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Economic Data: The Trinity

• The lectures will focus economic statistics like GDP, CPI, and the unemployment rate
• Policymakers and economists utilize these statistics to understand economic performance, formulate policy, and forecast trends
• These measures indicate a country's performance over any given period

GDP, CPI, and Unemployment Rate

• GDP measures the amount of goods and services a country produces
• CPI measures the rate at which aggregate prices increase over time
• The unemployment rate is the measure of people actively looking for work that are currently unemployed
• Statistics Canada computes and publishes these Canadian statistics

Statistics Canada and GDP

• Statistics Canada publishes GDP and components every quarter
• GDP is part of the Canadian System of Macroeconomic Accounts (CSMA), specifically the System of National Economic Accounts (SNEA).
• CSMA includes productivity measures, international accounts/trade data, government finances, and provincial output measures
• CSMA follows international standards for measuring economic activity, enabling comparisons of Canadian GDP across time and countries
• Statistics Canada collected and computed GDP for an extended period
• A time series is a collection of observations of the GDP variable over time
• Easily accessible Canadian data: GDP (from 1961 Q1), unemployment rate (from January 1976), CPI (from January 1914)
• GDP data has existed before 1961, but it's not easily accessible

Understanding GDP

• GDP and its components will be the starting point of the study notes
• GDP measures the total market value of goods and services produced in Canada in a given year
• GDP measures aggregate economic activity, indicating the amount of goods and services Canada produces
• GDP was introduced in 1937 when economies were mainly manufacturing-based

GDP Publication and Usage

• Canadian GDP is computed and published every three months:
  • 1st quarter (March 31) is published on May 31
  • 2nd quarter (June 30) is published on August 31
  • 3rd quarter (September 30) is published on November 30
  • 4th quarter (December 31) is published on February 28
• Statistics Canada releases GDP estimates about two months after each quarter
• This delay can be problematic, as policymakers must make real-time decisions before the data is available.
• Statistics Canada publishes monthly industry-level GDP
  • Offers a more immediate view of the economy's performance
  • Focuses on industries and uses the output method
• Other GDP methods (income and expenditure) are only published quarterly
• Statistics Canada computes GDP for each province annually, data is available 6-9 months after the year ends.
• Economists, politicians, and the media use GDP to measure a country's performance and inform policy decisions
• GDP indicates the production level, published quarterly, revealing increases or decreases in goods and services over time
• As a standardized metric, GDP enables comparisons of economic performance across time, regions, and countries

Real vs Nominal GDP

• GDP is a measure of the market value of all final goods and services produced in a country at a given time.
• The market value of apples produced in 2024 considers the price of apples × the quantity produced in 2024
• Market value of all goods and services can be measured in current (2024) or constant prices (i.e. 2017 prices)
• Real GDP uses constant prices, while nominal GDP uses current prices.
• Economists focus on real GDP to determine the changes in the quantity of goods/services produced over time, assuming prices remain constant

GDP Focus and Computation Factors

• GDP focuses on the market value of goods and services, implying some are excluded
  • Baking cookies at home and eating them is not counted
  • Baking cookies at home and selling them in a store is counted in GDP
  • Selling marijuana legally is counted
  • Selling marijuana illegally is not counted
• GDP counts goods and services produced within a country:
  • Goods produced in Canada are counted in Canada's GDP, regardless of the producer's nationality
  • Goods produced by a Canadian in the U.K. are not counted in Canada's GDP (included in UK GDP)
  • GM producing cars in Ontario is counted in Canada's GDP, even though GM is a U.S. company.
  • Output of Bombardier in West Virginia is not counted in Canada's GDP, although it is in a Candian company

GDP as a Time Series

• Statistics Canada publishes quarterly GDP data, creating a time series.
• Time series help study how variables evolve
• The current GDP level is compared with past levels to assess GDP growth or decline.
• One transformation applied to GDP data is calculating its growth rate, indicating changes from year to year or quarter to quarter.

GDP Growth Rate Calculations

• YoY GDP growth rate calculates the percentage change in GDP from the same quarter of the previous year
• The YoY growth rate of GDP from 2023 Q3 to 2024 Q3 of 1.49%: GDP YoY growth = ((2419572 - 2383979) / 2383979) * 100 = 1.49%
• This implies that GDP in 2024 Q3 (using 2017 prices) was 1.49% higher than in 2023 Q3

Annualized vs YoY Growth Rate

• Statistics Canada and the U.S. Bureau of Economic Analysis calculate the annualized growth rate of GDP, not the YoY growth rate
• The year-over-year growth rate measures how GDP has shifted compared to the same period of the prior year.
• The annualized growth rate uses short-term growth to predict yearly growth if it continued at the same rate for a full year.
• The annualized growth rate estimates GDP change over one year, assuming the observed quarterly growth continues

Contrasting Growth Rate Calculations

• For 2024 Q3, the annualized GDP growth rate is calculated as follows: [(GDP2024Q3 / GDP2024Q2)^4 - 1] × 100
• Given GDP in 2024 Q3 was 2,419,572 and in 2024 Q2 was 2,413,400, the annualized growth rate in 2024 Q3 is: GDP Annualized growth = [(2419572/ 2413400)^4 -1] * 100 = 1.03%
• GDP continues to grow at the rate it did from 2024 Q2 to 2024 Q3 means GDP would change at 1.03% over one year/four quarters
• Canada, the U.S., and many other countries compute the annual GDP growth rate using the Annualized growth rate
• Many countries like China, India, and some EU countries use YoY growth rate
• The Annualized growth rate focuses on short-term economic changes
• YoY focuses more on longer-term trends and evens out economic variations

Recessions and Booms

• If the growth rate is positive (negative), it implies that GDP has increased (decreased) from one period to another
• If real GDP falls for two consecutive quarters, economists infer there's a recession, indicating economic slowdown
• A recession is defined as a period of economic turndown that lasts for several month
• Economists consider other variables besides real GDP growth such as industrial production, employment, and real income to determine whether the economy is in a recession

Trend Growth Rate

• Policymakers and economists focus on the level of GDP, and the trend of real GDP or the trend growth rate of real GDP
• Economists associate the long-run or trend growth rate of GDP with the potential growth rate of GDP
• Potential growth/output growth is the maximum GDP growth without triggering inflation
• Knowing this rate is important as it helps policymakers gauge if the economy is close to its potential
• The levels and growth rate of real GDP is observed but the trend growth rate is not
• The trend growth rate is assumed to be constant or equal to the long-term average growth rate of real GDP
• However, this assumption fails given the varying growth rate of GDP from decade to decade
• Constant trend growth rates means future growth rates are known in advance (deterministic, not random)
• Economists believe the trend growth rate of GDP is random/stochastic and not deterministic
• Technological progress drives long-run GDP growth, rendering trend growth rate stochastic
• Different statistical methodologies are employed to estimate trend growth rate of GDP
• These methodologies are complex and beyond the scope of the material.

Output Gap

• Policymakers and economists often compare the actual level of GDP with the economy's potential GDP (or trend growth)
• Denote the economy's actual GDP with ( Y_t ) and the economy's potential GDP with ( \bar{Y}_t ), where t is a general index of time
• The output gap is the difference between actual and potential GDP ( Y_t - \bar{Y}_t )
• Positive output gaps (( Y_t > \bar{Y}_t )) indicate booms or expansions
  • It means there is too much demand compared to the economy's full potential
• Negative gaps ( Y_t < \bar{Y}_t ) imply the economy is operating below its potential with not enough demand
• The output gap is an important concept; the Bank of Canada uses it to determine the appropriate level of monetary stimulus

GDP Measurement

• Economists and policymakers rely heavily on GDP measures in their research or to formulate policy
• Since GDP measures the total value of goods and services produced by a its measurement is inherently complex
• Statistics Canada uses surveys and administrative data to estimate GDP and its components
• GDP computation relies heavily on wealth of information from Statistics Canada
• Survey divisions in the bureau compile and integrate a large amount of information to arrive at GDP components
• GDP relies on surveys, so preliminary estimates of GDP are revised as data becomes available

Challenges to Measuring GDP

• Measuring what is produced in a country poses many challenges:
  • The quality and source of data collected can lead to issues
    • Reliance on surveys, censuses, and administrative records, which may be inaccurate, outdated, or incomplete
  • There are difficulties with measuring the underground economy
    • It is difficult to capture unreported activities (gig economy, quasi or illegal activities, cash economy), can lead to underreporting
  • Measuring the digitalized economy presents unique challenges
    • Methodologically measure the digital economy/service and intangible assets (IP, R&D, e-commerce, ICT, digital media)
• Digitization of the economy is fundamentally changing how people and businesses interact and produce goods and services
• The intangible, global, and rapidly evolving nature of the digital economy clashes with GDP methodologies that were designed to measure tangible goods and services in localized markets.
• Digital goods and services (software, streaming, cloud storage) are intangible and difficult to assign value
• Investments in R&D, algorithms, and other IPs used to be treated as intermediate expenses but are now included in investment: this is difficult to measure
• Statistics Canada estimated that the share of the digital economy was 5.9% of total activity in 2020 and about the size of mining, oil, and gas extraction

GDP Measurement Methods

• GDP can be measured in three different ways:
  • Expenditure approach
  • Income approach
  • Output approach
• The three measures of GDP should, in theory, be identical to each other, but in practice, they are not the same because of measurement and other errors.

Expenditure Approach

• Defines GDP as the sum of final uses or expenditures on goods and services by resident institutional units (consumption, investment, and government), plus net exports
• GDP is the sum of: consumption (C), investment (I), government expenditures (G), exports (X) minus imports (M)
• Net exports is the difference between exports and imports: (NX = X – M)
  • (GDP = C + I + G + NX)

Income Approach

• GDP is defined as the total income earned domestically by owners of factors of production.
• Includes income earned domestically by foreigners but not income earned by Canadians abroad.
• Wages earned by a U.S. citizen working for Shopify in Canada are counted but not income earned by a Canadian citizen working for Google in the U.S.

Output Approach

• GDP is defined as the sum of gross value added of the industries plus taxes and less subsidies on products.
• The output approach focuses on the final value of the goods/services sold/purchased.
• To avoid double-counting, the output approach computes the value added to each good at each stage of production
• The value added at each stage of production is: sale value minus the cost of purchasing goods/services to manufacture the good

Circular Flow

• Some simple examples demonstrate how GDP is calculated using the three approaches by Statistics Canada
• The circular flow of expenditure and income explains the expenditure and income approach
• Consider a primitive economy that uses one input, labour, to produce one good, bread.
• The two agents in this economy: workers and firms -Firms employ workers to produce bread. -Workers purchase bread from the firm and consume it

Equivalency Between Income and Expenditure Approach

• Workers supply labour to firms for wages and purchase bread.
• Firms purchase labour from workers and pay wages, selling bread to workers
• This simple economy has two types of markets:
  • Goods market for bread
  • Factor market (labour)

Flow Factors

• The outer loop arrows represents corresponding expenditure and income flows.
• Workers pay firms to purchase bread which is represented by households to firms
• Firms pay workers wages for their labour, and this income is presented by firms to workers
• Income from producing goods/services equals total expenditure, as every dollar spent becomes income for sellers

Accounting Identity

• Increased bread production raises GDP, with the value of the extra loaf produced
• A firm employing additional labour for the extra bread increases wages
• Expenditure and income will increase by precely the same amount
• Changes on either the expenditure or income side affect the other side of the circular flow

Income and Aggregate Expenditure Factors

• Aggregate income (Y) is equal to aggregate expenditure (E), where Y = E
• Factor payments from firms to workers are expenditures of households on bread produced by firms
• GDP equals total expenditure on final goods and services: GDP = Y in this simplified economy
• Since Y = E, then GDP = Y = E

Output Approach Example: The iPad

• The output approach defines GDP as the sum of gross value added of the industries plus taxes and less subsidies on products: it equals the value of the final good sold
• Each iPad sells for $600 so Apple buys a motherboard from Foxconn for $200 and Foxconn buys semiconductors from ARM for $75.
• If one iPad is produced, is the value of the end product produced

Value-Added Assessment

• GDP equals the final good value, which is the iPad value, which is $600
• GDP can be calculated by adding the value-added at each stage of production
• The total value-added is calculated in this manner

Valud Added Formula

• Value-added equals the price of output, minus the price of input or intermediate good bought from other firms
• When using this approach, it must be ensured that there is no double-counting
• GDP should not be calculating as the value of all outputs at each stage of production
• The use of the value add approach means that caution should be taking when considering intermediate goods used in production
• GDP only includes the value of final goods and services or the value added
• Value-added is a firm’s ouput minus the cost of intermediate goods from other firms

Canadian Statistics and GDP at Market Prices

• Canadian GDP at market prices is calculated by Statistics Canada using the income and expenditure approaches.
• Measures GDP as the income earned by owners of factors of production
• Income items by firms to households are wages, salaries and all supplementary income labour.
• Net income comprises non-farm unincorporated businesses, including rent
• Corporate and government business enterprise profits are accounted before taxes
• Interest and miscellaneous investment income is also considered plus capital consumption allowance

Canada's GDP Income and Expenditure

• Calculation and components are tabulated

Component Considerations of Income Method

• Compensation of employees (labour income) is around 51.3% of GDP in 2024 Q3.
• Since labour income is significant , total consumption by individuals also represents a large part of total expenditure
• Gross operating surplus which is return on capital of incorporated entities (businesses), accounts for roughly 26.0% of total income in 2024 Q3.
• Gross mixed income is the return on capital of unincorporated entities: accounts for 12.6% of total income in 2024 Q3
• Taxes less subsidies on production, products, and imports account for about 10.2% of total income in 2024 Q3

Expenditure Method and GDP

• GDP is divided into four main categories of expenditure:
  • Consumption (C)
  • Investment (I)
  • Government expenditure (G)
  • Net exports (NX) or (Exports (X) - Imports (M))

Comparison of the Expenditure and Income Method

• Both methods provide an equal assessment of domestic product
• Income takes employees, surplus and discrepancies into account
• Expensiture approach takes consumption and production factors into account

Consumption as the Main Component of Expenditure

• Data tabulated and consumption factors considered

Consumption of Goods and Services

• Services account for around 56.8% of total consumption, non-durable goods about 23.8%, durable goods about 12.9% and semi non-durable goods approximately 6.5%.
• Household consumption of goods and services accounts for about 54% of GDP in Canada.
• The above ratio is very stable over time relative to similar western nations
• Durable goods demonstrate investment-like behaviors
• Services are the least volatile comparison

Consumption Exclusions

• Consumption from illegal sources are exlcuded
• Allowances, charity, etc are considered trasfer
• Home activities like cooking do not factor into GDP

Investment Factors of GDP Component

• Investment accounts for 22% of total GDP with machinery accounting for roughly 17 %
• Residential investment makes up 41.6% of GDP with investment in structures being split into 3 major categories:
  • Investment for familial use
  • investment in non-residential structures as capital
  • investment for machinery used in production

Investment Measurement

• Investment that is non-residential include software, R&D
• Intangible products are difficult to measure given their association as intermediate expensitures and their significant impact on labor (capital and GDP growth)
• Statistics for international use do not measure the impact of intangible accurately

Importance of Investment Measures

• Investment in its components is still minor relative to the over arch, that is said it is still watched
• Investments measure how much firms expect sales to increase
• If there are signs for sales going up, inventories increase in their investment that boost actual GDP. Inventories are economic indicators

Governement as a Component

• Government purchases are goods/services bought by the Canadian Federal, Provincial, and Municipal Government
• Many transfers like old age security benifits paid by the Canadian government are not calculated, this is also relative to the government sector's accounts for roughly 20%

Net Exports as a Component

• Net Exports is a total between exports and imports and accounts for only 33% of Canada's GDP
• 75% is to the US
  • 10% and 8% from EU and China

Interpreting Changes in GDP Components

• Gross Domestic Income by Y and Domestic Expenditure by E
  • Y = E = C + I + G + NX
  • Only a construction and not a theory of how it works
  • The aforementioned cautions for interpretating identity

Domestic and National Products

• Domestic output that is produced within cananda, non-residents or residents, or income for Canada, accounts nationalites
  • Foreigners that have earned income are counted while Candians abroad are not

Difference Between GDP and GPD

• National product focuses on residents of all Canadians and earnings that are earned in Canada by work
• GPD excludes foreign income, but includes canadian income

GDP: Factors and Calculations

• GNP = GDP + factor income earned by residents-income earned by residents withinCanada
• Both are not different with the GDP being only 1.2% larger showing that more foreigners contribute to the Canadian economy

GDP Chart

• Countries of the world are given GDP charts
• While this ratio is only in a fraction, many foriegn countries show significant differences

Factors for calculating GDP

• From GDP can other factors from abroad and with:
  • Net national product
  • National Income = NNP - taxes
    • Private disposable income = DPD- net income, interests etc
      • Private Savings income - consumption
        • Government savings taxed and transfered and is interest
        • National savings - private and government savings
        • GPD = imports and government savings to factor for abroad and consumption
        • Savings

Real and Nominal GDP

• Real is the well being while using GDP but economist dont generally use it, they calculate nominal GDP and then compare with real GDP

Example

• Calculations done for comparisons

GDP Flaws

• It assumes constant times
• This calculation is an estimation

Chain-weighted GDP

• GDP in Canada uses a fixed weight, it's old
• Implicit chain price index

Chain Calculations

• It uses a series of GDP depletors
• Statistics of Canda switched to recalculation GDP and historical growth rates
• Measures output current to next

Real GDP Welfare

• Welfare is increased with real GDP

• It takes into account base prices

• Real GDP has also known constant dollar measure

• Quantities have Changed

Real and Nominal GDP Example

• Prices

• Real in 2024 with prices

• Data and information

Nominal Comparisons Misleading

• In order for the production of products, there must be increased nominal GPD
• It also needs to have a lower rate of pricing

Measuring Welfare

• To measure how well an Economy performs, Real GDP and Nominal GDP are used

Welfare Factors

• Calculations factored from previous points

###GDP vs Chart

• Chart is presented

GDP Deflator

• This data is factored using Nominal and Real GDP factors The deflector GDP Deflector = (Nominal g /real gdp

The data is changed by level of products made domestically to estimate this

• Consumners, price index, and inflation are all factors

###Chain GDP

• Old data with statistic Canada using an implicit chain formula

GDP Analysis

• Fixed weight may add to this GDP formula
• Using technology will impact GDP growth
• Over time, computers increased

GDP: Other Factors

• Technology has significant growth
• Relatiive price levels of production
• The measure of real GDP has an accurate year.

Chain Formula

• Measure to make it easy by updating

Chain formula used based on price

• Chain formula is to find a base.

GDP/Chart

• Data and years included
• Author has done other calculations.

Measuring The Average

• There is no average, but it is important to average
  • The formula for data is GDP PER CAPITA = Real GDP / Population

Welfare Data and Information Factors

1. Gdp doesn't include wealth for home production 2.No good or bad externalities 3.wealth

• A population can have different wealth results

Economy Data and GPD welfare

• The rate is not shown in the market that are from the home- but they are not traded

• Wealth and market factors

• Developed data factors for under 40/1% of GPD is the developed data

• Many underground and illegal trades like bartering

• GPD is an entirely ignored factor-

• Water

• The pollution that it holds