Download 1. Gross Domestic Product (GDP)

ECN 200: Introduction to Economics
Nusrat Jahan
Lecture-7
Macroeconomic Aggregates
Measuring Economic Success
Economic success is measured by looking at 3 key variables1. Gross Domestic Product (GDP)
2. Unemployment and
3. Inflation
Gross Domestic Product (GDP)
GDP is the measure of the market value of all final goods and services produced in
a country in a year.
Nominal GDP: Nominal GDP is measured in actual market prices.
Real GDP: Real GDP is measured in constant or invariant prices.
Calculating GDP
Expenditure approach: In this approach all the expenditures done in the economy
are added to calculate GDP as Expenditure = Income.
Where, C = Consumption Expenditure
Ig = Gross Investment
G = Government Expenditure
NX = Net Export
Income approach: In this approach all the incomes of all the agents of the economy
are added to calculate GDP.
Incomes include- wage, rent, interest, profits and taxes.
Distinction between GDP and GNP
Consumer Price Index (CPI)
A consumer price index (CPI) measures changes in the price level of a market
basket of consumer goods and services purchased by households.
Measuring Inflation with CPI
Inflation is a rise in the general price level.
Consumer Basket is 5 Food and 2 Clothing
Year
Food Price Clothing
Price
Food
spending
Clothing
Spending
Total
Spending
CPI (Base
2003)
Inflation
2000
10
20
50
40
90
56.25
2001
12
22
60
44
104
65.00
15.5%
2002
15
25
75
50
125
78.12
20.18%
2003
20
30
100
60
160
100.00
28%
Types of Inflation
Demand Pull Inflation: This type of inflation results due to the increase in
Aggregate demand in the economy.
Cost Push Inflation: Increase in cost of production will result in cost push
inflation.