Download Macro Lesson 1_2

Lesson 1
THE DATA OF MACROECONOMICS
B112 Macro Economics
• The aims of the module are:
1.That you understand the fundamental BASIC –
KEY macro economic theories and the policies
– actions associated with them
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B112 Macro Economics
• The aims of the module are
2 Apply micro and macro economic theories and
concepts for decision making in the business
and wider environments
3 That you understand the understand the
underlying principles and trends of the
economy and the cause and effects of each
policy (SHORT and LONG RUN/TERMS)
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B112 Macro Economics
• The aims of the module are:
4 That you understand the general macro
economic theories and its effect upon business
organisations / industries and the market.
5 Use effectively macro (and micro) economic
theories in explaining business/industry and
market phenomena.
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B112 Macro Economics
What will be in the examination on the 26th
September?
• PART A which will test your understanding of key
terms SO??????
• PART B short questions to demonstrate a clear
understanding of basic Macro Economic Theory
• PART C longer questions to show how these theories
are applied.
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B112 Macro Economics
Some words about the B111 exam.
• PART A most achieved good markets
• PART B few students responded with reasoning
• PART C very few students gave examples and good
explanations.
• Performance tended to reflect attendance.
• If you want further feedback see me in tutorial on Friday 19th.
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B112 Key Areas to focus on
• Government’s role and policies
• Interest rates
• Taxation – income, profits spending??
• Monetary policies
• Measuring the performance of an economy
• International aspects – Trade
• The Chinese Economy.
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B112 The Broad Programme of
Study
• MIP on the website.
• Lectures will attempt to cover and explain the
topic
• Tutorial will help your understanding.
• Today Measuring the Economy
• Subsequently -
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Measuring a Nation’s
Income
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Measuring a Nation’s Income
• Microeconomics
• Microeconomics is the study of how individual
households and firms make decisions and how
they interact with one another in markets.
• Macroeconomics
• Macroeconomics is the study of the economy
as a whole.
• Its goal is to explain the economic changes that affect
many households, firms, and markets nationally and
internationally at once.
• The focus is on total activities – Aggregate Demand
and Supply – Industries as opposed to firms
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Measuring a Nation’s Income
• Macroeconomics answers questions like the
following:
• Why is average income high in some countries and
low in others?
• Why do prices rise rapidly in some time periods
while they are more stable in others?
• Why do production and employment expand in
some years and contract in others?
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THE ECONOMY’S INCOME AND
EXPENDITURE
• When judging whether the economy of a
country is doing well or poorly, it is natural to
look at the total income that everyone in the
economy is earning.
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THE ECONOMY’S INCOME AND
EXPENDITURE
• For an economy as a whole, income must equal
expenditure because:
• Every transaction has a buyer and a seller.
• Every dollar of spending by some buyer is a dollar
of income for some seller.
• CIRCULAR FLOW OF INCOME
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THE MEASUREMENT OF GROSS
DOMESTIC PRODUCT
• Gross domestic product (GDP) is a measure of
the income and expenditures of an economy.
• It is the total market value of all final goods and
services produced within a country in a given
period of time.
• Final goods and services bought by consumers
(households) and government.
• Final goods supplied by industries/ trade sectors
and govenrnents
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THE MEASUREMENT OF GROSS
DOMESTIC PRODUCT
• The equality of income and expenditure can be
illustrated with the circular-flow diagram.
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Figure 1 The Circular-Flow Diagram
MARKETS
FOR
GOODS AND SERVICES
•Firms sell
Goods
•Households buy
and services
sold
Revenue
Wages, rent,
and profit
Goods and
services
bought
HOUSEHOLDS
•Buy and consume
goods and services
•Own and sell factors
of production
FIRMS
•Produce and sell
goods and services
•Hire and use factors
of production
Factors of
production
Spending
MARKETS
FOR
FACTORS OF PRODUCTION
•Households sell
•Firms buy
Labor, land,
and capital
Income
= Flow of inputs
and outputs
= Flow of dollars
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THE MEASUREMENT OF GROSS
DOMESTIC PRODUCT
• GDP is the market value of all final goods and
services produced within a country in a given
period of time.
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THE MEASUREMENT OF GROSS
DOMESTIC PRODUCT
• “GDP is the Market Value . . .”
• Output is valued at market prices.
• “. . . Of All Final . . .”
• It records only the value of final goods, not
intermediate goods (the value is counted only once).
• “. . . Goods and Services . . . “
• It includes both tangible goods (food, clothing, cars)
and intangible services (haircuts, housecleaning,
doctor visits).
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THE MEASUREMENT OF GROSS
DOMESTIC PRODUCT
• “. . . Produced . . .”
• It includes goods and services currently produced,
not transactions involving goods produced in the
past.
• “ . . . Within a Country . . .”
• It measures the value of production within the
geographic confines of a country.
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THE MEASUREMENT OF GROSS
DOMESTIC PRODUCT
• “. . . In a Given Period of Time.”
• It measures the value of production that takes place
within a specific interval of time, usually a year or a
quarter (three months).
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THE COMPONENTS OF GDP
• GDP includes all items produced in the
economy and sold legally in markets.
• Measurement is financially based so does not
include bartering of goods and services
• I teach you economics you teach me Chinese
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THE COMPONENTS OF GDP
• What Is Not Counted in GDP?
• GDP excludes most items that are produced and
consumed at home and that never enter the
marketplace.
• It excludes items produced and sold illicitly, such as
illegal drugs.
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THE COMPONENTS OF GDP
• GDP (Y) is the sum of the following:
•
•
•
•
Consumption (C)
Investment (I)
Government Purchases (G)
Net Exports (NX)
Y = C + I + G + NX
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THE COMPONENTS OF GDP
• Consumption (C):
• The spending by households on goods and services,
with the exception of purchases of new housing.
• Investment (I):
• The spending on capital equipment, inventories
STOCKS OF ITEMS, and infrastructure structures,
including new housing – public and private. Roads
and Airports etc
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THE COMPONENTS OF GDP
• Government Purchases (G):
• The spending on goods and services by local, state,
and federal governments.
• Does not include transfer payments because they
are not made in exchange for currently produced
goods or services. EG Social payments / subsidies
• Net Exports (NX):
• Exports minus imports.
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Table 1 GDP and Its Components
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GDP and Its Components (2001)
Government Purchases
18%
Net Exports
Investment
-3
%
16%
Consumption
69%
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REAL VERSUS NOMINAL GDP
• Nominal GDP values the production of goods
and services at current prices.
• Real GDP values the production of goods and
services at constant prices.
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REAL VERSUS NOMINAL GDP
• An accurate view of the economy requires
adjusting nominal to real GDP by using the
GDP deflator.
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Table 2 Real and Nominal GDP
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Table 2 Real and Nominal GDP
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Table 2 Real and Nominal GDP
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The GDP Deflator
• The GDP deflator is a measure of the price
level calculated as the ratio of nominal GDP to
real GDP times 100.
• It tells us the rise in nominal GDP that is
attributable to a rise in prices rather than a rise
in the quantities produced.
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The GDP Deflator
• The GDP deflator is calculated as follows:
Nominal GDP
GDP deflator =
 100
Real GDP
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The GDP Deflator
• Converting Nominal GDP to Real GDP
• Nominal GDP is converted to real GDP as follows:
Real GDP20XX
Nominal GDP20XX

 100
GDP deflator20XX
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Table 2 Real and Nominal GDP
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Figure 2 Real GDP in the United States
Billions of
1996 Dollars
$10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
1970
1975
1980
1985
1990
1995
2000
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GDP Homework
• What is the latest GDP for
• The United States of America?
• China
• And another country of your choice
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GDP AND ECONOMIC WELLBEING
• GDP is the best single measure of the economic
well-being of a society.
• GDP per person tells us the income and
expenditure of the average person in the
economy.
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GDP AND ECONOMIC WELLBEING
• Higher GDP per person indicates a higher
standard of living.
• GDP is not a perfect measure of the happiness
or quality of life, however.
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GDP AND ECONOMIC
WELL-BEING
• Some things that contribute to well-being are
not included in GDP.
• The value of leisure.
• The value of a clean environment.
• The value of almost all activity that takes place
outside of markets, such as the value of the time
parents spend with their children and the value of
volunteer work.
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Table 3 GDP, Life Expectancy, and Literacy
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Summary
• Because every transaction has a buyer and a
seller, the total expenditure in the economy
must equal the total income in the economy.
• Gross Domestic Product (GDP) measures an
economy’s total expenditure on newly produced
goods and services and the total income earned
from the production of these goods and
services.
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Summary
• GDP is the market value of all final goods and
services produced within a country in a given
period of time.
• GDP is divided among four components of
expenditure: consumption, investment,
government purchases, and net exports.
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Summary
• Nominal GDP uses current prices to value the
economy’s production. Real GDP uses constant
base-year prices to value the economy’s
production of goods and services.
• The GDP deflator—calculated from the ratio of
nominal to real GDP—measures the level of
prices in the economy.
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Summary
• GDP is a good measure of economic well-being
because people prefer higher to lower incomes.
• It is not a perfect measure of well-being
because some things, such as leisure time and a
clean environment, aren’t measured by GDP.
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Production and Growth
A country’s standard of living
depends on its ability to produce
goods and services.
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Production and Growth
• Within a country there can be large changes in
the standard of living over time.
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Production and Growth
• In the United States over the past century,
average income as measured by real GDP per
person has grown by about 2 percent per year.
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Production and Growth
• Productivity refers to the amount of goods and
services produced for each hour of a worker’s
time.
• A nation’s standard of living is determined by
the productivity of its workers.
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Table 1 The Variety of Growth Experiences
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ECONOMIC GROWTH AROUND
THE WORLD
• Living standards, as measured by real GDP per
person, vary significantly among nations.
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ECONOMIC GROWTH AROUND
THE WORLD
• The poorest countries have average levels of
income that have not been seen in the United
States for many decades.
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ECONOMIC GROWTH AROUND
THE WORLD
• Annual growth rates that seem small become
large when compounded for many years.
• Compounding refers to the accumulation of a
growth rate over a period of time.
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PRODUCTIVITY: ITS ROLE AND
DETERMINANTS
• Productivity plays a key role in determining
living standards for all nations in the world.
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Why Productivity Is So Important
• Productivity refers to the amount of goods and
services that a worker can produce from each
hour of work.
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Why Productivity Is So Important
• To understand the large differences in living
standards across countries, we must focus on
the production of goods and services.
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How Productivity Is Determined
• The inputs used to produce goods and services
are called the factors of production.
• The factors of production directly determine
productivity.
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How Productivity Is Determined
• The Factors of Production
•
•
•
•
Physical capital
Human capital
Natural resources
Technological knowledge
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How Productivity Is Determined
• Physical Capital
• is a produced factor of production.
• It is an input into the production process that in the past
was an output from the production process.
• is the stock of equipment and structures that are
used to produce goods and services.
• Tools used to build or repair automobiles.
• Tools used to build furniture.
• Office buildings, schools, etc.
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How Productivity Is Determined
• Human Capital
• the economist’s term for the knowledge and skills
that workers acquire through education, training,
and experience
• Like physical capital, human capital raises a nation’s
ability to produce goods and services.
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How Productivity Is Determined
• Natural Resources
• inputs used in production that are provided by
nature, such as land, rivers, and mineral deposits.
• Renewable resources include trees and forests.
• Nonrenewable resources include petroleum and coal.
• can be important but are not necessary for an
economy to be highly productive in producing
goods and services.
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How Productivity Is Determined
• Technological Knowledge
• society’s understanding of the best ways to produce
goods and services.
• Human capital refers to the resources expended
transmitting this understanding to the labor force.
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FYI: The Production Function
• Economists often use a production function to
describe the relationship between the quantity
of inputs used in production and the quantity of
output from production.
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FYI: The Production Function
• Y = A F(L, K, H, N)
•
•
•
•
•
•
•
Y = quantity of output
A = available production technology
L = quantity of labor
K = quantity of physical capital
H = quantity of human capital
N = quantity of natural resources
F( ) is a function that shows how the inputs are
combined.
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FYI: The Production Function
• A production function has constant returns to
scale if, for any positive number x,
xY = A F(xL, xK, xH, xN)
• That is, a doubling of all inputs causes the
amount of output to double as well.
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FYI: The Production Function
• Production functions with constant returns to
scale have an interesting implication.
• Setting x = 1/L,
• Y/ L = A F(1, K/ L, H/ L, N/ L)
Where:
Y/L = output per worker
K/L = physical capital per worker
H/L = human capital per worker
N/L = natural resources per worker
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FYI: The Production Function
• The preceding equation says that productivity
(Y/L) depends on physical capital per worker
(K/L), human capital per worker (H/L), and
natural resources per worker (N/L), as well as
the state of technology, (A).
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ECONOMIC GROWTH AND
PUBLIC POLICY
• Governments can do many things to raise
productivity and living standards.
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ECONOMIC GROWTH AND
PUBLIC POLICY
• Government Policies That Raise Productivity
and Living Standards
•
•
•
•
Encourage saving and investment.
Encourage investment from abroad
Encourage education and training.
Establish secure property rights and maintain
political stability.
• Promote free trade.
• Promote research and development.
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The Importance of Saving and Investment
• One way to raise future productivity is to invest
more current resources in the production of
capital.
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Figure 1 Growth and Investment
(b) Investment 1960–1991
(a) Growth Rate 1960–1991
South Korea
Singapore
Japan
Israel
Canada
Brazil
West Germany
Mexico
United Kingdom
Nigeria
United States
India
Bangladesh
Chile
Rwanda
0
South Korea
Singapore
Japan
Israel
Canada
Brazil
West Germany
Mexico
United Kingdom
Nigeria
United States
India
Bangladesh
Chile
Rwanda
1
2
3
4
5
6 7
Growth Rate (percent)
0
10
20
30
40
Investment (percent of GDP)
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Diminishing Returns and the Catch-Up Effect
• As the stock of capital rises, the extra output
produced from an additional unit of capital
falls; this property is called diminishing returns.
• Because of diminishing returns, an increase in
the saving rate leads to higher growth only for a
while.
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Diminishing Returns and the Catch-Up Effect
• In the long run, the higher saving rate leads to a
higher level of productivity and income, but not
to higher growth in these areas.
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Diminishing Returns and the Catch-Up Effect
• The catch-up effect refers to the property
whereby countries that start off poor tend to
grow more rapidly than countries that start off
rich.
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Investment from Abroad
• Governments can increase capital accumulation
and long-term economic growth by encouraging
investment from foreign sources.
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Investment from Abroad
• Investment from abroad takes several forms:
• Foreign Direct Investment
• Capital investment owned and operated by a foreign
entity.
• Foreign Portfolio Investment
• Investments financed with foreign money but operated by
domestic residents.
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Education
• For a country’s long-run growth, education is at
least as important as investment in physical
capital.
• In the United States, each year of schooling raises a
person’s wage, on average, by about 10 percent.
• Thus, one way the government can enhance the
standard of living is to provide schools and
encourage the population to take advantage of them.
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Education
• An educated person might generate new ideas
about how best to produce goods and services,
which in turn, might enter society’s pool of
knowledge and provide an external benefit to
others.
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Education
• One problem facing some poor countries is the
brain drain—the emigration of many of the
most highly educated workers to rich countries.
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Property Rights and Political Stability
• Property rights refer to the ability of people to
exercise authority over the resources they own.
• An economy-wide respect for property rights is an
important prerequisite for the price system to work.
• It is necessary for investors to feel that their
investments are secure.
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Free Trade
• Trade is, in some ways, a type of technology.
• A country that eliminates trade restrictions will
experience the same kind of economic growth
that would occur after a major technological
advance.
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Free Trade
• Some countries engage in . . .
• . . . inward-orientated trade policies, avoiding
interaction with other countries.
• . . . outward-orientated trade policies, encouraging
interaction with other countries.
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Research and Development
• The advance of technological knowledge has
led to higher standards of living.
• Most technological advance comes from private
research by firms and individual inventors.
• Government can encourage the development of new
technologies through research grants, tax breaks,
and the patent system.
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CASE STUDY: The Productivity Slowdown
and Speedup
• From 1959 to 1973 productivity grew at a rate
of 3.2 percent per year.
• From 1973 to 1995 productivity grew by only
1.5 percent per year.
• Productivity accelerated again in 1995, growing
by 2.6 percent per year on average during the
next six years.
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CASE STUDY: The Productivity Slowdown
and Speedup
• The causes of the changes in productivity
growth are elusive.
• The slowdown cannot be traced to the factors of
production that are most easily measured.
• Many economists attribute the slowdown and
speedup in economic growth to changes in
technology and the creation of new ideas.
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Figure 2 The Growth in Real GDP Per Person
Growth Rate
(percent
per year)
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0
1870– 1890– 1910– 1930– 1950– 1970–
1890
1910
1930
1950
1970
1990
1990–
2000
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Population Growth
• Economists and other social scientists have
long debated how population growth affects a
society
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Population Growth
• Population growth interacts with other factors
of production:
• Stretching natural resources
• Diluting the capital stock
• Promoting technological progress
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Summary
• Economic prosperity, as measured by real GDP
per person, varies substantially around the
world.
• The average income of the world’s richest
countries is more than ten times that in the
world’s poorest countries.
• The standard of living in an economy depends
on the economy’s ability to produce goods and
services.
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Summary
• Productivity depends on the amounts of
physical capital, human capital, natural
resources, and technological knowledge
available to workers.
• Government policies can influence the
economy’s growth rate in many different ways.
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Summary
• The accumulation of capital is subject to
diminishing returns.
• Because of diminishing returns, higher saving
leads to a higher growth for a period of time,
but growth will eventually slow down.
• Also because of diminishing returns, the return
to capital is especially high in poor countries.
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Measuring the Cost
of Living
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Measuring the Cost of Living
• Inflation refers to a situation in which the
economy’s overall price level is rising.
• The inflation rate is the percentage change in
the price level from the previous period.
Month on Month/ Year on Year/ Quarter on
Quarter…
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THE CONSUMER PRICE INDEX
• The consumer price index (CPI) is a measure of
the overall cost of the goods and services
bought by a typical consumer.
• The relevant government department reports the
CPI each month.
• It is used to monitor changes in the cost of
living over time.
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THE CONSUMER PRICE INDEX
• When the CPI rises, the typical family has to
spend more dollars to maintain the same
standard of living.
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How the Consumer Price Index Is Calculated
• Fix the Basket: Determine what prices are most
important to the typical consumer.
• The US - Bureau of Labor Statistics (BLS)
identifies a market basket of goods and services
the typical consumer buys.
• The BLS conducts monthly consumer surveys to set
the weights for the prices of those goods and
services.
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How the Consumer Price Index Is Calculated
• Find the Prices: Find the prices of each of the
goods and services in the basket for each point
in time.
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How the Consumer Price Index Is Calculated
• Compute the Basket’s Cost: Use the data on
prices to calculate the cost of the basket of
goods and services at different times.
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How the Consumer Price Index Is Calculated
• Choose a Base Year and Compute the Index:
• Designate one year as the base year, making it the
benchmark against which other years are compared.
• Compute the index by dividing the price of the
basket in one year by the price in the base year and
multiplying by 100.
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How the Consumer Price Index Is Calculated
• Compute the inflation rate: The inflation rate
is the percentage change in the price index from
the preceding period.
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How the Consumer Price Index Is Calculated
• The Inflation Rate
• The inflation rate is calculated as follows:
CPI in Year 2 - CPI in Year 1
Inflation Rate in Year 2 =
 100
CPI in Year 1
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Table 1 Calculating the Consumer Price Index and the
Inflation Rate: An Example
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South-Western
Table 1 Calculating the Consumer Price Index and the
Inflation Rate: An Example
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© 2004 South-Western
South-Western
Table 1 Calculating the Consumer Price Index and the
Inflation Rate: An Example
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Copyright©2004
© 2004 South-Western
South-Western
Table 1 Calculating the Consumer Price Index and the
Inflation Rate: An Example
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South-Western
Table 1 Calculating the Consumer Price Index and the
Inflation Rate: An Example
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South-Western
How the Consumer Price Index Is Calculated
• Calculating the Consumer Price Index and the
Inflation Rate: Another Example
•
•
•
•
•
Base Year is 2002.
Basket of goods in 2002 costs $1,200.
The same basket in 2004 costs $1,236.
CPI = ($1,236/$1,200)  100 = 103.
Prices increased 3 percent between 2002 and 2004.
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FYI: What’s in the CPI’s Basket?
16%
Food and
beverages
17%
Transportation
Education and
communication
41%
Housing
6%
6%
6% 4% 4%
Medical care
Recreation
Apparel
Other goods
and services
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South-Western
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Problems in Measuring the Cost of Living
• The CPI is an accurate measure of the selected
goods that make up the typical bundle, but it is
not a perfect measure of the cost of living.
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Problems in Measuring the Cost of Living
• Substitution bias
• Introduction of new goods
• Unmeasured quality changes
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Problems in Measuring the Cost of Living
• Substitution Bias
• The basket does not change to reflect consumer
reaction to changes in relative prices.
• Consumers substitute toward goods that have become
relatively less expensive.
• The index overstates the increase in cost of living by not
considering consumer substitution.
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Problems in Measuring the Cost of Living
• Introduction of New Goods
• The basket does not reflect the change in purchasing
power brought on by the introduction of new
products.
• New products result in greater variety, which in turn
makes each dollar more valuable.
• Consumers need fewer dollars to maintain any given
standard of living.
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Problems in Measuring the Cost of Living
• The substitution bias, introduction of new
goods, and unmeasured quality changes cause
the CPI to overstate the true cost of living.
• The issue is important because many government
programs use the CPI to adjust for changes in the
overall level of prices / wages
• The CPI overstates inflation by about 1 percentage
point per year.
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The GDP Deflator versus the Consumer
Price Index
• The GDP deflator is calculated as follows:
Nominal GDP
GDP deflator =
 100
Real GDP
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The GDP Deflator versus the Consumer
Price Index
• The BLS calculates other prices indexes:
• The index for different regions within the country.
• The producer price index, which measures the cost
of a basket of goods and services bought by firms
rather than consumers.
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The GDP Deflator versus the Consumer
Price Index
• Economists and policymakers monitor both the
GDP deflator and the consumer price index to
gauge how quickly prices are rising.
• There are two important differences between
the indexes that can cause them to diverge.
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The GDP Deflator versus the Consumer
Price Index
• The GDP deflator reflects the prices of all
goods and services produced domestically,
whereas...
• …the consumer price index reflects the prices
of all goods and services bought by consumers.
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The GDP Deflator versus the Consumer
Price Index
• The consumer price index compares the price of
a fixed basket of goods and services to the price
of the basket in the base year (only occasionally
does the BLS change the basket)...
• …whereas the GDP deflator compares the price
of currently produced goods and services to the
price of the same goods and services in the base
year.
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Figure 2 Two Measures of Inflation
Percent
per Year
15
CPI
10
5
0
GDP deflator
1965
1970
1975
1980
1985
1990
1995
2000
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CORRECTING ECONOMIC VARIABLES
FOR THE EFFECTS OF INFLATION
• Price indexes are used to correct for the effects
of inflation when comparing dollar figures from
different times.
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Dollar Figures from Different Times
• Do the following to convert (inflate) Babe
Ruth’s wages in 1931 to dollars in 2001:
Salary2001
Price level in 2001
 Salary1931 
Price level in 1931
177
 $80,000 
15.2
 $931,579
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Table 2 The Most Popular Movies of All Times,
Inflation Adjusted
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Indexation
• When some dollar amount is automatically
corrected for inflation by law or contract, the
amount is said to be indexed for inflation.
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Real and Nominal Interest Rates
• Interest represents a payment in the future for a
transfer of money in the past.
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Real and Nominal Interest Rates
• The nominal interest rate is the interest rate
usually reported and not corrected for inflation.
• It is the interest rate that a bank pays.
• The real interest rate is the nominal interest
rate that is corrected for the effects of inflation.
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Real and Nominal Interest Rates
• You borrowed $1,000 for one year.
• Nominal interest rate was 15%.
• During the year inflation was 10%.
Real interest rate = Nominal interest rate –
Inflation
= 15% - 10% = 5%
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Figure 3 Real and Nominal Interest Rates
Interest Rates
(percent
per year)
15
10
Nominal interest rate
5
0
Real interest rate
–5
1965
1970
1975
1980
1985
1990
1995
2000
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Summary
• The consumer price index shows the cost of a
basket of goods and services relative to the cost
of the same basket in the base year.
• The index is used to measure the overall level
of prices in the economy.
• The percentage change in the CPI measures the
inflation rate.
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Summary
• The consumer price index is an imperfect
measure of the cost of living for the following
three reasons: substitution bias, the
introduction of new goods, and unmeasured
changes in quality.
• Because of measurement problems, the CPI
overstates annual inflation by about 1
percentage point.
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Summary
• Dollar figures from different points in time do
not represent a valid comparison of purchasing
power.
• Various laws and private contracts use price
indexes to correct for the effects of inflation.
• The real interest rate equals the nominal interest
rate minus the rate of inflation.
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Summary
• The GDP deflator differs from the CPI because
it includes goods and services produced rather
than goods and services consumed.
• In addition, the CPI uses a fixed basket of
goods, while the GDP deflator automatically
changes the group of goods and services over
time as the composition of GDP changes.
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