chapter2 - gdp and cpi - eng

8/10/2019 Chapter2 - GDP and CPI - eng

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MACROECONOMICSL PhngThoQunh

FACULTY OF INTERNATIONAL ECONOMICS

Mobile: 0987027398

Email: [email protected]


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LECTURE2:

MEASURINGMACROECONOMICVARIABLES


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MEASURING A NATIONS INCOME

Macroeconomics answers questions such as:

Why is average income high in some countries andlow in others?

Why do prices rise rapidly in some periods whilethey are more stable in other periods?

Why do production and employment expand insome years and contract in others?


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THE ECONOMYS INCOME ANDEXPENDITURE

When judging whether the economy is doing well or

poorly, it is natural to look at the total income that

everyone in the economy is earning.


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THE ECONOMYS INCOME ANDEXPENDITURE

For an economy as a whole, income must equal

expenditure because:

Every transaction has a buyer and a seller.

Every dollar of spending by some buyer is a dollarof income for some seller.


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THE MEASUREMENT OF GDP

Gross domestic product (GDP) is a measure of the

total income and expenditures of an economy.

It is the total market value of all final goods andservices produced within a country in a given period

of time.


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GDPis the market value ...

Output is valued at market prices.

... of all final ... It records only the value of finalgoods, not intermediate goods (the value is counted

only once).

... goods and services ...It includes both tangiblegoods (food, clothing, cars) and intangible services

(haircuts, house cleaning, doctorsvisits).


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... produced ... It includes goods and servicescurrently produced, not transactions involving

goods produced in the past.

... within a country ... It measures the value ofproduction within the geographic confines of a

country.

... in a given period of time.It measures the valueof production that takes place within a specific

interval of time, usually a year or a quarter (three

months).


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THE COMPONENTS OF GDP

GDP includes all items produced in the economy

and sold legally in markets.

What is not counted in GDP? GDP excludes most items that are produced and

consumed at home and that never enter the

marketplace.

It excludes items produced and sold illicitly, such asillegal drugs.


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THE CIRCULAR-FLOW DIAGRAM


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Sectors of a simple economy:

1) Households contain all the people2) Firms all the business enterprises


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Sectors are connected by 2 markets: factor and product market:

1) Households sell productive services to firms through factor

markets

- The factors of production are land, labor, capital.- When households sell productive services to firms, they

receive income: wages, rent, profits, interest

2) Firms sell goods & services in product markets

- The income of firms in this market is also the expenditure of

households


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- Underlying principle of the circular flow: the dollar

inflow into each market or sector must equal the

dollar outflow from each market or sector

- So, total production = total spending = total income


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COMPONENTS OF GDP

GDP (Y) is the sum of the following:

consumption (C)

investment (I)

government purchases (G)net exports (NX)

Y = C + I + G + NX


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COMPONENTS OF GDP

Consumption (C):

The spending by households on goods andservices, with the exception of purchases of new

housing.

Investment (I):

The spending on capital equipment, inventories

and structures, including household purchases ofnew housing.


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COMPONENTS OF GDP

Government purchases (G):

The spending on goods and services by local,State and federal governments

Does not include transfer payments because theyare not made in exchange for currently producedgoods or services

Net exports (NX): Exports minus imports.NX = X - M


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REAL VERSUS NOMINAL GDP

Nom inal GDP:

Nominal GDP values the production of goods and

services at current prices.

q: quantity

p: pricet: current year

i: good number i in n products

n

t

GDP = it

qi=1

n

i

t

p


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In reality, GDPn often increases from year to year.

Only looking at GDPn we can not know whether the

increase comes from price or quantity.


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Real GDP (GDPr) values the production of goods

and services at constant prices.

t = 0 is base year

r

t

GDP=

i

t

qi=1

n

i

0

p


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If GDPr increases, it exactly comes from the

increase in quantity

=> GDPr is used to measure economic growth


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GDP DEFLATOR

GDP Deflator-D GDP): The GDP deflator is a

measure of the price level calculated as the ratio of

nominal GDP to real GDP times 100.

It tells us the rise in nominal GDP that is attributable

to a rise in prices rather than a rise in the quantities

produced..

GDP

t

D=

n

t

GDP

r

t

GDP 100


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GDPN, GDPRANDGDP DEFLATOR

P book Q book P pen Q pen

2011 5 100 3 75

2012 6 150 4 100

2013 7 200 5 150


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2011 is base year

Year Nominal GDP

2011 100 x 5 + 3 x 75 = 725

2012 6 x 150 + 4 x 100 = 1300

2013 7 x 200 + 5 x 150 = 2150


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Year Real GDP

2011 5 x 100 + 3 x 75 = 725

2012 5 x 150 + 3 x100 = 1050

2013 5 x 200 + 3 x 150 = 1450


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Year D GDP = (GDPn/GDPr) x 100

2011 D GDP = 725/725 x 100 = 100

2012 D GDP = 1300/1050 x 100 = 124

2013 D GDP = 2150/1450 x 100 = 148


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Inflation rate in 2012 = (124100)/100 = 24%

Inflation rate in 2013 = (148124)/124 = 19.35%


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GDP AND ECONOMIC WELLBEING

Some things that contribute to wellbeing are not

included in GDP:

the value of leisure

the value of a clean environment

the value of almost all activity that takes placeoutside of markets, such as the value of the time

parents spend with their children and the value of

volunteer work.


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GDP PERCAPITAOFSOMENATIONSIN2012


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GDP ANDQUALITYOFLIFE


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CONSUMERPRICEINDEX- CPI


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CPI

The consumer price index (CPI) is a measure of the

overall cost of the goods and services bought by a

typical consumer.

- When the CPI rises, the typical family has to spend

more dollars to maintain the same standard of

living.

- The Vietnamese Bureau of Statistics reports the

CPI each month.


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HOWTHECPIISCALCULATED?

B1: Fix the base year and the basket

of goods and services

- Year 2010

- Basket: 10kg rice v 5kg fish

B2: Determine the prices of each of

the goods and services in the basket

for each point in time.

Nm Gi go Gi c2010 3 15

2011 4 17

2012 5 22

B3: Calculate the baskets cost: Usethe data on prices to calculate the

cost of the basket of goods and

services at different times. CP t =

2010: 3 x 10kg go+ 15 x 5kg c = 1052011: 4 x 10kg go+ 17 x 5kg c = 1252012: 5 x 10kg go+ 22 x 5kg c = 160

B4: Compute the index 2010: = (105/105) X 100 = 100

2011: = (125/105) X 100 = 1192012: = (160/105) X 100 = 152.4

B5: Compute inflation rate T llmpht nm2011:(119 - 100)/100 x 100% = 19%

T llmpht nm2012:

(152.4119)/119 x 100% = 28%

i

0q

i

t

p

i

t

p i

0

q

t

CPI = ( it

pi

t

qi

0

pi

0

q ) 100

t

CPI t 1

CPIt 1

CPI 100%


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PROBLEMS IN MEASURING THE COST

OF LIVING

The CPI is an accurate measure of the selected

goods that make up the typical bundle, but it is not

a perfect measure of the cost of living

substitution bias

introduction of new goods

unmeasured quality changes


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PROBLEMS IN MEASURING THE COST

OF LIVING

Introduction of new goods:

- The basket does not reflect the change in

purchasing power brought on by the introduction of

new products.

- New products result in greater variety, which in

turn makes each dollar more valuable.

- Consumers need fewer dollars to maintain any

given standard of living.


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PROBLEMS IN MEASURING THE

COST OF LIVING

Unmeasured quality changes

If the quality of a good rises from one year to thenext, the value of a dollar rises, even if the price of

the good stays the same.


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CORRECTING ECONOMIC VARIABLES

FOR THE EFFECTS OF INFLATION

Price indexes are used to correct for the effects of

inflation when comparing dollar figures from

different times.


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DOLLAR FIGURES FROM DIFFERENT TIMES


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INDEXATION

When some dollar amount is automatically

corrected for inflation by law or contract, the

amount is said to be indexed for inflation.


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REAL AND NOMINAL INTEREST RATES

Interest represents a payment in the future for a

transfer of money in the past.

The nominal interest rate is the interest rate usuallyreported and not corrected for inflation. It is the

interest rate that a bank pays.

The real interest rate is the nominal interest rate that

is corrected for the effects of inflation.


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REAL AND NOMINAL INTEREST RATES

Real interest rate = Nominal interest rateInflation rate

r = i -


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QUESTIONS

1. GDP is equal to

a. The total value of goods and services produced in an economy

during a given period

b. C + I +G +IM

c. The total value of intermediate goods plus final goods

d. The total income received by producers of final goods and services

2. Which of the following is included in GDP?

a. Changes to inventories

b. Intermediate goods

c. Used goodsd. Financial assets

e. Foreign produced goods


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QUESTIONS

3. Which is the following is not included in GDP:

a. Capital goods such as machinery

b. Imports

c. The value of domestically produced services

d. Government purchases of goods and services

e. The construction of structures

chapter2 - gdp and cpi - eng

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