lecture 15 – academic year 2014/15 introduction to economics fabio landini main macroeconomic...
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Lecture 15 – academic year 2014/15Introduction to Economics
Fabio Landini
Main Macroeconomic Aggregates (II)
Questions of the day?
• What is the role of prices in the determination of GDP?
• What is inflation and how it is measured?
• What is unemployment and how it is measured?
• How can you decompose the GDP?
The role of prices: Real GDP and nominal GDP
GDP = value of the goods
Value of the goods = quantities x market prices
Which prices?
Nominal GDP: Value of the final goods and services computed using the current quantities and prices
Real GDP: Value of the final goods and services computed using current quantities and prices of a specific year (called “the base year”)
Real GDP and Nominal GDP
A single good
Year Quantity Price2000 100 1002001 103 102
Nominal GDP2000 =
price2000 x q.ty2000 = 100x100 =10000
Nominal GDP2001 =
price2001 x q.ty2001 = 102x103=10506
Nominal GDP growth=
= 0,0506 = 5,06%
The growth of GDP is computed in order to know how much the production has increased.
But 5,06% considers both the variation of products and the variation of prices.
10000
0000105061
Real GDP and Nominal GDP
In order to know the actual increase in production we must use the Real GDP
Base year = 2000
Real GDP2000 = price2000 x q.ty2000 = 100x100 =10000
Important: Real GDP is equal to the nominal GDP2000
Real GDP2001=price2000 x q.ty2001 = 100x103 = 10300
Important: It is different from the Nominal GDP2001 = 10506
Real GDP and Nominal GDP
Real GDP growth=
= 0,03 = 3%
It differs from the growth of nominal GDP = 5,06%
The growth of real GDP measures the variation of production given a certain set of fix prices
What differentiate the growth of nominal GDP from the growth of real GDP? The variation of prices, namely inflation
10000
0000103001
Real GDP and Nominal GDP
Inflation
Inflation rate (π) = Rise in the general level of prices in an economy over a period of time
Two ways to measure the level of prices:•GDP deflator•Consumer price index (CPI)
Inflation
1) GDP deflator: Diversity in the growth of nominal and real GDP -> price variation
GDP Deflator
πt
InflationIn the preceding example:
Nominal GDP2000 10000; Nominal GDP2001 10506
Base year = 2000 Real GDP2000 = 10000 ; Real GDP2001 10300
On the basis of the preceding formula we obtain:
Inflation
It is also possible to show that
π = n – g
where g annual rate of growth of real GDP n annual rate of growth of nominal GDP
InflationIn our example we have•n = 5,06%•g = 3%•π = 2%
Using the above formula we obtain π = n – g = 5,06% - 3% = 2,06% ≅ 2%
The GDP deflator considers the prices of of all final goods produced in the economy.
In many cases it is more interesting to look at the price increase that characterize the goods that are purchased by the consumers.
2) Consumer price index (CPI) = considers only the average goods that are purchased by the consumers
Example• Two goods: bread and clothes• On average a consumer buys 1 cloth and 10 kg of
bread every year
Bread ClothesPrice 2000 1 100Price 2001 1,1 101
Inflation
Price bread2000 = 1 -> Price bread2001=1,1 -> Δ = 10%Price clothes2000 = 100 -> Price clothes2001101 -> Δ = 1%
Inflation -> average of the two variation
Important: no simple average, but average weighted by the quantity consumed and the value of the goods
Inflation
Computation of the CPI:
Expenditure 2000 q.ty bread x price bread2000 + + q.ty clothes x price clothes2000 =10x1+1x100 110
Expenditure 2001 q.ty bread x price bread2001 + + q.ty clothes x price clothes2001 10x1,1+1x101 112
Inflation
π
0,0181 = 1,81%
Inflation computed using the CPI measures the average growth in the consumers’ expenditure
Important: 1,8% is an intermediate value between 10% (Δ price of bread) and 1% (Δ price of clothes)
Important: CPI considers a fixed basket of goods which is updated periodically
110110 - 112
Inflation
Inflation in Italy 1970-2011
0,0
5,0
10,0
15,0
20,0
25,0
1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
INF
LA
ZIO
NE
(IN
%)
ANNO
Inflation is usually positive (prices increase over time)
0,0
5,0
10,0
15,0
20,0
25,0
1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
INF
LA
ZIO
NE
(IN
%)
ANNO
Inflation is different depending on the period(>10% between 1974 and 1984 ; < 3% since 1997)
0,0
5,0
10,0
15,0
20,0
25,0
1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
INF
LA
ZIO
NE
(IN
%)
ANNO
• Why do prices increase?• What is it that determines the level of
inflation?
Some answers during the course….
Inflation
Labour market
Employed = Those who currently have a job
Unemployed = Those who are looking for a job or are going to start a new job (+ those who are under unemployment protection programs)
Important: those who are not looking for a job are not considered unemployed (e.g., housewife and students are not unemployed)
Labour force Employed + Unemployed
Unemployment rate (u)
Important: Those who are not looking for a job are counted neither in the numerator nor in the denominator
The unemployment rate measures the portion of workers who are unemployed
Labour market
Another problem: how to measure the portion of workers over the total population -> participation rate
Participation rate =
Labour market
Unemployment rate in Italy, EU, US 1995-2011
The unemployment rate is usually positive (there are workers who do not find a job)
The unemployment rate is different across countries
3
4
5
6
7
8
9
10
11
12
13
TASS
O D
I DIS
OCC
UPA
ZIO
NE
(IN %
)
ANNO
ITA
UE
USA
• Why is there unemployment?
• Why is unemployment different across countries?
Some answers during the course…..
Labour market
Decomposition of GDP
GDP – Measures the value of production of goods and services
Goods and services are exchange din the market -> Supply and Demand
It is possible to decompose GDP both on the side of supply and on the side of demand
From the point of view of supply the GDP is equal to the sum of the sectorial A.V. (2° definition examined in Lecture 14)
From the point of view of demand it is possible to decompose the GDP in different categories of expenditure
a) Consumption (C) – Households’ purchase of goods and services
•Durable goods (average life >3 years)•Non-durable goods (average life <3 years)•Services
Decomposition of GDP
b) Investment (I) – Firms’ purchase of capital goods that are used as inputs in future production activities (e.g. machines, plants, etc.)
A particular category is represented by the investment in stockpile (goods that are not sold)
• It is not financial investment
Decomposition of GDP
c) Government expenditure (G) – Purchase of goods and services by the public administration (Government, public bodies, etc.)
Decomposition of GDP
The sum C+I+G = expenditure in goods and services by the residents of a country (national expenditure)
To compute the total demand of goods and services (=demand of goods and services produced in the economy) we must consider that:
•Some goods that are produced in the country are sold abroad
•Some goods that are produced abroad are purchased in the country
Decomposition of GDP
Therefore, to the national expenditure we must add
•Export (X) – Purchase of national goods and services by the rest of the world (e.g. Italian wine sold in Germany)
and subtract
•Import (Q) – Purchase of goods and services produced abroad by the residents of the country (e.g. Swiss cheese sold in Italy)
Decomposition of GDP
Therefore, the aggregate demand of national goods and services (Z) is equal to:
Z C + I + G + X - Q
Some other important aggregate measures are:
•Commercial balance Difference between import and export
•Public deficit Difference between Government’s expenditure and Government’s revenues
Decomposition of GDP
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