measuring the circular flow gdp, gnp, nnp, ni, pi, & di chapter: 7 & 8

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Measuring the Circular Flow Measuring the Circular Flow GDP, GNP, NNP, NI, PI, & DI GDP, GNP, NNP, NI, PI, & DI CHAPTER: 7 & 8

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Measuring the Circular FlowMeasuring the Circular FlowGDP, GNP, NNP, NI, PI, & DIGDP, GNP, NNP, NI, PI, & DI

CHAPTER: 7 & 8

AP Macro Outline – 2005-2006 I.                    Basic economic concepts 8 – 12 % Chapters 1, 2, 3, 4, 5 & parts of 20 A.     Scarcity, choice and opportunity costsB.     Production possibilities curveC.     Comparative advantage, specialization and exchangeD.     Demand, supply, and market equilibriumE.      Macroeconomic issues: business cycle, unemployment, inflation, growth  II. Measurement of economic performance 12 – 16 % Chapters 4, 5, 7, 8A.     National Income Accounts (4-6%)1.      Circular flow2.      Gross Domestic Product3.      Components of GDP4.      Real versus Nominal GDPB.     Inflation measurement and adjustment (4-5%)1.      Price indices2.      Nominal versus real values3.      Costs of inflationC.     Unemployment (4-5%)1.      Definition and measurement2.      Types of unemployment3. Natural rate of unemployment

V. Inflation, Unemployment and Stabilization Policies 20 – 30% Chapters 16, 17, 18, 19A.     Fiscal and Monetary policies (15-20%)1.    Demand side effects2.    Supply side effects3.    Policy mix4.    Government deficits and debtB.     Inflation and unemployment (5-10%)1.    Types of inflation a)      Demand-pullb)      Cost-push2.    The Phillips Curve: short run versus long run3.    Role of expectations VI. Economic Growth and Productivity 4 – 6% Mix of all chaptersA. Investment in Human capitalB. Investment in physical capitalC. Research and development and technological progressD. Growth policy  VII. Open economy: International Trade and Finance 10 – 12% Chapters 6, 37, 38A.     Balance of payment accounts1.    Balance of trade2.    Current account3.    Capital accountB.     Foreign exchange market1.    Demand for and supply of foreign exchange2.    Exchange rate determination3.    Currency appreciation and depreciationC.     Net Exports and Capital flowsD.     Links to financial and goods markets.  

AP Macro Outline – 2005-2006 I.                    Basic economic concepts 8 – 12 % Chapters 1, 2, 3, 4, 5 & parts of 20 A.     Scarcity, choice and opportunity costsB.     Production possibilities curveC.     Comparative advantage, specialization and exchangeD.     Demand, supply, and market equilibriumE.      Macroeconomic issues: business cycle, unemployment, inflation, growth  II. Measurement of economic performance 12 – 16 % Chapters 4, 5, 7, 8A.     National Income Accounts (4-6%)1.      Circular flow2.      Gross Domestic Product3.      Components of GDP4.      Real versus Nominal GDPB.     Inflation measurement and adjustment (4-5%)1.      Price indices2.      Nominal versus real values3.      Costs of inflationC.     Unemployment (4-5%)1.      Definition and measurement2.      Types of unemployment3. Natural rate of unemployment

NEXT!!!!

The Circular Flow RevisitedThe Circular Flow Revisited

BUSINESSESBUSINESSES HOUSEHOLDSHOUSEHOLDS

RESOURCERESOURCEMARKETMARKET

RESOURCESRESOURCES INPUTSINPUTS

$ COSTS$ COSTS $ INCOMES$ INCOMES

PRODUCTPRODUCTMARKETMARKET

GOODS &GOODS &SERVICESSERVICES

GOODS &GOODS &SERVICESSERVICES

$ CONSUMPTION$ CONSUMPTION$ REVENUE$ REVENUE

GOVERNMENTGOVERNMENT

REST OFREST OF THE WORLDTHE WORLD

U.S. ImportsU.S. ImportsU.S. ExpendituresU.S. Expenditures

U.S. ExportsU.S. ExportsForeign ExpendituresForeign Expenditures

I. The Importance ofI. The Importance of

Macroeconomic Macroeconomic MeasurementMeasurement

A. National Income Accounting:•1. Economic Pulse of the Nation1. Economic Pulse of the Nation

I. The Importance ofI. The Importance of

Macroeconomic Macroeconomic MeasurementMeasurement

I. The Importance ofI. The Importance of

Macroeconomic Macroeconomic MeasurementMeasurement

A. National Income Accounting:

•1. Economic Pulse of the Nation1. Economic Pulse of the Nation•2. Comparisons Over Time2. Comparisons Over Time

I. The Importance ofI. The Importance of

Macroeconomic Macroeconomic MeasurementMeasurement

I. The Importance ofI. The Importance of

Macroeconomic Macroeconomic MeasurementMeasurementA. National Income Accounting:

•1. Economic Pulse of the Nation1. Economic Pulse of the Nation•2. Comparisons Over Time2. Comparisons Over Time•3. Basis For Public Policy3. Basis For Public Policy

The Importance ofThe Importance of

Macroeconomic Macroeconomic MeasurementMeasurement

The Importance ofThe Importance of

Macroeconomic Macroeconomic MeasurementMeasurement

National Income Accounting:

•Economic Pulse of the NationEconomic Pulse of the Nation•Comparisons Over TimeComparisons Over Time•Basis For Public PolicyBasis For Public Policy

What Are These Accounting Measures?

B. GROSS DOMESTIC PRODUCT...

the total market value of all final goods and services produced inside the USA in one year no matter who owns the company!!!!

C. GROSS NATIONAL PRODUCT...the total market value of all final goods and services produced in the economy in one year...INCLUDES: the value of US owned production inforeign countries, but EXCLUDES: foreign owned companies inside

the USA.

GROSS DOMESTIC PRODUCT...the total market value of all final goods and services produced in the economy in one year...

GNP vs. GDPAP Essay

2001GNP=

GDP + net receiptsOf American Companies

Abroad

NOTES:NOTES:

GROSS Domestic &National PRODUCT...

the total market value of all final goods and services produced in the economy in one year...•D. CharacteristicsD. Characteristics

• 1. Final Goods – to measure1. Final Goods – to measureaccurately we want to take careaccurately we want to take careto ensure that goods and servicesto ensure that goods and services

are only counted once.are only counted once.

GROSS DOMESTIC/NATIONAL PRODUCTthe total market value of all final goods and services produced in an economy in one year...

•Final Goods vs.Final Goods vs.•2. Intermediate Goods2. Intermediate GoodsGoods and services that Goods and services that are purchased for furtherare purchased for furtherprocessing and processing and manufacturing.manufacturing.

GROSS DOMESTIC PRODUCT...

•Final Goods - onlyFinal Goods - only•Intermediate Goods - excludedIntermediate Goods - excluded

•3. Value Added - Approach3. Value Added - Approach

the total market value of all final goods and services produced in the economy in one year...

Calculating the GDP by this Method!

•4. A Monetary Measure•5. Avoid Double Counting•6. Excludes Nonproduction Transactions

GROSS DOMESTIC & NATIONAL PRODUCTS ...

the total market value of all final goods and services produced in the economy in one year…only in the USA for GDP or by US companies abroad for GNP.GDP and GNP are both:

•A Monetary Measure•To Avoid Double Counting: GDP Excludes Nonproduction Transactions

GROSS DOMESTIC PRODUCT...

7. Examples of Nonproduction Transactions7. Examples of Nonproduction Transactions - Financial Transactions are excluded:- Financial Transactions are excluded:

- Public Transfer Payments- Public Transfer Payments(welfare, social security, veteran’s benefits)(welfare, social security, veteran’s benefits)

- Private Transfer Payments- Private Transfer Payments ($ money from parents or rich relative)($ money from parents or rich relative)

- Security Transactions- Security Transactions(Buying or selling existing stocks and bonds)(Buying or selling existing stocks and bonds)

GROSS DOMESTIC& NATIONAL PRODUCT...

the total market value of all final goods and services produced in the economy in one year...Excludes:Excludes:Financial TransactionsFinancial Transactions - Secondhand Sales – they have - Secondhand Sales – they have already been counted in already been counted in previous years.previous years.

GROSS DOMESTIC& NATIONAL PRODUCT...

the total market value of all final goods and services produced in the economy in one year...Excludes:Excludes:Financial TransactionsFinancial TransactionsSecondhand Sales Secondhand Sales Services for which no Services for which no compensation is given.compensation is given.

GROSS DOMESTIC PRODUCT...the total market value of all final goods and services produced in the economy in one year...•A Monetary Measure,

Avoids Double Counting, & Excludes Nonproduction Transactions

•II. Two Sides to GDP

•Two Sides to GDP:

A. A. Spending & IncomeSpending & Income

More?

GROSS DOMESTIC PRODUCT...

B. Expenditures ApproachB. Expenditures Approach

Amount spent to purchasethis year’s total output

Amount spent to purchasethis year’s total output

GROSS DOMESTIC PRODUCT...

C. Income ApproachC. Income ApproachThe money income derived from production of this year’s output

The money income derived from production of this year’s output

B. Expenditures ApproachB. Expenditures ApproachAmount spent to purchasethis year’s total output

Amount spent to purchasethis year’s total output

GROSS DOMESTIC PRODUCT...

1. GDP = C + I + G + X - M

1. GDP = W + P + i + R + Inbt + Dep

Expenditures ApproachExpenditures Approach

1.1. Back to ExpendituresBack to Expenditures2.2. C + I + G + X - MC + I + G + X - M- - Personal Consumption ExpenditurePersonal Consumption Expenditure ( ( C ))

1.1. Back to ExpendituresBack to Expenditures2.2. C + I + G + X - MC + I + G + X - M- - Personal Consumption ExpenditurePersonal Consumption Expenditure ( ( C ))

Expenditures ApproachExpenditures Approach

Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))

• DurablesDurables• DurablesDurables

Expenditures ApproachExpenditures Approach

Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))

• DurablesDurables• NondurablesNondurables• DurablesDurables• NondurablesNondurables

Expenditures ApproachExpenditures Approach

Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))

• DurablesDurables• NondurablesNondurables• ServicesServices

• DurablesDurables• NondurablesNondurables• ServicesServices

Expenditures ApproachExpenditures Approach

Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))

Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))

Gross – Total investment (added and replacement)Private – Individual firms, not the governmentDomestic – in the U.S. not overseasInvestment??? See next slide

Expenditures ApproachExpenditures Approach

Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))

• Machinery, Equipment, & Tools• Machinery, Equipment, & Tools

Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))

Expenditures ApproachExpenditures Approach

Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))

• Machinery, Equipment, & Tools• All Construction – residential and commercial

• Machinery, Equipment, & Tools• All Construction – residential and commercial

Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))

Expenditures ApproachExpenditures Approach

Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))

• Machinery, Equipment, & Tools• All Construction• Changes in Inventories - GDP measures this year’s total Output/production. - Even though a good may sit in inventory and not be sold it was still produced so it is counted. - Increase in inventories is an addition to GDP - Decrease in inventories is a subtraction to GDP

• Machinery, Equipment, & Tools• All Construction• Changes in Inventories - GDP measures this year’s total Output/production. - Even though a good may sit in inventory and not be sold it was still produced so it is counted. - Increase in inventories is an addition to GDP - Decrease in inventories is a subtraction to GDP

Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))

Expenditures ApproachExpenditures Approach

Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))

• Machinery, Equipment, & Tools• All Construction• Changes in Inventories

• Machinery, Equipment, & Tools• All Construction• Changes in Inventories

Gross vs. Net InvestmentGross vs. Net Investment

Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))

Gross Private Domestic Investment

Total investment in a year.

Net Private Investment:

Gross private domestic investment – (minus) depreciation!

Expenditures ApproachExpenditures Approach

Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))

• Machinery, Equipment, & Tools• All Construction• Changes in Inventories

• Machinery, Equipment, & Tools• All Construction• Changes in Inventories

Gross vs. Net InvestmentGross vs. Net Investment

Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))

NOTES:NOTES:

Net InvestmentNet Investment& Economic Growth& Economic Growth

Expenditures ApproachExpenditures Approach

Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))

• Machinery, Equipment, & Tools• All Construction• Changes in Inventories

• Machinery, Equipment, & Tools• All Construction• Changes in Inventories

Gross vs. Net InvestmentGross vs. Net Investment

Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))

NOTES:NOTES:

Net InvestmentNet Investment& Economic Growth& Economic Growth

Expanding EconomyExpanding Economy

Expenditures ApproachExpenditures Approach

Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))

• Machinery, Equipment, & Tools• All Construction• Changes in Inventories

• Machinery, Equipment, & Tools• All Construction• Changes in Inventories

Gross vs. Net InvestmentGross vs. Net Investment

Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))

NOTES:NOTES:

Net InvestmentNet Investment& Economic Growth& Economic Growth

Expanding EconomyExpanding EconomyStatic EconomyStatic Economy

Expenditures ApproachExpenditures Approach

Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))

• Machinery, Equipment, & Tools• All Construction• Changes in Inventories

• Machinery, Equipment, & Tools• All Construction• Changes in Inventories

Gross vs. Net InvestmentGross vs. Net Investment

Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))

NOTES:NOTES:

Net InvestmentNet Investment& Economic Growth& Economic Growth

Expanding EconomyExpanding EconomyStatic EconomyStatic EconomyDeclining EconomyDeclining Economy

Economies Grow as Investment rises:

Investment

Shifts PPC’s to

the right!

Economies grow in

The Long and

Short Run

Because of Investment!

AmericanBusiness

Investment is Volatile!!!!

Keynes the father of MACRO believed business Investment to be the most volatile of the factors in GDP!

Can your family stop paying its bills?

Can government not pay social security?

Recession2000-2001

Fear9/11

Y-2K

Expenditures ApproachExpenditures Approach

Government Purchases (Government Purchases ( G ))Government Purchases (Government Purchases ( G ))

Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))

Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))

Expenditures ApproachExpenditures Approach

Government Purchases (Government Purchases ( G ))Government Purchases (Government Purchases ( G ))

Net Exports (Net Exports ( Xn ) = ) = (X – M)(X – M)Net Exports (Net Exports ( Xn ) = ) = (X – M)(X – M)

Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))

Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))

The Circular Flow RevisitedThe Circular Flow Revisited

BUSINESSESBUSINESSES HOUSEHOLDSHOUSEHOLDS

RESOURCERESOURCEMARKETMARKET

RESOURCESRESOURCES INPUTSINPUTS

$ COSTS$ COSTS $ INCOMES$ INCOMES

PRODUCTPRODUCTMARKETMARKET

GOODS &GOODS &SERVICESSERVICES

GOODS &GOODS &SERVICESSERVICES

$ CONSUMPTION$ CONSUMPTION$ REVENUE$ REVENUE

GOVERNMENTGOVERNMENT

REST OFREST OF THE WORLDTHE WORLD

U.S. ImportsU.S. ImportsU.S. ExpendituresU.S. Expenditures

U.S. ExportsU.S. ExportsForeign ExpendituresForeign Expenditures

GDP = C + I + G + (X – M)

GDP = W + P + i + R + InBT + Dep

SummarySummary

C + Ig + G + Xn = GDPC + Ig + G + Xn = GDP

Expenditures ApproachExpenditures Approach

Next: The Income ApproachNext: The Income Approach

SummarySummary

C + Ig + G + Xn = GDPC + Ig + G + Xn = GDP

Expenditures ApproachExpenditures Approach

• 1. Compensation of Employees1. Compensation of Employees

C. Incomes ApproachC. Incomes Approach

Largest, includes not only wages but other compensationcosts such as social security, pensions, health funds etc…

• 1. Compensation of Employees• 2. Rents2. Rents

Incomes ApproachIncomes Approach

Payments to landlords, rent on office space.It is net rental income – depreciation. This will always be calculated for you as final rents.

• 1. Compensation of Employees• 2. Rents• 3. Interest3. Interest

Incomes ApproachIncomes Approach

Payments to households on savings, CD’s, corporate bonds.

• 1. Compensation of Employees• 2. Rents• 3. Interest• 4. Proprietors’ Income4. Proprietors’ Income

Incomes ApproachIncomes Approach

Profits of the small business owner.

• 1. Compensation of Employees• 2. Rents• 3. Interest• 4. Proprietors’ Income• 5. Corporate Profits5. Corporate Profits

Incomes ApproachIncomes Approach

Corporate earnings can be distributed in three ways.

• Compensation of Employees• Rents• Interest• Proprietors’ Income• Corporate Profits 1- Corporate Income Taxes1- Corporate Income Taxes

Incomes ApproachIncomes Approach

• Compensation of Employees• Rents• Interest• Proprietors’ Income• Corporate Profits 1- Corporate Income Taxes1- Corporate Income Taxes 2- Dividends2- Dividends

Incomes ApproachIncomes Approach

• Compensation of Employees• Rents• Interest• Proprietors’ Income• Corporate Profits 1- Corporate Income Taxes1- Corporate Income Taxes 2- Dividends2- Dividends 3- Undistributed Corporate Profits3- Undistributed Corporate Profits

Incomes ApproachIncomes Approach

So far we have something called national income

• 1. Compensation of Employees• 2. Rents• 3. Interest• 4. Proprietors’ Income• 5. Corporate Profits - Corporate Income Taxes- Corporate Income Taxes - Dividends- Dividends - Undistributed Corporate Profits- Undistributed Corporate Profits• 6. 6. Indirect Business Taxes &Indirect Business Taxes & DepreciationDepreciation

Incomes ApproachIncomes Approach

Depreciation....Depreciation....

Consumption of Fixed CapitalConsumption of Fixed Capital

Depreciation is also....Depreciation is also....

Consumption of Fixed CapitalConsumption of Fixed Capital

Net American Factor IncomeNet American Factor IncomeEarned Abroad less foreignEarned Abroad less foreignIncomes in the US = GNPIncomes in the US = GNP

Measuring the US economy

Sum of the Final Demands Method:

GDP = C + I + G + (X – M)

Income Method:

GDP =

W + P + i + R + Indirect Business Taxes +

Depreciation

Value Added Approach

Sum of the value added in each step of the production….with round about production this may include many, many steps!

Gross Domestic Product’s 3 methods of calculation: GDP = C + I + G + (X – M) GDP = W + i + R + P + Inbt + Dep Value Added GNP = GDP + (US production in

foreign countries – Foreign

production in the US)Most Famous and Largest of the National Income Accounts!!!!!

Gross National Product GNP = GDP – Foreign

production in the US + US production in foreign

countries Net Foreign Factors (NFF) GNP = GDP + NFF

Significance – shows how much foreign production takes placein the U.S compared to U.S. production overseas.Not an indicator relied on by economists as much today.Economists are concerned with output with in each respective Country no matter who owns the company.

Net National ProductNet Domestic Product

NNP = GNP – DepreciationDepreciation: the loss in value from use of a capital good.

NDP = GDP – DepreciationDepreciation: the loss in value from use of a capital good.

Many Economist Consider these the best measures of the national economy!!!!

Why???? Investment in capital is what pushes us beyond that PPC!!!!

National Income

NI = W + P + i + R NI = GDP – (Dep +

Inbt)

NI = NDP - Inbt

Remember, Weasel Puss is Red!!!

This shows us what Households andBusinesses made as income.It takes out depreciation ($ spent toreplace worn out capital) andSales and Excise taxes that go tothe government.

Personal Income

PI = NI – (RE + CPT + FICA) + TP• RE: Retained Earnings/ Corporate Earnings• CPT: Corporate Profit Taxes• FICA: Federal Insurance Corporation of

America ( Social Security )• TP: Transfer Payments

This shows what Households earned as income!!!

Disposable Income

DI = PI – PT DI = C + S This shows what householdshave to spend. Remember what isn’t taken awayin taxes we either spend or save.

Spending is a big indicator of economic growth!!!!

Do you get it?????? Use the following information to calculate GDP,

GNP and NNP, NDP and NI. Profits 1150, consumer consumption 8000, net

exports (-150), wages 7250, depreciation 359, Investment 635, interest 311, indirect business taxes 200, rent 101, net foreign factors 40, government expenditures 886.

GDP – expenditure approach?? GDP – income approach?? GNP?? NNP?? NDP?? NI – income approach?? Congratulations you just completed question 7 of your

homework for 10 points.

Marginal Propensity to Consume & Marginal Propensity to Save

$1.00 = MPC + MPS MPC = ^C/^DI MPS = ^S/^DI

A measurement that attempts to ask thequestion, to what extent does consumptionspur economic growth?

II. Comparing GDP’sII. Comparing GDP’s

A. NOMINAL vs. REAL GDPA. NOMINAL vs. REAL GDPCurrent priced GDP’s or Nominal GDP’s cannot be compared!

GDP’s corrected for inflation or Real GDP’s can be compared!

Measuring the Price LevelMeasuring the Price Level

B. The GDP Deflator/Index....

NOMINAL & REAL GDPNOMINAL & REAL GDP

Measuring the Price LevelMeasuring the Price Level

The GDP Deflator/Index....

NOMINAL & REAL GDPNOMINAL & REAL GDP

......inflating for falling pricesinflating for falling prices

Measuring the Price LevelMeasuring the Price Level

The GDP Deflator/Index....

NOMINAL & REAL GDPNOMINAL & REAL GDP

......inflating for falling pricesinflating for falling prices

......deflating for rising pricesdeflating for rising prices

Converting a Nominal to a Real

=PI of year

you want to compare

x 100RGDP2005 NominalGDP 2005

Inflating & Deflating GDPInflating & Deflating GDP

or GDP Deflator/GDP index

Top 10 Economic Powers in the World By GDP

1. United States $10,910,000,000,000

2. Japan $4,765,000,000,000

3. Germany $1,866,000,000,000

4. Britain $1,427,000,000,000

5. France $1,294,000,000,000

6. China $1,080,000,000,000

7. Italy $1,074,000,000,000

8. Canada $704,000,000,000

9. Brazil $701,000,000,000

10. Mexico $575,000,000,000

Per capita RGDP or RGDP/Person

RGDP/Population If RGDP is rising

slower than population, standard of living is falling!

If RGDP is rising faster than population standard of living is rising!

Top Countries in GDP Per Capita

1. Norway $38,500

2. USA $37,500

3. Switzerland $31,000

4. Denmark $30,500

5. Iceland $30,000

6. Finland $27,500

7. Britain $27,300

8. Germany $27,200

9. Sweden$27,100

10. France $27,000

11. Italy $26,900

12. Japan $26,800

13. Spain $23,000

Source – The Economist

Bottom 10 Countries GDP Per Capita

1. Sierra Leone $480

2. Tanzania $501

3. Burundi $578

4. Malawi $586

5. Ethiopia $628

6. Sudan $664

7. Guinea-Bissau $678

8. Congo $727

9. Mali $753

10. Niger $753Source – United Nations

C. Measuring the Price LevelC. Measuring the Price Level

INFLATION: INFLATION: INFLATION: INFLATION:

A sustained increase in theA sustained increase in the average/general level of pricesaverage/general level of pricesA sustained increase in theA sustained increase in the average/general level of pricesaverage/general level of prices

Rate of inflation (CPI and PPI)Rate of inflation (CPI and PPI)calculated using index numbers calculated using index numbers based on a fixed/weighted based on a fixed/weighted Market BasketsMarket Baskets

Rate of inflation (CPI and PPI)Rate of inflation (CPI and PPI)calculated using index numbers calculated using index numbers based on a fixed/weighted based on a fixed/weighted Market BasketsMarket Baskets

CPI – PPI – GDP DeflatorCPI – PPI – GDP Deflator

The big 3 measures of inflation! CPI – consumer prices PPI – producer prices GDP deflator – all prices

Inflationary Measures

Consumer Price Index: 250 – 400 item weighted market basket of goods and services purchased by urban/suburban families of moderate income.

Producer Price Index: a similar weighted market basket purchased by businesses

GDP Index: all items purchased in the American economy

Consumer Price Index

= Price of same marketbasket in base year

x 100CPI

Price of 2005 market basket

Measuring the Price LevelMeasuring the Price Level

Consumer Price Index is aBase year average of 1982-4

= Price of same marketbasket in base period

(1982-1984)

x 100CPI

Price of 1982-1984 market basket in

specific year (2005)

Measuring the Price LevelMeasuring the Price Level

CPI82-84 = 100

Producer Price Index

= Price of same marketbasket in base period

(1982-1984)

x 100PPI

Price of the 2005market basket

Measuring the Price LevelMeasuring the Price Level

CPI Calculated using

the same method but different market baskets!!!

See Excel Spread Sheets on CPI.

My family was a CPI family and you’re not!

http://minneapolisfed.org/research/data/us/calc/index.cfm

Speed of Inflation Creeping

• 3-5 % Galloping

• 8-15% Hyper

• 100+%

In the American Economy Inflation at Greater Than 5% is consideredA problem that the Federal Government or the Fed should Fix!

Hyperinflation was rare before the 20th century; older economies would revert to either specie metals or barter once inflation reached a certain level. The widespread use of fiat money created the possibility of hyperinflation as governments often tended to print larger

amounts of money to finance their expenses. Inflation results where such an increase in money supply occurs without regard for the actual market demand. Rates of inflation of several hundred percent per month are often seen.

Extreme examples include Germany in the early 1920s when the rate of inflation hit 3.25 million percent per month; Greece in the mid-1940s with 8.55 billion percent per month; and Hungary during the same approximate time period at 4.19 quintillion percent per month. Other more moderate examples include Eastern European countries in the period of economic transition in the early 1990s and in Bolivia and Peru in 1985 and 1988, respectively.

Nations such as Ghana in North Western Africa continue to this day to have inflation in the order of 30% per annum.

Inflation 1923/24: a woman feeds her tiled stove with money.The Democratic Weimer Republic created by Versailles is blamed.

Money was printed to pay Versailles’s imposed reparations!

Value of moneyDramaticallyDeclines inHyperInflation!

4 years tuition Saved in 1922,Buys a postageStamp in 1923!

Money wasCheaper thanCoal!

Hyperinflation!

Various workers also had to be paid by the Weimar Government, additional currency was printed, which fueled a period of hyperinflation. The value of the Mark declined from 4.2 per US dollar to 1,000,000 per dollar by August 1923 and 4,200,000,000,000 per dollar on November 20. On December 1, a new currency was established at the rate of 1,000,000,000,000 old marks for 1 new mark, the Rentenmark.

1 - Measuring Inflation & 1 - Measuring Inflation & DeflationDeflation

Measuring the Price LevelMeasuring the Price Level

1 - Measuring Inflation & 1 - Measuring Inflation & DeflationDeflation

2 - Comparing GDPs2 - Comparing GDPs

Measuring the Price LevelMeasuring the Price Level

Consumer Price Index Question 11 – Randy’s Year!

= x 100100Year #1 Market Basket

$150

Measuring the Price LevelMeasuring the Price Level

CPI base year = 100

Year #1 Market Basket$150

Price Indexin a given

year=

Price of market basket

in a specific year2005

Price of the same marketbasket in the base year 1982-1984

x 100

Measuring the Price LevelMeasuring the Price Level

Price Index: CPI, PPI, GDPD

Price of Randy’s market basket year 2 = $153

Price of Randy’s market basket year 1 = $150

x 100=102

Price Indexin a given

year =

Price of market basket

in a specific year

Price of the same marketbasket in the base year

x 100

Measuring the Price LevelMeasuring the Price Level

Price Index

Consumer Price Index

= Price of same weighted market basket in base period (1982-1984)

x 100CPI

Price of 2005 weighted

market basket

Measuring the Price LevelMeasuring the Price Level

Producer Price Index

= Price of same marketbasket in 1982-84

x 100PPI

Price of some market basket in specific year -

2005

Measuring the Price LevelMeasuring the Price Level

GDP, Social Welfare, FlawsGDP, Social Welfare, Flaws Nonmarket TransactionsLeisureImproved Product QualityComposition and Distribution of

OutputPer Capita OutputGDP and the EnvironmentThe Underground Economy

THE UNDERGROUND ECONOMY AS A PERCENT OF GDPTHE UNDERGROUND ECONOMY AS A PERCENT OF GDP

GLOBAL PERSPECTIVE

0 5 10 15 20 25 30

GreeceSpain

ItalyPortugalBelgiumSweden

GermanyFrance

HollandBritain

United StatesJapan

Switzerland

0 5 10 15 20 25 30

GreeceSpain

ItalyPortugalBelgiumSweden

GermanyFrance

HollandBritain

United StatesJapan

Switzerland

THE UNDERGROUND ECONOMY AS A PERCENT OF GDPTHE UNDERGROUND ECONOMY AS A PERCENT OF GDP

GLOBAL PERSPECTIVE

ChapterChapterConclusionsConclusions

Copyright McGraw-Hill, Inc. 1999

national income accounting

gross domestic productfinal goodsintermediate goodsmultiple countingvalue addedexpenditures approachincome approachpersonal consumption

expendituresgross private domestic

investmentnet private domestic

investmentgovernment purchases

net exportsnational incomeindirect business

taxesconsumption of fixed

capitalnet domestic productpersonal incomedisposable incomenominal GDPreal GDPprice indexconsumer price indexCopyright McGraw-Hill, Inc.

1999

Quiz – Thursday, December 1

8- points multiple choice from chapter 23- points GDP, GNP, NDP, NI, PI, DI –

formulas. 4 points – Calculating RGDP and CPI’s –

formulas. 35 points total Happy December No notes for quiz!

Next...Next...MACROECONOMIC INSTABILITY:MACROECONOMIC INSTABILITY:UNEMPLOYMENT & INFLATIONUNEMPLOYMENT & INFLATION

Chapter 8