## Archive for September 5th, 2007

### Changing Financial System

September 5, 2007

I just came across this paper from Claudio Borio, Research Head, BIS. It is a nice paper which summarises the changes and constancies in Financial Systems over the period. He anslyses how financial distress is caused and policy actions for the same.

It is things we as students of finance know about but his presentation of ideas is superb. His policy suggestions where he compares the policies to address financial system with that of policies to strengthen road safety is superb. Most academicians and policymakers have a fascination for making the same comparison and Borio does not disappoint.

A nice crisp paper without any arithmetic.

### Differences between 2 GDP approaches

September 5, 2007

GDP is calculated seperately in two ways and CSO has recently begun providing us data using the 2 approaches. I had written about this development here. (Actually there is a third approach-income but it is more difficult and complex to calculate)

As you collect seperate data for the entire economy to arrive at one GDP figure it is normal to expect the deviations in the two approaches.  The CSO acknowledges the same and calls the differnce as discrepancies. See this press release for details.

Abheek Barua and Bidisha Ganguly have written a nice article highlighting the same aspect in the recent Q1 2007-08 GDP estimates. The difference in growth rates of GDP between the two methods is a huge 2%. Production-wise estimates for GDP growth in Q1 is 9.3% but expenditure-wise it is 7.3% !! (I also analysed the developments but did missed this aspect)

I just extended the analysis a bit and calculated the differences in previous years as well.

Here are the findings:

P – E       Growth(P) Growth(E)
2000-01       7,754           4.04             2.46
2001-02       38,836        5.21              3.69
2002-03    (21,707)        3.73              6.68
2003-04    (10,918)        8.39             7.83
2004-05    (88,766)        8.33           11.51
2005-06    (96,343)        9.23            9.21
2006-07     (41,279)        9.35            7.17

Note: (1) GDP taken is GDP at Market Prices
(2) P – GDP via production
(3) E- GDP via expenditure

• Ist column shows the differnce between GDP (Production) minus GDP (Expenditure). Brackets indicate minus. Hence, using expenditure approach one gets higher GDP figures. In the last 5 FY, GDP (exp) has been higher.
• However, you get higher growth rates using GDP (Production). Out of the seven periods analysed, 3 have been in favour of GDP(P) and 2 of GDP(E) and two are marginally in favour of GDP (P).
• However, growth in GDP (E) whenever higher than GDP (P), former is higher by around 3% whereas the same figure for GDP (P) is around 1.5%.

In summary, if you are analyst wanting to put a positive report on India and you look at absolute figures quote GDP(E) and whenever growth rates look at both and pick the highest (most probably it would be GDP (P))  🙂

September 5, 2007

1. Firstly all the papers presented at recent Jackson Hole symposium are available online. The discussions on papers are Feldstein’s speech is still not available. WSJ Blog points to economists reactions to the papers and views presented.

2. WSJ Blog points to this blog from Alan Greenspan.

3. Mankiw points to an excellent piece written by Ken Rogoff. To cut it short, he feels that Fed should cut interest rates as real economy needs help. I loved the final para:

In a sense, a central bank’s relationship with asset markets is like that of a man who claims he is going to the ballet to make himself happy, not to make his wife happy. But then he sheepishly adds that if his wife is not happy, he cannot be happy. Perhaps Bernanke will soon come to feel the same way, now that his honeymoon as Fed chairman is over.

4. Rodrik explains why we use maths in economics? I am sure most would not like his summary:

The moral of the story is that if you are smart enough to be a Nobel-prize winning economist maybe you can do without the math, but the rest of us mere mortals cannot. We need the math to make sure that we think straight–to ensure that our conclusions follow from our premises and that we haven’t left loose ends hanging in our argument.

In other words, we use math not because we are smart, but because we are not smart enough.