sybms final ppt

8/8/2019 Sybms Final Ppt

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In tro d u ctio n toM a cro e co n o m ics


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2

Introduction toMacroeconomics

Microeconomics examines thebehavior of individual decision-making unitsbusiness firms and

households. Macroeconomics deals with the

economy as a whole; it examinesthe behavior of economicaggregates such as aggregateincome, consumption, investment,and the overall level of prices.

Aggregate behaviorrefers to thebehavior of all households and

firms together.


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3


Microeconomists generallyconclude that markets

work well.Macroeconomists,however, observe thatsome important prices

often seem sticky.

Sticky prices are pricesthat do not always adjust

rapidly to maintain the


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4


Macroeconomists oftenreflect on the

microeconomic principlesunderlyingmacroeconomic analysis,or the microeconomic

foundations ofmacroeconomics.


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5

The Roots ofMacroeconomics

The GreatDepression was

a period of severeeconomiccontraction andhigh

unemploymentthat began in1929 andcontinuedthroughout the


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Classical economists appliedmicroeconomic models, or marketclearing models, to economy-wide

problems. However, simple classical models

failed to explain the prolongedexistence of high unemploymentduring the Great Depression. Thisprovided the impetus for thedevelopment of macroeconomics.


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In 1936, John Maynard Keynes published TheGeneral Theory of Employment, Interest, andMoney.

Keynes believed governments could intervene in

the economy and affect the level of output andemployment.

During periods of low private demand, thegovernment can stimulate aggregate demand

to lift the economy out of recession.


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8

Recent MacroeconomicHistory

Fine-tuning was the phrase used byWalter Heller to refer to thegovernments role in regulating

inflation and unemployment.

The use of Keynesian policy to fine-tune the economy in the 1960s, led

to disillusionment in the 1970s andearly 1980s.


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9

Recent MacroeconomicHistory

Stagflation occurs when the overallprice level rises rapidly (inflation)during periods of recession or high

and persistent unemployment(stagnation).


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So what is the economy?

The economy is made up offour sectors sometimescalled economic agents:

Households who receive payments (income) for theirservices (eg labour and land) and use this money tobuy the output of firms (ie consumption orhousehold spending).

Firms who use land labour and capital to producegoods and services for which they pay wages rentetc (income) and receive payment (expenditure)

Government (also known as the public or statesector) and

International eg consumers buying overseasproducts (M) and Foreigners buying UK products (X)

V

it

alk

n

ow

le

d

ge


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Difference between micro &macro

Microeconomics

Recession in the tourist industry due tothe global downturn

A government subsidy to steelproducers

A recession in the textiles industry

Increased spending on the NationalHealth Service


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Microeconomics


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Difference between micro &macro

Macroeconomics

Strong economic growth arising fromhigh levels of consumer spending

A fall in exports because of a recessionin leading European markets

Higher interest rates to curb inflationary

pressure


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Macroeconomic Concerns

Three of the major concerns ofmacroeconomics are:

Inflation

Output growth

Unemployment

BOP & Exchange rate


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Inflation and Deflation

Inflation is an increase in the overallprice level.

Hyperinflationis a period of very

rapid increases in the overall pricelevel. Hyperinflations are rare, buthave been used to study the costsand consequences of evenmoderate inflation.

Deflation is a decrease in the overallprice level. Prolonged periods ofdeflation can be just as damagingfor the economy as sustained

inflation.


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Output Growth:Short Run and Long Run

The business cycle is thecycle of short-term upsand downs in theeconomy.

The main measure of howan economy is doing is

aggregate output:Aggregate outputis the

total quantity of goodsand services produced in

an economy in a given


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Output Growth:Short Run and Long Run

A recessionis a period during whichaggregate output declines. Twoconsecutive quarters of decrease in

output signal a recession. A prolonged and deep recession

becomes a depression.

Policy makers attempt not only to

smooth fluctuations in outputduring a business cycle but also toincrease the growth rate of outputin the long-run.


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Unemployment

The unemployment rate is thepercentage of the labor force that isunemployed.

The unemployment rate is a keyindicator of the economys health.

The existence of unemployment

seems to imply that the aggregatelabor market is not in equilibrium.Why do labor markets not clearwhen other markets do?


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Government in theMacroeconomy

There are three kinds ofpolicy that the

government has used toinfluence themacroeconomy:

1.Fiscal policy

2.Monetary policy

3.Growth or supply-sidepolicies


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Government in theMacroeconomy

Fiscal policyrefers to governmentpolicies concerning taxes andspending.

Monetary policyconsists of toolsused by the Federal Reserve tocontrol the quantity of money in theeconomy.

Growth policies are governmentpolicies that focus on stimulatingaggregate supply instead ofaggregate demand.


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Why Macro Economics

B coz there are forcesattracting the economyas whole

A problem can be tackledat the level of wholeeconomy


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ROLE OF GOVERNMEN INTHE MACRO ECONOMY

Three type of policy to influence theworking

1)


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The Components ofthe Macroeconomy

The circular flowdiagram shows

the incomereceived andpayments made

by each sector ofthe economy.


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The Three Market Arenas

Households, firms, thegovernment, and the rest

of the world all interact inthree different marketarenas:

1.Goods-and-services market

2.Labor market

3.Money (financial) market


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Households and the government purchase goodsand services (demand) from firms in thegoods-and services market, and firmssupplyto the goods and services market.

In the labor market, firms and governmentpurchase (demand) labor from households(supply).

The total supply of labor in the economy depends onthe sum of decisions made by households.


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In the money marketsometimes called thefinancial markethouseholds purchase stocksand bonds from firms.

Households supplyfunds to this market in the

expectation of earning income, and also demand(borrow) funds from this market.

Firms, government, and the rest of the world alsoengage in borrowing and lending, coordinated byfinancial institutions.


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Financial Instruments

Shares of stockarefinancial instruments that

give to the holder a sharein the firms ownershipand therefore the right toshare in the firms profits.

Dividends are the portionof a corporations profitsthat the firm pays outeach period to itsshareholders.


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The Circular Flow of Income inSymbols

Domestic Output (GDP) is either Consumed (C)

Invested (I)

Bought by the Government (G) Bought by the foreigners, net

exports (X-Z)

Factor Incomes are spent on Consumption (C)

Saving (S)

Paying taxes net of benefits (T-B)


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The Economic Problem

The circular flow of income

firms and households

The circular flow of goods and incomes


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goods markets

real flows: goods and services



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Goods and services


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goods markets


money flows: consumer expenditure



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Goods and services

The circular flow of goods and incomesThe circular flow of goods and incomes


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Goods and services

Consumer

expenditure




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Goods and services

Consumer

expenditure



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goods markets



factor markets



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Goods and services

Consumer

expenditure

Services of factors of production (labour, etc)



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goods markets

real flows: goods and services money flows: consumer expenditure

factor markets

real flows: services of labour and other

factors



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Goods and services

Consumer

expenditure

Wages, rentdividends, etc.

Services of factors of production (labour, etc)



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The circular flow of income firms and households goods markets



factor markets real flows: services of labour and other

factors money flows: wages and other incomes


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Circular Flow Between Firms and


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Circular Flow Between Firms andHouseholds

(real resources)

Goods and services

Factor Input

Households Firms

, ,Household includes workers managersentrepreneurs etc



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(corresponding flow of payments)

Spending ongoods and services

Factor incomes

Households Firms


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Goods and services

Services ofproductive factors

Factor incomes

Households Firms


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Goods and services

Services ofproductive factors

Factor incomes

Households Firms

Expenditure

Output

Income3 dif

fere

ntway

ofmeas

uring

th

eeco

nomi

cactiv

ity

inthe

econ

omy


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Leakages from the Circular Flow

Leakages(in terms of flow of payment)

money paid to the households but notreturned to firm

Or flow of payments that started fromfirms but did not return back tofirms

e.g. household savings, net taxes andimports



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Factor incomes

Households Firms

Leakages


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Injections into the Circular Flow

Injections (in terms of flow of payment)

are revenue for firms not from salesto household

e.g. investment by firms, government

purchases and exports



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Factor incomes

Households Firms

Injections


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Figure 2-2 Introduction of Saving and Investment to the Circular FlowDiagram

Saving investments identity in


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Saving investments identity inNational Income Accounts

S im p le e co n o m y n ie th e r g o v t N o r fo re ig n tra d e

va lu e of ou tp u t sold in eco n om y Y = +C I ( )i

W h at h ap p en s to u n sold ou tp u t

T h is le a d s to in cre a se in v e n to rie s o f g o o d s

.w h ich is tre a te d a s a ctu a l in ve stm e n t

+G N P Fro m v ie w p o in t o f its a llo ca tio n b e tw ee n C S

S in ce N a tio n a l in co m e = +Y C S ( )ii


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( ) ( )Fro m id e n titie s i a n d ii w e g e t

+ = = +C I Y C S

+ = . )Le ft h a n d sid e C I Y C o m p o n e n ts o f A g g d e m a n d

= + ( . )R ig h t h an d sid e Y C S A lloca tion a t N I to e ith e r C o r S

so v a lu e o f o u tp u t p ro d u ced o r sold e q u a lto to ta lY re ceive d

& ,In com e rece ive d is S p en t o n g o od s S e rvices p rod u ced inN o w S u b stra ctin g th e C fro m b o th sid e s

=I S

=S im p le e c o n o m y I S

R e la tio n o f in v e stm e n t a n d savin gT h i f h h ld i h i


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T h e p o rtio n o f h o u se h o ld in co m e th a t is n o t.co n su m e d is ca lle d p e rso n a lsa vin g T h e se

fu n d s a re ch a n n e le d to b u sin e ss firm s in tw o

:w a y s

.1 Th ey b u y b u sin ess bo n d s o r stocks

.2 T h e y d e p o sit sa v in g s in fin a n cia l

in te rm e d ia rie s to b e le n t to b u sin e ss firm sS a v in g is a le a ka g efrom the income used for

.co n su m p tio n e x p e n d itu re s T h is le a ka g e m u stb e b a la n ce d b y a n in je ctio n -o n n o n

co n su m p tio n sp e n d in g in th e fo rm o f p riv a te.in ve stm e n t


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The circular flow of incomeThe circular flow of income


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Factorpayments

Consumption ofdomestically

produced goodsand services (Cd)



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Factorpayments



BANKS, etc

NetNetsaving (S)saving (S)



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Factorpayments



BANKS, etc

Investment (I)Investment (I)




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Factorpayments



BANKS, etc GOV.



NetNet

taxes (T)taxes (T)



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Factorpayments



BANKS, etc GOV.


GovernmentGovernment

expenditure (expenditure (GG

))


NetNet

taxes (T)taxes (T)



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Factorpayments



BANKS, etc GOV. ABROAD


GovernmentGovernment

expenditure (expenditure (GG

))


NetNet

taxes (T)taxes (T)

ImportImport

expenditure (M)expenditure (M)



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Factorpayments





GovernmentGovernmentexpenditure (expenditure (GG))

ExportExportexpenditure (X)expenditure (X)


NetNet

taxes (T)taxes (T)

ImportImport




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Factorpayments








NetNettaxes (T)taxes (T)

ImportImport


WITHDRAWALSWITHDRAWALS



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Factorpayments








NetNettaxes (T)taxes (T)

ImportImport


WITHDRAWALSWITHDRAWALS

INJECTIONSINJECTIONS

Economic Base Model Collapses All SpendingEconomic Base Model Collapses All Spendingi t R i l d N R i li t R i l d N R i l


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Factorpayments

Regional Purchases ofregionally produced goods

and servicesOUTSIDE OF REGION


ImportImportexpenditure (M)expenditure (M)

into Regional and Non-Regionalinto Regional and Non-Regional

WITHDRAWALWITHDRAWAL

INJECTIONINJECTION

Transactions with foreign


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Transactions with foreignsector

Includes sales of goods and services,assets, and transfers

Exports - sales of domestically

produced goods to other countries Imports - goods bought from other

countries

+ + ( )Total E p C I G i


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= + + - ( )Total Exp C I G i

Total income received allocated

= + + ----- ( )Y C S T ii

Since expenditure must be equal Income received( ) ( )From equ i and ii

+ + = + + ---- ( )C I G C S T iiiSince C cancels out

+ = + - ( )I G S T iv

By rearranging we obtain

- = - ----- ( )G T S I v


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Leakages and Injections Note that

C + S + T = C + I +G +NX -C -C

S + T I + G + NX (4) Leakages (S+T) must be exactly balanced

by injections of non consumptionspending (I+G+NX)

Equation 4 is the magic equation. Itstechnical name the leakages-injection)identity.

If there is a budget deficit (T-G) < 0 then, I + NX S < 0 (T-

If T


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there are 3 implications

1.Budget deficit could make (I) smaller.

2.Budget deficit requires that (S) must rise to

avoid any downward pressure on totalinvestment (I+NX).

3.If S does not increase, to avoid a decline in(I+NX), there must be more borrowing

from foreigners and a decline in lendingto foreigners.

e.g.,

T G = (I + NX) - S

-1.8 = (17.8 1) 18.4 (deficit financed byforeign borrowing (-NX), and S to be greaterthan I)

4.4 = (20.8 4) 12.4 (surplus with greater

borrowing (-NX) allowed I to increase to 20.8

The government budget and the twindeficits


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deficits

Rearrange eq. 4 to show the uses of a

government budget surplus T G = (I + NX) S (5)

If T>G, there are 3 ways that agovernment budget surplus can be

used1.A budget surplus allows private

savings to decline without a needfor a decline of total investment(I+NX).

2.A budget surplus can stimulatedomestic investment (I)

3.a budget surplus can boost foreign h u s in o p e n e co n o m y


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= + + +a tio n a l In co m e C I G X n( - )n re p re se n ts n e t e xp o rts X M. ,I ca n e ith e r b e co n su m e d sa ve d o r p a id a s Ta xe s

+ + + = + +h e re fo re C I G X n C S T,sis C o m m o n o n b o th sid e s+ + = +G X n S T

, -h o w s su m o f p vt In vt G o vt E xp a n d X M is e q u a l.o th e su m o f sa vin g s a n d ta x re ve n u e


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(b) Certain transactions are excluded from nationalincome accounting

1. Transfer payment (Excluded)

This represent the redistribution of income Fromone group to another, From govt. to people viz

-> prize money, pensions, reliefs benefits,unemployment benefits, interest on govt debt, gift s,Charity payments and awards etc.

-> It do not form the payments made For

rendering productive Services in the Current year to'

T f t


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Transfer payments

Transfer payments are transactionswherein one party is not obliged todeliver a good or service in return

for the payment. Examples: retirement benefits,

unemployment benefits,

scholarships, and donations.


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personal Y = N .I - social security contributions -corporate Income Taxes -undistributed profits+ Transfer payments.

Disposable Income (DI)

DI = P.I-personal Taxes

It can be either consumed or saved,Hence, DI = C+S

-> ircular flow of income in Three 'and four Sectoreconomy


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-> ntroducing the government and Foreign Trade toational income accounting-> ovt also affects economic activities denoted by G-> ovt receives its income by direct and in direct taxesenoted by T-> ovt purchase good and Services and creates agg demand-> here is also a transfer of income from govt toousehold in form of mployement Benefitensions and other forms denoted by R-> or this beneficiaries do not contribute any thingowards productive activities of economy-> ut it will increase disposable income to put sector+o expand C S or both

-> oreign sector forms the external sector in the economy


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-> ts inclusion in the national income accounts through= [ - ]xports and imports is demoted by Nx X M-> his significantly affects economy's income and output-> ( ),he national income identity with the govt sector G( ), ( )ransfers R Taxes T and Foreign Trade Nx becomes

= + + +C I G Nxhe income received in the Pvt sector is used for spendingenoted by DY

= + - (Y Y R T Taxes are deducted and Transfers are)dded= Income= Transfers from govt to people= Tax from people to govt

hese are incorporated into national income accounts to exhibitthe . ( )gg output and disposable incomes DY are related


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= + -ccordingly DY Y R T= + ( - )o that Y DY T R

-> his disposable income can be either spend or saved or botho the identity holds good are= +Y C S

= + - = +rom DY Y R T and DY C Se Obtain+ = + -S T R T and= { + - } - - - ( = + )Y R T S DY S As DY C S. -gg C is equal to DY savings

-> ince we have already Stated that+ + + , .I G NX substituting we get

= ( + - )-Y R T S


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OR= + + + + - -C I G Nx R T S

= + + +s Y C I G Nx- = ( + - ) +earranging S I G R T NX

= , =hen X M Nx 0( + ) = ( = )o that G R T Govt expt Govt revenueand =I

-> ( + > )udget deficit G R T


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-> ( > )he saving exceed investment S I=ven it Nx 0

-> coz to Finance budget deficit the govt borrowrom financial market there is rise innterest rates Which decrease I and increase S-> (ovt borrowing Reduces Pvt Invt Crowding out)F Pvt I


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. ( + )=e G R T there is Still possibility>f S I due to Net exports remain( > )ositive X M

-> uring 1980's most of countries haveitnessed huge budgetary deficit with( )ounting trade imbalance deficitsBecoz-> ovt resort to external borrowings toide over the deficit Following inadequateomestic savings to cut down pvt invt

-> . e govt resort to external borrowingso Save


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rowding out of pvt Invt,elationship amongst the variables Y, , , , , ,DY C S I Nx R and T

= + + + ( - ), = + - = +C I G Nx X M DY Y R T C Sccordingly we obtain= + - = + + - ( = + )DY T R C S T R As DY C S= + + +I G Nx

= + + +ith foreign Trade included Y C I G Nx


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echnically called GDP-> = + - = +isposable income DY Y R T C S it isllocated into consumption and savings-> ccordingly we obtain

+ + - = + + +S T R C I G NxOR- = + + -I G R Nx T-> here is saving invt equality when govt+ =udget is balanced so that G R T and there,s a trade balance with Nx turns into Zero


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Net Factor Income from Abroad(Components)

1) Net compensation of employees

2) Net income from property i.e a rent,interest, and income from

entrepreneurship (i.e profits and dividends)

3) Net retained earnings of the resident

companies working in foreign countries.

3 Approaches for measuring


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pp gGDP

1.Expenditure Approach (upper loop) measures GDP as the sum ofexpenditures on final goods andservices.

2.Income Approach (lower loop) measuresGDP as the sum of incomes of factorsof production (wages, rent, interest andprofit.

3.Value-added Approach measures GDP asthe sum of value added at each stageof production (from initial to finalstage)


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I A h


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Income Approach Uses the lower loop of the circular flow diagram: sum of

payments to the various factors of production.

Suppose that in the production of rice the sales andexpenses are as follows:

SalesSales P 20,000P 20,000

Expenses:Expenses:WagesWages 80008000

RentRent 40004000

InterestInterest 20002000

TotalTotal 14,00014,000

ProfitProfit 6,0006,000

GDP=Sum of Payments toGDP=Sum of Payments tofactorsfactors

20,00020,000 P 20,000P 20,000

Value Added Approach


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Value Added Approach

Suppose that rice is the only final product of aneconomy: It goes through several (3) stages ofproduction.

Stage of ProdnStage of ProdnValue ofValue ofintermediateintermediategoodgood

Value ofValue ofSalesSales

Value-addedValue-added

Farmer - PalayFarmer - Palay 12,00012,000 12,00012,000

Rice Miller -Milled RiceRice Miller -Milled Rice 12,00012,000 15,00015,000 3,0003,000

Retailers - RiceRetailers - Rice 15,00015,000 20,00020,000 5,0005,000

GDP= Total ValueGDP= Total ValueAddedAdded

20,00020,000

Notes of the 3 approaches


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Notes of the 3 approaches

The expenditure approach, income approach, and thevalue-added approach all come up with the sameestimate of the GDP. They are equivalent approaches.

In the income approach, profitis also considered a paymentto the entrepreneur. So the incomes are (1) wages, (2)rent, (3) interest, and (4) profit. Profit adjusts to make

the sum equal to the final value of the good. In the value added approach, only the value added in eachstage of production are included. If we add the value ofintermediate product with the value of the final product,we commit the sin of double-counting.

At each stage of production, the value-added is equal towages, interest, rent, and profit. Therefore the value ofthe final product is likewise the same of all payments tothe factors of production.


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The distinction between GDP


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The distinction between GDPand GNP

Gross Domestic Product GDP 4,022,700

Net Factor Income from the

Rest of the World

NFIRW 267,500

Gross National Product GNP 4,290,200


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computation of National


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( ) The goods and services having monetaryra n sa ctio n s e n te rin g th e m a rk e t a re in clu d e d ina tio n a l in co m e a cco u n ts-> ousehold works are omitted

o u se w ive so u se rep airsa sh in g a n d C le a n in g-> his is becoz difficultiesf measuring the money.a lu e o f o u tp u t flo w in g fro m th e m

computation of NationalIncome


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some incomes such as social securitycontribution

Corporate income taxes & undistributed

profits are not actually received

Some incomes which are Received likeTransfer payments are not currentlyearned

Transfer payment (old-age pension s,unempt compes- ation , relief payments,int-payment on public debts.

. ( )Capital gains or losses Excludedhere is a possibilities of the rise in the value at fixed


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ssets with the rise in theirkt prices such as FlatsIand ther assets.his refers to capital gains This gain do not Form a part ofational income

. ( )Illegal Activities Excluded, - ,muggling black marketing gambling and bribe

. - ( )second hand buying and selling Activities Excluded-> , , ,f houses property shares debentures-> ,here is mere transfers of ownership despite gains-> hese goods already exist and their values are included in.revious year's N I-> owever service rendered by broker constitute this years GNP.ince this refers to current year's output

( ) Income generated by Foreign firms-> he Foreign Firms are located in a country


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-> hey generate a segment of output and income in Our.ountry) should this income Form a part OF national incomeF India or a parent country to which the firm belongs?

-> MF has viewed that the production of output and incomeenerated will be a part of GDP Of the country where theyre locatedrofits generated by the foreign company will be the GNP of.he parent county

( ) Problems arising out of imputing values to goods and.ervices that do not enter the market-> n farm sector Where many farmers produce crops like, ,heat mice Vegetables not for market but for selfconsumption

-> n the companies the managers and executives enjoyfrin e benefits' When their com an offers them free


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-> he diffiiculty arises since the business Firms hardlyaintained the record of the Changes in the physical volume ofinventories


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-> nd many a times they maintain the record in value terms ratherhan physical terms-> aluation poses a real problem-> orrectly estimating depreciation is a difficult task-> t is either understated or overstated

iffculties of computing national income in developing countriesncluding India. -Problem arising out of non monetized segment Of the economy

-> he output is retained for self consumption or exchanged Forther goods-> nly a rough estimate of the value of these outputs can be made. /Failure to keep accounts Records. Income and output generated by industry of origin-> .stimation of NI cannot be precise in country

-> ccupational Classifcation is incomplete and un scientific-> coz in rural areas people get income from various sourcesike working on farm land doing part time jobs etc


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-> his makes estimation difficult task. Reliable data is inadequate

-> he national income committee arise has noticed that the.tatistical data available in agri and small Scale sector isnadequate and unreliable. other problems

-> iffculties in adopting particular method-> conomy either use product or income method-> any facts and Figures for income method are lacking-> ifficulty arises on account of illeteracy and superstitionsmong people-> eople hardly disclose their income or they provide is.islending

Nominal and Real GDP and GDPDeflator


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* Nominal GDP

Measures the value of output Of goods and servicesproduced in a given period at the current prices

-> 2007 nominal GDP will be value of G & S produced in 2007valued at 2007 market price

-> 2000 nominal GDP is value of output produced in 2000 measuredat market prices prevailed in the year 2000

-> If P increases by 50% -> and nominal GDP will increase by 50%

although economy produces exactly same qty last & current year* Real GDP

Measures the Changes in the physical output of goodsand services produced during two different-time periods by valuinggoods and services at these periods at the same prices called

constant prices

* GDP deflatorIt is th e ra tio o f n o m in a l G D P to re a l G D P O f th e

g ive n ye a r


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g ive n ye a r

-> Itis a measure of the Changes taking place in the price.of th e g oo d s b etw een b ase yea r an d C u rren t yea r

su p p ose if N om in al G D P a t 2 0 0 7 is 7 8 8 5 5 R e a l G D P o f 2 0 0 7 is 6 3 1 7 0

= /G D P D eflator N om in al G D P R ea lG D P

7 8 8 5 3 = .I 256 3 1 7 0

-> This has significantimplication since 25 percentin cre a se in G D P is d u e to p rice in cre a se o r in fla tio n o v e r

th e p e rio d 2 0 0 0 to 2 0 0 7

Nominal and Real GDP


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Nominal and Real GDP

GDP at current prices or nominal GDP -GDPmeasured using the prices of the year for whichit is calculated

Nominal GDP can be a misleading indicator ofchanges in output or income because it also

embodies changes in the prices of goods andservices.

Real GDP or GDP at constant prices measuresthe total value of output using the prices of aselected year (the base year).

Real GDP better for analysis overtime because iteliminates the effects of price changes

Table 8 5


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Table 8.5

YEAR 1 YEAR 2QUANTITY Ice Cream 100 100 Buko Pie 100 100PRICE Ice Cream 50 100 Buko Pie 100 200VALUE Ice Cream 5,000 10,000 Buko Pie 10,000 20,000NOMINAL GDP 15,000 30,000


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GDPyear 1 = (100) (50) + (100) (100) = 15,000 GDPyear 2 = (100) (50) + (100) (100) = 15,000

In practice, calculating real GDP using theprevious approach is a tedious process because

there are so many goods and services areproduced in an economy. Can simplify thecalculation process by using the GDP deflator.

GDP deflator - a price index that allows us toconvert nominal GDP into real GDP. (note: price

index to be defined later)

Real GDP


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Real GDP

GDP, GNP, Depreciation


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122

, , p

GNP Deflator for yeart =

Nominal GNP for year t

Real GNP foryear t

Changes in GNP Deflator allows us toisolate the effect of increasing prices

on Nominal GNP

Calculation of Real GDP


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Calculation of Real GDP

Item 1990 1998 2002

GDP at currentprices (million PhP)

1,072,000 2,665,100 4,022,700

GDP deflator (baseyear 1985)

149.5 300.1 384.6

GDP at constantprices (million PhP)

720,700 888,000 1,046,100

:eal GDP goods are evaluated at( )constant base year prices


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( )y

:ominal GDP goods are evaluated atcurrent year prices=DP deflator ( / )nominal GDP real GDP

, .100 measures price movement over time

.long run trend in GDP vs short runfluctuations

recessions or slumps

expansions or booms

Real and Nominal GDP


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125



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128

GDP, GNP, Depreciation


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p

Nominal Gross National Product Measures national output at current prices

= value of all goods at current prices

Real Gross National Product

Measures output at base year prices e.g. value of todays national output at

1995 prices Allows us eliminate the effect of price

changes and see how real output evolvesover time


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r ce n ces n n a an t e rMeasurement


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ive Index series in India DP DeflatorWPICPI PI for industrial workers -PI For urban non manual employees PI For agricultural labourers) GDP deflatort refers to the index of average price of

he goods and services produced in the.conomy It excludes those of- .n termediate goods and raw materials


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sybms final ppt

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