Download Inflation

Main Macroeconomic
Aggregates (II)
2015/2016
Introduction to Economics
Augusto Ninni
Questions of the day?
1. Which are the components of the GDP?
2. What is the role of prices in the determination of GDP? What
is inflation and how it is measured?
3. What is unemployment and how it is measured?
For sake of simplicity GDP (territory) = GNP (residents)
GDP – Measures the final value of production of goods and services
GDP – Measures the final value of demand of goods and services
D=S
It is possible to decompose GDP both on the side of supply and on the
side of demand
Suppose at first that we are in a closed economy, without exports or
imports
Composition of GDP
• From the point of view of supply GDP is equal to the sum
of the sectorial VAs (2° definition examined in Lecture
14)
• VA Agriculture + VA Industry + VA Services
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
b) Investment (I) – Firms’ purchase of capital goods that are
used as inputs in future production activities (e.g.
machines, plants, etc.), often for a lot of years
A particular category is represented by the investment in
stockpile (goods that are produced but not sold)
• It is not financial investment
• c) Government expenditure (G) – Purchase of
goods and services by the public administration
(Government, public bodies, etc.)
The sum C+I+G = expenditure in goods and services by people
living in a country (domestic expenditure)
But the economy is not closed
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
(exports)
• Some goods that are produced abroad are purchased in the
country (imports)
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) – element of demand
and subtract
•Import (Q) – Purchase of goods and services
produced abroad by the residents of the country
(e.g. Swiss cheese
sold in Italy) – element of
supply
• D=S
• (C+I+G+E)-Q = Z
• C+I+G+E = Z + Q
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= State balance
Difference between Government’s expenditure and
Government’s revenues
The role of prices: Real GDP and nominal GDP
GDP = value of the final goods and services
It is a flux value, defined on conventional terms
GDP and the maid…(Pigou)
Value of the goods = quantities * market prices
Which kind of prices? → usually market 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”)
Italian GDP, million of dollars
(source: Oecd)
1700000
1650000
1600000
1550000
1500000
1450000
2008
2009
2010
current
2011
constant
2012
2013
2014
Real GDP and Nominal GDP
A single good
Year
2000
2001
Quantity
100 100
103
Price
102
Nominal GDP2000 =
price2000 * q.ty2000 = 100*100 =10000
Nominal GDP2001 =
price2001 * q.ty2001 = 102*103=10506
Real GDP and Nominal GDP
Nominal GDP growth=
Nom GDP2001 - Nom GDP2000 10506  10000
=
=
Nom GDP2000
10000
= 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.
In order to know the actual increase in production we must
use the Real GDP
Base year = 2000
Real GDP2000 =
price2000 * q.ty2000 = 100*100 =10000
Important: Real GDP is equal to the nominal GDP in the base
year (2000)
Real GDP2001=
price2000 * q.ty2001 = 100*103 = 10300
Important: It is different from the Nominal GDP2001 = 10506
in another year
10300  10000
Real GDP2001 - Real GDP2000
=
=
Real GDP2000
10000
Real GDP growth= 0,03 = 3%
The growth of real GDP measures the variation of
production given a certain set of fix prices
What differentiates the growth of nominal GDP from the
growth of real GDP? → The variation of prices, namely
inflation (the growth rate of prices: the contrary is
deflation)
 P2001 * Q 2001
 ____________ /
 P2000 * Q 2000
Price index
P2001
____
=
P 2000
Q 2011
______
Q 2010
Inflation
Inflation rate (π) = Rise in the general level of prices in an
economy over a period of time
Two ways to measure the dynamics of prices (price index=:
•GDP deflator
•Consumer price index (CPI)
Inflation
1) GDP deflator: Diversity in the growth of nominal and real GDP > price variation
πt = GDP Deflator = ↑
↑
Nominal GDP
Real GDP
Inflation
It is also possible to show that
π=n–g
Where
Π = annual rate of growth of prices
g = annual rate of growth of real GDP
n = annual rate of growth of nominal GDP
Inflation
In 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.
But in many cases it is more interesting to look at the
price increase that characterize the goods that are
purchased only by the consumers.
Inflation
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
Price 2000
Price 2001
∆
Bread
Clothes
1
100
1.1
101
10%
1%
Inflation
Inflation -> average of the two variation
Important: no simple average, but average weighted by
the value of the goods
Inflation
Computation of the CPI:
Expenditure 2000
= q.ty bread * price bread2000 +
+ q.ty clothes * price clothes2000 =
=10*1+1*100 = 110
Expenditure 2001
= q.ty bread * price bread2001 +
+ q.ty clothes * price clothes2001 =
= 10*1.1+1*101 = 112
Inflation
π =
Expenditure 2001 - Expenditure2000
Expenditure 2000
112 - 110
=
110
=
=
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
Inflation in Italy 1970-2011
25,0
INFLAZIONE (IN%)
20,0
15,0
10,0
5,0
0,0
1971
1974
1977
1980
1983
1986
1989
1992
ANNO
1995
1998
2001
2004
2007
2010
Inflation is different depending on the period
(>10% between 1974 and 1984 ; < 3% since 1997)
25,0
INFLAZIONE (IN%)
20,0
15,0
10,0
5,0
0,0
1971
1974
1977
1980
1983
1986
1989
1992
ANNO
1995
1998
2001
2004
2007
2010
Inflation
• Why do prices increase?
• How to struggle inflation ?
Some answers during the course….
Labour market
Employed = Those who currently have a job
Unemployed = Those who have not a job but 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., elder people, housewife
and students are not considered unemployed)
Labour market
Labour force = Employed + Unemployed
Unemployment rate (u) = Unemployed
Labour force
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
potential workers who are unemployed
Labour market
Another problem: how to measure the portion of
workers over the total population -> participation rate
Participation rate =
Labour force
=
Tot. population under working age
ANNO
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
19
99
19
98
6
19
97
10
19
96
12
19
95
TASSO DI DISOCCUPAZIONE (IN %)
Unemployment rate in Italy, EU, US 1995-2011
13
ITA
11
UE
9
8
7
USA
5
4
3
The unemployment rate is usually positive (there are
workers who do not find a job)
The unemployment rate is different across countries
13
TASSO DI DISOCCUPAZIONE (IN %)
12
ITA
11
UE
10
9
8
7
6
USA
5
4
3
ANNO
Labour market
• Why is there unemployment?
• Why is unemployment different across countries?
• How to struggle unemployment ?
Some answers during the course…..