Managerial Performance and the Need for Data

Managerial Performance and the Need for Data

All the economic actors active in a market consider and analyze permanently the evolution of the business cycle by using available data in order to make rational choices in their business decision. In other words, the decision making relies in all its phases and in all circumstances on data, here including statistical data. Managers, entrepreneurs and businessmen use data aiming at:

Understanding their company (their department as part of the company) and their business environment (business risks and opportunities in the domestic and international market)

Solving disturbances in the functioning of their company

Improving the performance of their business.

To this end, they build mental models by answering questions like:

How is my business (department or company) doing now?

How has it done in the past? What were the highest and the lowest performance in the past and where is my business now as compared to the historical maximum and minimum level of performance?

At what levels could I perform in terms of sales, profits, investments, number of personnel, opening towards the international market, etc?

How are my competitors doing in the domestic and/or in the international market?

Etc, etc.

Answering questions like the above mentioned ones, a business professional makes use of:

Primary data from the day to day reports of the company (department) and/or from the official statistics at industry and market level. These data show quantitative aspects of the economic life.

Derivate data resulting from comparisons (over the time and/or space bound), from calculus, etc. These data reveal qualitative aspects of the analyzed variables.

Sources of data needed in business decision

There are three different sources of data:

1. The company (department) creates itself information which is summarized by the management information system (MIS) in routine reports. They contain financial accounting, marketing and operations data, which describe the actual state of the firm (department) and help managers to sense any disturbance, gap or shift between current performance and historical performance, between current performance and budgeted (planned) performance. These are internal (routine) data.

2. The company (can) create complementary (ad hoc) data by conducting special surveys or pilot projects developed with its employees:

- Internal surveys in the human resource department or in the operations department in order to better understand critical issues in the companies functioning

- Market surveys in order to achieve a deeper understanding of the attitude of the costumers and of the competitors on the local, regional, national and/or international market.

- Pilot projects named also planned change studies. In order to improve the performance of a department, managers may run small-scale planned change experiments. By studying the results, they decide to continue, to extend, to correct or to abandon the process of change at company level.

3. The company may access or buy data and/or studies from outside sources. These are external data. They are considered neutral information for the company management as these data do not reflect the interest of the firm. Types of external data sources:

- External studies on industry-wide production, sales, exports, imports, etc. These studies are developed by independent bodies or by specialized research institutions

- Statistical surveys containing local, regional or national economic data

- Country reports

- Foreign market reports etc, etc.

All these data needed by a competition facing management might be also structured according the level of coverage of the information in three groups:

Microeconomic data = company data referring to the internal data of the given company and also to the activity of the competitors

Mezzo-economic data = industry wide data or sector data

Macroeconomic data = national economy data

A wise company management will use in its decision making a mix of data by combining internal and external data, routine and specially developed data, micro- , mezzo- , macro- and sometimes even global (worldwide economy) data.

Role of statistics in preparing business decision

Statistical methods and indicators help the company management to:

sense problems (inside the company), risks and opportunities (in the business environment)

set up a diagnosis and generate alternative solutions for the business

make decision (chose the best alternative in the given business environment by considering the actual and potential competitiveness of the company) and

control the implementation by following the impact of the decision on the companys performance

In all these steps of the decision making process, statistics offer appropriate methods for:

- data collection,

- data organizing,

- data analyzing and interpreting.

See also the graphs No. 1.1 and 1.2. They show that statistics is a way of thinking that helps managers and business professionals collect or create, summarize, organize, analyze and interpret data in order to register and solve problems, to sense opportunities and risks.

Complementary bibiographical references in English:

Brightmann, Harvey, Schneider, Howard (1992): Statistics for Business Problem Solving. Cincinnati, Ohio, South-Western Publishing Co.

Curwin, Jon and Slater, Roger (1995): Quantitative Methods for Business Decisions. Third Edition. Londra, Chapman & Hall

Senn, James A 1987): Information Systems in Management. Third Edition. Belmont, California, Wadsworth Publishing

The Circular Economic Flow in an Open Economy.

Transactors and Transactions

Business professionals need informations related to their business environment. Most of these informations are quantitative data, hereincluding statistics, which present the current status and dynamics of demand and supply in the local, regional, national and/or international market. In other words, before starting to negotiate with a foreign partner, businessmen need to learn about the risks (political, social, macroeconomic, legal system related risks and information fiability risks) specifc to the country where the partner operates.

The economic activity of a community consists of transactions (operations, flows) between its economic actors (also known as independent economic entities = economic operators = transactors). In most of the cases, a transactor provides an economic value to another transactor and receives, in return, an equal value. This kind of transaction is also known as an exchange between economic partners. Besides the exchanges, in an economy there are also transfers. This type of transactions designes a change in ownership from one economic actor to another without compensation.

At a country level, the totality of transactions taking place during a reference period of time (usually one year; sometimes also during a six months or three months basis) is known as the circular economic flow. In order to easilly undestand this circular flow, some basic principles have to be respected by every analist:

to define and classify all the transactors inter-acting in the domestic and/or international market;

to define and classify all the transactions specific to an open market economy;

to establish reliable data sourses and appropriate methodology aiming at collecting, organizing and aggregating data;

to co-ordinate the specific sub-systems of data (indicators) for obtaining a general, comprehensive image of the economy, able to offer coherent informations;

to ensure cross-border (international) comparability for the domestic data. N.B. There is a strong and effective co-operation between the national bodies responsible for the official statistics and between international organizations and institutions producing regional or worl wide statistics.

Transactors (economic entities) are phisical or moral persons which enter transactions in order to accomplish their mission in the society. There are five types of transactors:

households, which buy final consumption goods and services from the market and offer in the factor market the labor of the household members and also via commercial banks their savings;

businesses buy labor, capital goods and material consumables in the factor market and offer their products (goods and/or services) to other economic actors present in the local, regional, national or international market;

the state (the public administration represented by the central government and by the local administration) plays a dual role in the circular flow of an economy: on one hand, the public administration is a consumer like every private household, on the othe hand, it produces and offers to the community membres goods and services for free or at a symbolic price (not covering the costs of the factors involved in their production);

commercial banks are a special kind of businesses with a specific role in the society: they mobilize the surplus money (savings) from the previously mentioned economic actors and redistribute the money to thouse entities interested to atract and invest money in various development or institutional projects. Banks also offer banking services and professional consultancy to their clients;

the external sector (laso known as the rest of the world) is another special transactor of an open economy as it is grouping al the companies, institutions, organizations and commercial banks which intermediate the link between the domestic economy and the national economies accross the country borders.

For economic analysis purposes, transactors are grouped by industries they (economic branches), as well as according to the institutional sectors specific for a market economy.

A transaction is defined as an economic flow (between economic entities) that reflects creation, transformation, exchange, transfer or extinction of economic value and involves change in ownership of goods and/or financial assets, the provision of services or the provision of labor. There are two types of transactions:

Real (concrete) flows related to the production, distribution and/or consumption of (tangible) goods and services. In Figure 2.1, flows no. 2, 6, 8, 9 are real flows.

Finacial (money) flows or payment streems related to the creation and distribution of incomes as well as to claims on and liabilities to the different economic sectors. In Figure 2.1, flows no. 1, 3, 4, 5, 7, and 10, 11, 12 are financial ones.

At a country economy level, the equality:

summarizes up the activity of all the transactors of an open economy. This equality is shown in a symplified version of the circular economic flow in Figure 2.1. The presented flows have the folloing significance:

1. Households earn income by selling labor and by supplying (renting via commercial banks) capital to businesses. That means: households provide factor inputs to businesses, which in turn pay wages, rents and profits as income.
2. A part of that income flows back to the businesses in form of expenditure of the households to buy goods and services supplied in the market by the busnisses.
3. The savings of the households are concentrated by commercial banks, which offer in turn interest payments.
4. Households pay to the fiscal system of the public administration direct taxes and receice from the state consumer subsidies. Td Sg = Net consumer subsidies.

Between the businesses and the public administration there is a similar double oriented flow: businesses pay indirect taxes (on turnover, on profits, on imports, etc.) and some of the companies receive from the state operation subsidies aiming at supporting their activity or at correcting supply prices in the local market. Tind Si = Net operation subsidies (known also as state subsidies given to companies).

Figure 2.1. The circular flow of economic activity in an open economy

6. The public administration (central government and local administration) uses its income (or a part of it) to purchase goods and services from busnisses in order to fulfill its social mission.
7. State savings are hold in commercial banks and earn interes payments.
8. Export of goods and services to foreign partners.
9. Import of goods and services from foreign partners.
10. Payments for the transactions developed with cross-border partners. N.B. The difference beween the total value of exports and that of imports is known as net export.
11. Businesses deposit their savings (E_i) as well as money amounts (A) covering the depreciation of the capital goods used in the processing activity and earn interes payments from the commercial banks.
12. The banking sector offers loans to the other economic entities. Businesses engage loans in order to invest (greenfield investments, development investments and/or replacement investments). The households and the State are borrowing money in order to cover consumption or investment needs.

In this simplified presentation, we did not include important transactions between the different businesses and other operations, but this simplification is not altering the understanding of the circular economic flow.

The System of National Accounts (SNA)

The System of National Accounts (SNA) consists of a set of coherent, consistent and integrated macroeconomic accounts, balance sheets and tables. It is based on internationally agreed concepts, definitions, classifications and accounting rules. At present, most countries produce their national accounts on a basis consistent with that described in the United Nations publication A System of National Accounts updated in 1993 and commonly referred to as SNA93.

Eurostat Statistical Office of the European Union has developed the European System of Accounts (ESA) as a more in depth analysis instrument for the member states macro-economic outlook. The Romanian National Institute of Statistics applies ESA starting with 1999 estimates.

In practice, the accounts are compiled by the national bodies responsible for the official statistics for a succession of reference periods, thus providing a continuing flow of data that is indispensable for the monitoring, analysis and evaluation of the current macroeconomic performance and the tendencies registered over time within an economy.

The main accounts built up within national ESA are:

- Production account (C1);

- Generation of income account (C2);

- Distribution of income account (C3);

- Use of income account (C4);

- Capital account (C5);

- Financial account (C6).

Finally, a separate account the external sector or the rest of the world (C7) is designed to summarize up the economic flows between the resident economic entities and the non-resident ones.

Some of the developed countries are currently trying to include in the SNA some other critical aspects of sustainable economic development such as the impact of economic activity on the environment. A major difficulty in doing so is induced by 'the non-market' character of some of the environmental issues. Under such circumstance it is impossible to directly put a money value on them. The SNA93 solution is to produce estimates in the form of satellite accounts, which are accounting statements consistent with, but compiled and presented separately from, the main (or core) accounts. The major advantage of such an approach is that the core accounts are quarantined from the conceptual and measurement problems which can have a large impact on the estimates for environmental aspects.

The SNA is implemented at national economy level and at region level as a result of aggregation of data registered by individual economic entities, and/or institutional units. These data are in a first round summarized up by industries and then aggregated at region level and at country level in order to display and understand the functioning of the economy. For economists and business professionals it is essential to be able to observe and analyze the interaction between the different industries, sectors and/or regions existing within the economy of the home country and also of the (potential) partner country.

To this end, the real flows between transactors are grouped by industries using the Classification of Activities in the National Economy (CANE). The Classification of Activities in the National Economy, applied by the Romanian National Institute of Statistics in official publications since 1997 is harmonized with that used within the European Union and at international level, the economic activities being classified by homogeneity, by sections, divisions, groups and classes.

In order to present a structured picture of the financial flows between the transactors, data are grouped by institutional sectors, by considering the main economic function and the source if their supply. The resident institutional units (entities whose center of economic interest is placed in the economic territory of a country) are grouped into six institutional sectors as follows (see also Table No. 2.1:

1. Non-financial corporations and quasi-corporate enterprises
2. Credit institutions
3. Insurance companies
4. General government
5. Private non-profit institutions
6. Households

1. Non-financial corporations and quasi-corporate enterprises refer to non-financial units whose economic function is to produce goods and/or services for the non-financial market and whose main resources (over 50%) accrue from the sale of their output. This sector also includes besides the productive companies the autonomous regies.

2. Credit institutions group together entities whose main function is to finance, i.e. to collect, transform and distribute financial reserves existing in the society. The main resource of these units consists of the saving deposits and of interest incomes.

3. Insurance companies are chiefly engaged in insurance businesses, i.e. turn individual risks into collective ones in order to better cover damages. The main source of income for these companies is represented by contractual premiums.

4. The general government sector includes the central government of the country, the local administration, the judicial and prosecutors bodies, the institutions carrying out activities of education, health, culture, art, defense, etc. Only institutions financed (totally or partly) by the public budget are included in this sector. The main financing source for these institutions is represented by the budget incomes from direct and indirect taxes paid by the contributors.

5. The private non-profit institutions include religious organizations (cults), trade unions, political parties, associations, foundations, cultural and sports organizations, the Red Cross and various charity organizations. Their main resources are the voluntary contributions and donations of individuals and/or of households as well as sponsorship and entrepreneurial incomes.

6. Households main function is consumption of goods and services. Eventually, households may have also productive activities achieved by family association or by independent private entrepreneurs. The main resources of households are represented by compensation of labor, entrepreneurial incomes, and transfers from other sectors.

All the non-resident entities active on the economic territory of the country are grouped into a distinct external sector (known also as the rest of the world sector).

Certain key aggregates, such as gross domestic product (GDP) or national income (NI) are widely used as performance indicators of the economy of a country. They are estimated within the SNA, but the calculation of such aggregates has long ceased to be the primary purpose for compiling the accounts. Data provided by SNA are used to explain structural aspects of economic growth, to show regional gaps in development, to better understand the impact of various factors on the present and expected results of macroeconomic policies, to sense the business environment (risks and opportunities).

The national accounts are designed to provide a coherent and consistent set of data for various types of economic analysis. The major macroeconomic aggregate GDP provides an estimate of the overall unduplicated value of production in a countrys economy. However, while being an important indicator of a countrys economic performance, GDP is not necessarily a reliable indicator of overall community welfare or of quality of life. A number of other aspects, such as distribution of income, life expectancy, public health, education, environment quality, crime rates etc. have to be taken into account when discussing welfare or quality of life.

Estimation of Macroeconomic Aggregates

The business environment of a country (region) is scrutinized by business professionals through a group of statistical indicators expressing the national (regional) performance. To this end, they might use output or/and income aggregates. The word aggregate means sum or total.

How to obtain macroeconomic aggregates? What to sense with them?

Using data registered on transactions between the entities of an economy (between domestic/resident economic entities, as well as between them and non-resident ones), most of the countries produce their national accounts. The System of National Accounts (SNA) is a set of coherent, consistent and integrated accounts, balance sheets and statistical tables based on internationally agreed concepts, definitions, classifications and principles of data collection and aggregation.

A large international co-operation is behind the world wide harmonization of the SNA methodology. In 1993 under the aegis of the United Nations an updated version of the SNA Handbook was released. It is currently referred to as the SNA93.

The basic macroeconomic aggregate estimated within the SNA is the gross domestic product (GDP). It expresses the total value added in form of final goods and services marketed during the reference period by resident and non-resident entities operating in a countrys economy.

There are four methods of estimating GDP. According to the type of transactions (flows) registered and aggregated, we observe:

Two estimations based on real (concrete) flows: the production approach and the consumption approach;

Two estimations based on financial flows: the income approach and the expenditure approach.

As data sources and collection methodologies differ, usually there are four estimations of the same GDP in a given reference year. The national body responsible for official statistics is in charge to verify and guarantee the accuracy of the implemented methodologies and decide about the best estimation of the macroeconomic aggregate. After a series of verifications and homologations, a definitive level of GDP is published.

The various estimation methods are presented bellow:

a)      The production approach is summing up the gross output of businesses after subtracting the intermediate consumption. By applying this approach, business professionals learn about the relative size of a given industry and of its importance for the countrys economy.

GDP = Σ (GO_i IC_i)

Where: GO is the gross output of company i (or of industry i) and IC is the intermediate consumption in the respective entity.

The distribution of GDP by industries helps business professionals to appreciate the size and the importance of the specific field (industry) wherein they (intend to) develop transactions in a partner country.

b)      The consumption approach is based on the following equality:

GDP = PC + GC + GFCF + CS + (X M)

Where: PC is the private consumption of households and of non-profit organizations; GC is the consumption of the general government (public administration and its central and local entities and institutions); GFCF = gross fixed capital formation; CS = changes in inventories (stocks of final goods held by producers); X = exports of goods and services; M = imports of goods and services. Usually, (X M) is referred to as net exports.

By analyzing the dynamics of the different components of the GDP, an economist can observe the growth factors and their significance in the general economic development of a country.

c)      The income approach equals the GDP with the total value of income received by factors involved in its production and is composed of wages, rentals and profits.

GDP = CE + GOS

Where: CE = compensation of the total employees in all the entities of an economy, and GOS = gross operating surplus of all the economic actors.

This analytical perspective of the GDP is useful in observing the effectiveness of capital inputs in the various industries as compared to the overall effectiveness of the national economy. On the other hand, the manager of a company may observe how his business is doing as compared to the average effectiveness registered at industry level.

d)      The expenditure approach takes into account the fact that besides private consumption and savings (which represent the national income of a society) the GDP is influenced by the indirect taxes and the depreciation of capital goods used in the economy during the reference period of time.

GDP = (PC + PS) + IT + DCG

Where: PC = private consumption expenditures of the citizens; PS = personal savings of the citizens; (PC + PS) = National income of a country; IT = net of the indirect taxes (by subtracting from the total amount of indirect taxes paid by businesses the operation subsidies given by the government to some companies); DCG = depreciation of capital goods.

This approach offers another way to decompose GDP and reveals the absolute and relative size of the national income of a country, frequently referred to as a global welfare indicator.

In order to get appropriate macroeconomic estimates, five measurement and aggregation principles are followed in the general SNA architecture:

general coverage of value data at market prices;

unduplicated value of production (only the value added is registered);

gross versus net estimates differ by the depreciation of capital goods;

N.B: GDP DCG = NDP and NDP IT = National Income

domestic versus national aggregates differ according the summing up criterion (territoriality versus nationality of the companies registered as shown in Figure No. 2.2.);

current and constant price estimates of the macroeconomic aggregates (see next paragraph).

Price statistics in an open market economy

There are different price categories in an open market economy: consumer prices, whole sale prices, official sector prices, exports prices and imports prices. These categories show different dynamics which are captured by different index numbers (see also data in Table No. 2.3.).

The consumer price index (CPI) measures the evolution of prices for goods purchased and tariffs for services used by the population in a certain period (current period) as against a previous period (basic or reference period). Consumer price index is calculated only for elements from population direct consumption, excluding: consumption from own resources, investment and accumulation expenditures, interests paid to credits, insurance rates, fines, taxes, etc., as well as expenditures for labor payment in agricultural production of individual households.

Data sources:

1. Prices and tariffs paid by individuals in their interaction with detail sale entities or services providers. These prices and tarriffs are registered by a sampling survey carried out by the NIS. Specialized statistical staff assures the collection of data based on questionnaire-books corresponding to the groups of goods (food and non-food) and services taken into CPI calculation. Statistical survey on consumer prices uses the following samples:

i) Sample of localities - is set up observing the restrictions of representatively in keeping with the number of inhabitants and the volume of goods sale and provisions of services. It includes 42 localities from urban area of which 68 research centers were selected.

ii) Samples of observation units - includes shops and units rendering services to the population from research centers. The selection was based on the need to assure the representatively from the viewpoint of the volume of goods sale and provisions of services. Units recording prices/tariffs are kept in the sample, as far as possible, a longer period in order to assure the continuity and comparability in time of data series. The sample includes about 6000 units of which almost 80% represent private ownership. Unique prices/tariffs applicable country wide are set up by normative documents or negotiation notes (electric and thermal energy, methane gas, rail, air and river transport, mail and courier services, radio and TV subscriptions). They are registered using information received by the Competition Office from the producers or providers.

iii) Sample of goods and services - includes items having an important weight in the population consumption. The used nomenclature is divided into 3 aggregation levels: groups, positions and items as follows:

* group of food goods contains 54 positions with 312 items;

* group of non-food goods contains 112 positions with 770 items;

* group of services contains 48 positions with 378 items.

The items are individualized in terms of variety of goods and services.

2. Information collected from this survey are completed by those from the survey on prices of main agricultural products sold by private producers in agro-food markets, thus covering the main sources for the population supply.

Weighting system The weights used for the calculation of consumer price indices are obtained from the Household Integrated Survey (HIS). These structural data are estimated as average monthly expenditures of a household in order to purchase goods and to pay for the services necessary for meeting living needs of the family members. Since January 2003, for CPI calculations there are used the weights resulted from the structure of average expenditures of a household in 2001.

CPI calculation method: CPI is calculated as an index of Laspeyres type with fixed basis. See formula 2.13.

The monthly inflation rate represents the rise of consumer prices in one month as against previous month.

The monthly average inflation rate expresses the average of monthly price rises. It is calculated as a geometrical mean of consumer price monthly indices with basis in the chain, of which the comparison basis, equal to 100, is subtracted.

The yearly inflation rate represents average rise of consumer prices in one year as against previous year. This rate is calculated as a percentage ratio between average price index of one year and that of previous year, of which 100 is subtracted. At their turn, price average indices of two years are determined as simple arithmetic means of monthly indices for each year, being calculated as against the same base (October 1990=100). The inflation rate at end of year represents the consumer price increase in December of one year as against the same month of previous year.

Industrial production price index for domestic market Industrial production price index measures the evolution of prices for industrial products/services manufactured and delivered by domestic producers in a certain period (called current period) as against previous period (called basic or reference period), in the first marketing stage of products/services.

The coverage of industrial production price index is represented by all products manufactured and sold (on domestic market) by industrial producers whose activity is enlisted in the pertinent CANE divisions (10, 11, 13, 14, 15-37, 40 and 41).

In order to build up the industrial production price index, there are taken into calculation only the transactions corresponding to the first marketing stage of products, namely their output from manufacturing enterprises. The observed variable represents the price associated to these transactions, which is to be determined depending on the seller (economic unit), the specific product for transaction, and the type of buyer and other characteristics of the transaction.

The great number of transactions carried out by industrial economic units, within the national economy, makes impossible their pursuing as a whole. Therefore, pursuing and collecting the wholesale prices for industrial products are made on a sample of economic entities representative for each CANE activity class, based on a unique nomenclature of industrial products.

Industrial production price index covers almost totally the mining and quarrying and manufacturing sectors, as well as energy sector. The index calculation does not comprise:

* radioactive ores extraction and preparation;

* weapons and ammunition production;

* long-cycle fabrication industrial production;

* ships and aircraft production;

* machine-building branches unique products;

* products manufactured and used up within the same enterprise (internal consumption).

The industrial goods produced by economic units selected in the sample are treated differently depending on their main destinations, domestic market and export.

The nomenclatures used in the calculation of the industrial production price index are:

Classification of Activities from the National Economy (CANE) is built up on one side, in order to reflect the new economic relations and on the other side, to assure the alignment with the Nomenclature of Activities from European Community. According to this classification, economic and social activities are divided into 5 steps (section, subsection, division, group and class), based on the principle of homogeneity, structures of classification comparable with the existing ones from European statistics (NACE) and world statistics (CITI/ISIC) used in UNO statistics.

Nomenclature of products Pursuing and recording prices of assortments manufactured and delivered by economic units for the sample are made based on an unique nomenclature of industrial products - PRODIND which comprises 2696 physical products characterizing the activity of sections D, E and F from CANE. The product included in the nomenclature represents the first aggregation level of component assortments characterizing the movement of industrial production prices. It represents in fact a family of homogeneous assortments having common technical and functional and physical and chemical characteristics.

Nomenclature of assortments The assortment is one good resulting from a well-defined manufacturing technological process, having specific technical and functional characteristics. The assortment represents the elementary level pursuing the price associated to the transactions.

The nomenclature of assortments is not unique by country, it is carried out at level of each economic unit by specialist statisticians together with specialists from enterprises.

Nomenclature of economic units. The main data source for building up the sample of economic units is constituted by the Yearly Statistical Survey (structural) in enterprises (YSS). Based on data from this statistical survey, economic units are downward arranged by turnover in each CANE activity class, being retained in the sample the economic units whose turnover represents at least 60% of total CANE that class. The coverage degree is between 60% and 100%, while per total industry it is over 76%.

Building up the weighting system and calculation algorithm Industrial production price index is of Laspeyres type, using a system of constant weightings for successive aggregation of data afferent to the value of transacted industrial production, by destinations. The system of weights used in the calculation of industrial production price index is set up separately by destinations, as it is used for the calculation industrial production price index delivered to domestic market or to export. The weighting values by destinations for all aggregation levels were determined from the Yearly Statistical Survey (structural) in enterprises.

The dynamics of prices in an open economy is summarized up by the implicit GDP deflator. The estimation procedure of this general price index consists of two stages. Firstly, a price index is computed for each of the components of GDP (see formula 2.15) in order to estimate a constant price value of the component. Secondly, by summing up the obtained constant price components of GDP one can estimate the implicit GDP deflator (formula 2.16) by comparing current price data with the sum calculated.

International comparability of macroeconomic aggregates

Recommendations to be followed for a sound international comparison of macroeconomic data:

make use of the same definition of the analyzed macroeconomic concept

involve the same methods of data collection and aggregation

refer to the same period of time

convert (translate) all the value data into data in the same currency unit

choose appropriate indicators for expressive comparisons.

The conversion (translation) of value data expressed in various national currencies to a single reference currency is based on two different concepts:

The exchange rate concept (ER concept);

The purchasing power parity concept (PPP concept).

The ER concept makes use of the official exchange rate of the given local currency when compared to the reference currency (Euro or US Dollar, usually), established by each countries Central Bank (in Romania, the National Bank) as an annual average of the day by day exchange rates established as a result of the transactions in the inter-bank market during the reference year. This concept is easy applicable and understandable, but many economists argue that ER might alter not only as an effect of changing balance between supply and demand of goods, services and factors in the real market. Inflows and outflows of short term capital and some para-economic factors (emotional reactions of the resident and non-resident holders of bank deposits in local and foreign currency, insufficient coverage in reliable information of the money market, etc.) have also a strong impact on the dynamics of ER.

The PPP concept involves another conversion rate which is the result of comparing the value of a standard consumption basket expressed in various national currencies and also in the reference currency. The standard consumption basket has been designed as the sum of goods and services regularly purchased by a family for covering living needs during one month. The advantage offered by this concept consists in eliminating the impact of the para-economic factors during periods of market instability and/or macroeconomic tensions in a country. The critique of this concept refers to the fact that only final consumption goods and services are involved in the estimation of PPP, all the capital goods being neglected. Many economists are also questioning the structure of the standard consumption basket an abstract list of goods and services which is often quite far away from the real composition of the final consumption of local families.

According to the latest estimates of the IMF and the World Bank (see also data in Table No. 2.3.), Romania registered in 2001 a GDP/capita of:

1710 USD/inhabitant according to the WB Atlas method, which uses the ER concept. This value ranked Romania on position 110 in the world economy.

6980 USD/inhabitant when using the PPP concept. Romania ranked 87 in the world.

Complementary references in English:

Landsburg, Steven E, Feinstone, Lauren J. (1997): Macroeconomics. International Edition, McGraw-Hill

Atkinson, Lloyd C, (1982): Economics the Science of Choice. Richard D. Irwin Inc., Homewood, Illinois