26 thoughts on “Monday Message Board (on Tuesday)”

  1. you might have seen this already, but if not…

    Regulation Vacation Celebration!

  2. Funny stuff Gerard, dress up or come as you are…pirate/fisherman, disciple/terrorist.. Some enterprising Somali travel office could set the ball rolling but you’d want to insist on hefty insurance, theirs and yours.

  3. It looks like the net exports number will push GDP for Q1 into positive territory. This seems counter intuitive to me because net exports is a result of a big drop in exports and an even bigger drop in imports.

    The ABS says:
    Goods exports fell $6,297m (10%)
    Goods imports fell $6,557m (11%)
    Services exports rose $351m (3%)
    Services imports fell $289m (2%)

    So there was a whole lot less trade going on in Q1, but this adds to GDP (?!)

    One wonders what our export performance would have been like if the AUD hadn’t crashed 30%+ during the Oct-Mar period. Of course, that big fat cushion is gone now, lower mineral prices are locked in for 12 months. Hey, that must be why Rio was up 4% yesterday.

  6. Looks like early government action is working.

    Actually it was all due to net exports and the weak AUD. The same AUD that isn’t weak anymore. See above.

  7. The headline real GDP figure is misleading, the commentary needs to focus on the terms of trade adjusted real GDP, real gross domestic income, which fell 1.4% in Q1 following a 1.3% fall in Q4 2008.

  8. the commentary needs to focus on the terms of trade adjusted real GDP, real gross domestic income

    It sure does. If you want to see some really nasty numbers click here

  10. SDFC: “The headline real GDP figure is misleading, the commentary needs to focus on the terms of trade adjusted real GDP, real gross domestic income, which fell 1.4% in Q1 following a 1.3% fall in Q4 2008.”

    Why? Real GDI measures the real value of what Australians can purchase from the sale of GDP.

    Imagine real GDP was unchanged, the amount of work done, goods and services produced, was the same as it was before, and all prices were unchanged expect import prices, which fell. That would mean real GDI would be higher. Is this what you want to measure?

    It would be like saying the cost of living went down so I must have produced more. It means I will probably buy more, but it doesn’t mean I produced more.

    It works the other way too. Did rising export prices previously really mean the economy was growing faster than the GDP figures said it was?

    I mean, if you guys reckon the 1.4% fall in real GDI in the March quarter told the true story then you must also believe the 2.8% rise in real GDP in the June quarter last year told the true story too, and not the GDP rise of 0.3%.

    You must also believe the annnual rise of 1.7% in real GDI (March quarter to March quarter, latest numbers) tells the true story and not the 0.4% rise in real GDP.

    Oh really?

  11. JQ – Where has your name gone for this site? Its nowhere to be seen except in the address bar.

  12. Is this what you want to measure?

    What we really want to measure, or at least what the media wants to report on, is whether we are in recession. In your case above (import prices falling) it would increasw our buying power and we’d feel better off.

    I mean, if you guys reckon the 1.4% fall in real GDI in the March quarter told the true story then you must also believe the 2.8% rise in real GDP in the June quarter last year told the true story too, and not the GDP rise of 0.3%

    Yes and yes, although I might not have admitted it at the time 🙂

    GDP calculations do weird things with prices and volumes that sometimes throw up funny numbers, especially in times of high volatility in prices and currencies like we’re seeing at the moment.

    A better measure is GNI per capita

    When GDP is adjusted for the development of prices, i.e. calculated in constant prices, each individual product included in output, as well as each individual product included in use, is deflated by its own separate price index so as to reflect the development of output by volume as accurately as possible. For measures of income such as GNI and household disposable income, there is no unambiguous underlying measure of volume

  13. Bill Evans is awake…

    Australia’s national accounts for the March quarter emphasise how difficult it has become for the authorities to assess Australia’s current economic performance. There are three large distortive forces – the collapse in AUD and commodity prices in the second half of 2008 which has made it difficult for the statistician to calculate trade volumes from nominal data (note the 3.9ppt’s contribution to GDP growth from net exports over the last two quarters). Imports are estimated to have collapsed by nearly 15 per cent while final demand slowed by only around 1 per cent – very suspicious indeed!
    …
    Net exports are now likely to subtract from growth through the rest of 2009 (rising AUD; statistical revision of import collapse; export contraction as impact of resources capacity and rural surge fades)

    I repeat my main point. The GDP numbers were not as clear cut as the media cheerleaders suggest. The extreme volatility in the AUD, export prices, and import volumes over the past 6-9 months has made it very difficult to produce an accurate measure of economic performance. All kinds of statistical oddities are being introduced, and we really need to look at the income numbers.

  14. Gaz
    Changes in relative prices are relevant. GDP is more than just production, it measures income and expenditure as well. Remember the dollars and cents economy is the economy we all have to live and do business in.

    Rising inflation, a sub 4.5% unemployment rate along with robust wages and profit growth, suggest the 2.8% rise in real GDI was a more accurate reflection of the state of the economy in June 2008 than the real GDP figure of 0.3%. Just as the sharp falls in RGDI over the past two quarters more accurately reflect the current state of the economy. You need to realise the 1.7% YOY rise in RGDI contains a fair amount of old information.

    You might want to explain why you think changes in the terms of trade are irrelevant.

  15. You might want to explain why you think changes in the terms of trade are irrelevant.

    Huh? Where did I say that? The collapsing terms-of-trade (combined with rising AUD) are the main reasons export incomes are crashing.

  17. Carbonsink: I think sdfc’s comment “I think You might want to explain why you think changes in the terms of trade are irrelevant” was aimed at me.

    And it’s a rather odd question, given that the calculation for real gross domestic income (real GDI) assumes there is no change in the terms of trade (technically, by deflating nominal exports by import prices).

    Changes in the terms of trade are irrelevant in calculating real GDI, because the volume of exports is irrelevant to that, just the value of export revenue in terms of what volume of imports you can buy with it.

    Anyway, I think the point that’s being lost in this conversation is that real GDP and real GDI measure different things. There are valid reasons for measuring those different things.

    Real GDP measures the quantity produced, which has a bearing on employment, resource usage, etc.

    Real GDI measures the real value of goods and services that can be purchased with the income from GDP. An analogous concept is real household disposable income – it doesn’t measure how much work we did or the volume of stuff we produced, it just measures the purchasing power of household income.

    But I don’t think you can say one is wrong and one is right. It’s like arguing whether centimetres are more accurate than litres.

    More generally, I think we should be very careful of looking for reasons why the latest national accounts might be suspicious or misleading in some way.

    GDP probably rose in the December quarter and I think everyone should just get over it. It doesn’t mean “we’re not in recession” but it most probably did happen.

    The fall in domestic final demand was more than offset by a rise in exports, at long last, and by a big fall in imports, which is plausible in light of a) the big fall in business investment in equipment and the high import penetration in that sector, b) the anticipated slump in final demand reflected in big inventory rundowns, c) the lower $A and consequent increase in import prices, d) the dysfunction in the global trade finance system.

    There’s nothing implausible about that and it doesn’t contradict the fall in real GDI, because real GDP and real GDI, by definition, diverge when the terms of trade changes.

  18. Gaz, Gaz, Gaz – You continue to confuse GDP(I) with Real Gross Domestic Income. GDP(I) is an income measure of GDP while Real Gross Domestic Income RGDI is real GDP adjusted for the terms of trade.

    From page 8 of the March quarter National Accounts.
    The real purchasing power of income generated by domestic production is affected by
    changes in import and export prices. Real gross domestic income adjusts the chain
    volume measure of GDP by the Terms of trade.

    GDP(I) is but measure of GDP, along with GDP(P) and GDP(E). As these measures should theoretically be the same but through measurement problems never are, it is the average of the three measures that is used to calculate headline real GDP.

  19. sdfc: “Gaz, Gaz, Gaz – You continue to confuse GDP(I) with Real Gross Domestic Income. GDP(I) is an income measure of GDP while Real Gross Domestic Income RGDI is real GDP adjusted for the terms of trade.”

    sdfc I know perfectly well the difference between GDP(I) and real GDI, thank you very much.

    When the ABS says “Real gross domestic income adjusts the chain
    volume measure of GDP by the Terms of trade” this means the terms of trade effect is removed, ie by “adding exports of goods and services at current prices deflated by the implicit price deflator for imports of goods and services”.

    In other words it does not so much allow for the terms of trade effect as assumes there has been no terms of trade change.

    As the your quote from the ABS makes it clear, real GDI is designed to measure the “real purchasing power of income generated by domestic production”, and NOT the volume of domestic production itself. That’s the point I was trying to make.

    Simplified hypothetical example: Australia is a car factory. All the cars are exported and sold and, with the proceeds, TVs are imported. GDP measures how many cars are produced. Real GDI measures how many TVs can be imported with the revenue from car exports.

    I’d be grateful if you could point out where in my comments I’ve said anything that could legitimately be taken as an indication that I have confused real GDP and real GDP(I).

    In other words, you end up with a measure of GDP which delfates nominal exports by the price deflator for imports, thereby giving a measure of exports in terms of the volumes of imports that can be bought with aggregate export reveneue, rather than the volume of exports.

  21. Gaz

    This really is getting silly. Think about it, the terms of trade effect has already been removed from the chain volume measure. RGDI puts the terms of trade effect back in.

    My statement that you are confusing GDP(I) with RGDI (not real GDP) comes from your comment that RGDI assumes no change in the terms of trade.

  22. Not silly, sdfc.

    Real GDI assumes no change in the terms of trade. It takes nominal GDP and converts it to a real terms measure in the usual way EXCEPT it uses the same deflator for imports and exports. In other words, it assumes there’s no change in the terms of trade.

    Here is what the ABS says:

    Real gross domestic income
    Calculated by:
    – taking the volume measure of gross national expenditure (GNE)
    – adding exports of goods and services at current prices deflated by the implicit price deflator for imports of goods and services
    – deducting the volume measure of imports of goods and services
    – adding the current price statistical discrepancy for GDP(E) deflated by the implicit price deflator for GDP.

    Notice that exports are deflated by the IPD for imports, so import and export prices are assumed to move by the same amount, ie no change in the terms of trade.

    I can see why we are talking at cross purposes, though. To get real GDP, you “remove” price effects to get to real terms. So I can see where you’re coming from when you say real GDI “puts the terms of trade effect back in” because, by using the same price deflators for both imports and exports, the terms of trade effect on nominal trade has been “put back in” to the real measures. OK, fair enough.

    When I said the terms of trade effect was “removed” by the method used to calculate real GDI, I was referring to the effect of a change in the terms of trade in causing the real and nominal trade balances to behave differently in real and nominal GDP. In the components of real GDI, the trade balance does the same thing as the nominal trade balance.

    But the key point remains – to get real GDI from nominal GDP, exports are deflated by import prices because real GDI is a measure of the real purchasing power of GDP, not an alternative or somehow better measure of real aggregate output (ie GDP).

    Both concepts are useful.

  23. Take a closer look Gaz, exports at CURRENT prices are deflated by the import price deflator and then deducting the volume measure of imports (imports at current prices deflated by the import price deflator). This is not the same as assuming no change in the terms of trade.

    Let me make this clear, if export values rise faster than import values (assuming no change in volumes) and then both are deflated by the same price deflator, then the ratio of export prices to import prices has still increased. Let me provide a simplified example – 4/2 is greater than 2/2.

  24. sdfc :Let me make this clear, if export values rise faster than import values (assuming no change in volumes) and then both are deflated by the same price deflator, then the ratio of export prices to import prices has still increased. Let me provide a simplified example – 4/2 is greater than 2/2.

    sdfc, if exports and imports are both deflated using the same deflator, ie assuming the export price deflator (XIPD) is equal to the import price deflator (MIPD), that’s assuming the terms of trade has not changed. I can’t think of any other way of putting it.

    The terms of trade is an index of XIPD/MIPD, and if XIPD = MIPD then the terms of trade is constant.

    Now let’s look at your example, the case where export values rose more than import values but volumes of both remained unchanged, ie export prices rose more than import prices.

    Deflating both by the same price deflator would give you an increasing ratio of export *”volumes”* to import *volumes*. This result tells us nothing about the change in relative prices (as you suggest it does), not surprisingly because deflating the value measures removes, rather than reveals, the price component.

    Of course that resulting measure of export “volumes” would obviously not be a genuine volume measure, but a measure of the volume of imports corresponding to a nominal value of exports, ie the purchasing power of exports measured in terms of import volumes.

    Which brings me back again to my original point. Real GDI is a measure of purchasing power, real GDP is a measure of production and ne’er the twain shall meet. (Except, that is, on those rare occasions when there really is no change in the terms of trade.)

  25. Gaz, we’re talking around in circles so let’s just concentrate on your last comment where you seem to acknowledge an increase in the terms of trade raises RGDI. This is exactly the point. A rising terms of trade increases real income, higher real income generates higher expenditure (consumption and investment). This increases economic activity in the dollars and cents economy, raising employment. This is why real GDP understates just how well (or poorly) an economy is doing in times when there are large changes in the terms of trade.

  26. Yes, sdfc I agree with all that. As I said in my first comment here – real GDI measures the real value of what Australians can purchase from the sale of a given quantity of GDP.

    The only comment I’d add is that the link between an increase in real GDI, higher expenditure, higher production and higher employment is not mechanical. An increase in purchasing power will affect the economy in that way but how quickly and how completely that potential will be realised is subject to a range of influences.

    There’s no doubt it’s a useful indicator and certainly puts the GDP estimate into perspective.

    Cheers.

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