore, mospi is thinking of including mobile manufacturing in the category of landlines. Similarly, ways are being devised to include LCD TV sets in the category of colour TVs.
It includes 534 items that account for 80% of the output of the manufacturing industry.

Recently Released IIP figures

IIP numbers released this October indicated that industrial output expanded by 10.4% in the month of August, 22-month high. The figure stood at 1.7% at same time last year. If we look at individual sector growth rates then manufacturing grew at 10.2% while electricity too saw a growth of 10.6%. Mining was the best performer which grew by 12.9% during August. Out of 17 industries, 14 showed signs of growth. Consumer durables grew by 22.3% due to increased production of television and refrigerators, basic goods by 10%, intermediate goods saw growth of 14.3% and capital goods expanded by 8.3% which is good indicator of increased investment activity in the economy. There can be various factors that lead us to the magical figure of 10.4% (while raising few questions in our minds). Few of these are:

• Stimulus measures by the Government: The impact of various stimulus measures by the government. Reports indicate that government has released stimulus packages worth Rs 3 lakh crore in 2008-09 and 2009-10. The Rs. 1,86,000 crore stimulus package is assumed to have boosted demand for infrastructure. Adding to these efforts RBI pumped more than Rs. 2 lakh crore in to the system to bring down interest rates. Concentrating on the monetary policy, if we analyse the actual amount of credit offtake and the excess liquidity still existing in the economy do we have enough reasons to believe that in times of low confidence the monetary policy works? How far was it necessary for the government to supplement it with fiscal expansion? Is the double digit inflation rate, as indicated by CPI, a result of these measures? Is it justifiable?
• Base effect: Could this high number simply be a result of the base effect i.e. weak numbers in the reference period?
• Real growth in core sector and picking up of exports: India’s core sector clocked reasonablt healthy growth of 7.1% in August 2009 comapred to 2.1% (year on year basis). Out of the six industris that comprise the sector, cement production grew by 17.6% (highest among all), coal 12.9% (YoY) and electricity grew by 9.8%. Infrastrucure growth stood at 7.1% which is a positive sign for the economy indicating revival of demand, spending and confidence in the economy. Also, there are new low cost housing projects coming up in the country (s.a. Tata’s new project in Mumbai) which are being supported by government. This has also generated a lot of FII interest in the Indian stock market especially in real estate, heavy capital goods and infrastructure stocks. What is the impact of global recovery (if at all any) in this growth of the Indian core sector? Also, a revival in the international demand for our exports is a major reason for growth in exports.

India's National Income Accounting

The link given below provides information about India's GDP and its composition.
http://www.mospi.nic.in/sdrsum0.htm

We need to appreciate the fact that the changing composition of India's GDP can have a lot of implications for our economy. The share of agriculture is around 16%, while the majority comes from services and manufacturing (the third largest contributor). The data in the tables will give you GDP numbers in absolute terms as well as percentage. The focus is more on GDP at current and constant prices.

Though the share of agriculture is declining, but the population employed in agriculture is still around 50%. There have been some significant changes in the past s.a. increase in per capita income, changes in demand patterns etc. (not considering the recessionary time period) due to the development of manufacturing and services sectors. What does it indicate to a businessman exploring opportunities in Indian economy? What do the future managers and entrepreneurs (i.e. you all) think about it?

More to come on this topic.....

You are welcome to share your observations, suggestions, analysis or opinion....... :)

Human Development Index

HDI is a measure of human development in an economy/country. The growth of an economy can be measured using various indicators s.a. GDP growth rate, IIP, etc. The real purpose of growth is to improve the lives/standard of living of the citizens of a country. The benefits of economic prosperity should trickle down to the masses in terms of better opportunities for income, employment and education. All the indicators mentioned above do not directly measure this welfare as they only indicate the monetary aspect of it. Therefore, we need an indicator like Human Development Index (HDI) which can be used to measure human development and rank countries accordingly.


HDI considers three dimensions:

• Life expectancy at birth, a measure of health and longevity
• Knowledge and education gauged using adult literacy ratio, primary, secondary and tertiary gross enrollment numbers (with one-third weighting)
• Standard of living measured using natural log of par capita GDP at PPP.

Is HDI doing a really good job of gauging the non-monetary aspects? Is something missing? Take a close look at the three dimensions mentioned above and think..........

National Income Accounting

National income accounts provide the formal structure for macroeconomic theory. It starts with the circular flow of income model, is based on national income accounting identity and helps us arrive at certain economic characteristics that affect business climate.
To begin with we provide you with some relevant topics that are important before we try to relate business and economy.

Some important concepts:

Stock vs. Flow Variables

• Stock Variables: those measuring how much of something exists at aparticular point in time.
• Flow Variables: those measuring changes in stock variables over time.

To start with we look at the first basic measure of national output i.e. GDP (Gross Domestic Product) - It is the value of all final goods and services produced in the economy/country within a given period (generally a year). The output of each of the goods produced is valued at market prices and added together to get GDP.
The value of total output in an economy identically equals the value of total income (based on the circular flow diagram).

National Income Accounting Identity
GDP (expenditure approach)= C+I+G+NX
C: Consumption expenditure
I: Investment expenditure
G: Government Spending
NX: Net exports (Exports - Imports)
If NX > 0, trade surplus
If NX < 0, trade deficit

Methods of Measuring GDP

• Expenditure Approach
  Based on the expenditure done by various sectors in the economy.
  C: Household spending on Goods & Services (G&S) including durables, nondurables, services.
  I: Spending by firms and HH on new capital.
  Namely plants, equipment, inventory and new housing.
  (DO NOT confuse with investment used in every day language.)
  1) Inventory Investment: change in the value of inventories businesses have on hand.
  2) Fixed Investment: Of a more permanent nature than inventory.
  a) Nonresidential: spending done by firms for new capital
  b) Residential: apartments, private homes.
  NOTE: I is gross investment: includes both replacement of worn out capital (K) as well as addition of new K. In other words, depreciation of K is not subtracted (if did subtract out then would have net I).
  G: Gov’t purchases of G&S. Includes imputed values of public goods (e.g. parks). Imputed values calculated as the cost of providing the good. Transfer payments too are not included.
  Also interest payments by G excluded (not considered payments
  for current services; rather considered a transfer).
  NX = EX-IM: Total demand for domestic G&S by ROW.
  EX: Exports: G&S sold to ROW
  IM: Imports: Purchases of G&S by US from ROW.
  Imports are subtracted because not produced in home.
• Value Added Approach
  Disaggregate GDP by which industry produced the value added associated with output. The value added is the value of the firm’s output minus the value of its purchases from other firms.
  For instance consider a single industry economy: Bread making
  Farmer grows wheat and sells it for Rs.10/gm to flour maker. Value added here is Rs 10. Flour maker sells the flour to baker for Rs 15. Value added is Rs.(15-10) = Rs. 5. The baker makes bread out of it and sells to the retailer for Rs. 22. Value added at this stage is Rs.(22-15) = Rs. 7. The retailer sells the bread to customers for Rs. 25. Value added here is Rs. (25-22) = Rs. 3. Thus, total value added in the economy is Rs.(10+5+7+3) = Rs. 25.
  Therfore, GDP = #Bread Loaves * Rs. 25
• Income Approach
  This approach is based on the income earned by the agents involved in economic activity(the suppliers of labour, capital etc.) According to the simple circular flow diagram that total expenditures (on G&S) equals total income. We will call total income National Income (NY). It includes:
  a) Compensation of employees (wages, social security and pension contributions)
  b) Proprietors income (unincorporated business income)
  c) Rental income (which includes imputed rent of homeowners since still providing services)
  d) Corporate profits (incorporated business income)
  e) Net interest (interest paid to HH by businesses and interest paid by ROW to HH and businesses.
  Note: interest payments by HH & G not included since not connected with provision of G&S)

NY does not exactly equal GDP. We must adjust NY by
· adding depreciation (capital consumption allowance)
· adding indirect taxes (sales, customs duties, license fees, etc.)
· subtracting subsidies
· adding net factor payment to the ROW
Therefore, GDP = NY + Depn + (Indirect Taxes - Subsidies) + Net Factor Payment to ROW

Other Measures: NNP, NY, PY, Yd
GDP is the most comprehensive measure of aggregate output for an economy but there are other measures which are also of interest.
GDP
- Net Factor Payment to ROW
=GNP
- Depn
=NNP
- (indirect taxes - subsidies)
- statistical error
=NY
- retained corporate earnings
- Social Security contributions
+ interest payments made by G and consumers
+ transfer payments (including social security)
=Personal Income = C + S + T
- personal income taxes
=Disposable Income = Yd = C + S = take home pay (its different from fat CTC inclusive packages :) )