Download Good Q (2000) P (2000) PQ P

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Econ. 102. Chapter 2. Data of Macroeconomics: GDP, CPI and Unemployment
1.
Economic activity arises from scarcity, i.e., the available resources are insufficient to meet all wants.
Economics studies the choices people make to cope with scarcity. These choices determine the
performance of the economy. The performance of the economy can be summarized by (1) the
standard of living, (2) cost of living, and (3) business cycle.
2. Three main issues that macroeconomics tries to study and understand are
(a) The standard of living: the level of consumption of goods and services that people enjoy on the
average. It is measured by RGDP per person (average income per person).
(b) The cost of living: the number of dollars it takes to buy the goods and services that achieve a
given standard of living. It is measured by CPI, GDP deflator, and inflation rate.
(c) business cycle: a periodic but irregular up-and-down movement in output, incomes and
unemployment. It is measured by economic growth rate and unemployment rate.
3.
Economic data offer systematic and objective information. Various statistics are computed that
summarize the state of the economy. Economists use these statistics to study the economy;
policymakers use them to monitor changes in the economy and formulate appropriate policies.
4.
GDP (gross domestic product) is the market value of all final goods and services within an economy
in a given period of time.
5.
Final good or service: A good or service that is produced for its final user and not as a component of
another good or service. It is not used as an intermediate good or service.
Note: GDP does not include the used goods and the intermediate goods.
6.
GDP can be viewed in two ways: (1) the total income of everyone in the economy. (2) the total
expenditure on the economy’s output of goods and services.
GDP: Total Expenditure Approach: 2007
Item
Total (billion of $)
Consumption (C)
9,710
Investment (I)
2,130
Gover’t purchases (G)
2,675
Net Exports (X-IM)
-708
GDP = C+I+G+(X-IM) 13,807
Per Person ($)
32,143
7,052
8,855
-2,343
.
45,707
7. Changes in GDP combine changes in (i) prices and (ii) output quantity.
8. NGDP (nominal GDP) is the value of all final goods and services measured at current prices.
9. RGDP (real GDP) is GDP measured by using a constant set of prices.
10. GDP deflator = (NGDP/RGDP)x100 %.
11. NGDP = RGDP x GDP deflator. RGDP = (NGDP/GDP deflator)x100%.
12. Total expenditure: Y = C + I + G + NX
C (consumption) = the expenditure by households on nondurable goods, durable goods and services.
I (investment) = the purchase of new capital goods (tool, machines, building) and additions to
inventory. It includes (i) business fixed investment, (ii) residential fixed investment, (iii) inventory
investment.
G (government purchases) = the goods and services bought by federal, state and local government.
NX (net export) = Export – Import.
13. GNP (gross national product) = GDP + factor payments from abroad – factor payments to abroad. GNP
measures the total income earned by nationals (residents of a nation).
14. NNP (net national product) = GNP – Depreciation.
15. National income (NI) = NNP – indirect business taxes. NI measures how much everyone in the
economy has earned.
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16. NI = compensation of employees (70%) + proprietors’ income (9%) + rental income (2%) + corporate
profits (12%) + net interest (7%)
17. Personal income = NI – corporate profits – social insurance contributions – net interest + dividends +
government transfers to individuals + personal interest income.
18. Disposable income = personal income – personal tax and nontax payments. We are interested in
disposable income because it is the amount households and noncorporate businesses have available to
spend after satisfying their obligations to the government.
19. CPI (consumer price index): A price index shows that the cost of a fixed basket of consumer goods
relative to the cost of the same basket in a base year.
CPI = (cost of CPI basket at current period prices/ Cost of CPI basket at base period prices) x 100%
20. CPI vs GDP deflator
a. GDP deflator measures the price of all goods and services produced, whereas CPI measures the
prices of only the goods and services bought by consumers.
b. CDP deflator includes only those goods produced domestically. Imported goods are not part of
GDP and do not show up in the GDP deflator.
c. The CPI assigns fixed weights to the prices of different goods, whereas GDP deflator assigns
changing weight over time.
Unemployment Rate
21. 2008
millions
Population
304.5
- People under 16 or living in institution
- 74.7
Working age population
233.8
- Not in labor force
- 79.2
Labor force
154.6
Employment
- 145.8
Unemployment
8.8
22. Unemployment: all persons in labor force who during the week before survey:
a. had no employment,
b. were available for work.
And either
a. had made specific efforts to find job some time during the previous 4 weeks or
b. were waiting to be recalled to a job from which they had been laid off.
23. Employment: all persons in labor force who during the week before the survey:
a. worked at least 1 hour as paid employees or worked 15 hours or more as unpaid workers in their
family business.
b. Were not working but had jobs or business from which they were temporarily absent.
24. Unemployment rate = (No. of people unemployed/Labor force)x100% = (8.8/145.8)x100 = 6.0%
25. Labor force participation rate = (labor force/working age population) x 100%
= (154.6/233.8)x100 = 66.1%
Example: NGDP and RGDP calculation
Good
Q (2001)
Q’ (2002)
P (2001)
P’ (2002)
Apples
100
160
$1.00
$0.5
Oranges
200
220
$0.5
$2.25
1. NGDP (2001) = PQ = $1 x 100 + $0.5 x 200 = $100 + $100 = $200.
NGDP (2002) = P’Q’ = $0.5 x 160 + $2.25 x 2.20 = $80 + $495 = $575.
2. At the price of 2001
GDP (2001) = PQ = $1 x 100 + $0.5 x 200 = $100 + $100 = $200.
GDP (2002) = PQ’ = $1 x 160 + $0.5 x 220 = $160 + $110 = $270.
3. At the price of 2002
GDP (2001) = P’Q = $0.5 x 100 + $2.25 x 200 = $50 + $450 = $500.
GDP (2002) = P’Q’ = $0.5 x 160 + $2.25 x 220 = $80 + $495 = $575.
4. Growth rate at the price of 2001 = [(270-200)/200] = 0.35 or 35%
5. Growth rate at the price of 2002 = [(575-500)/500] = 0.15 or 15%.
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6. Average growth rate = (0.35 + 0.15)/2 = 0.25 or 25%.
7. RGDP (2001) = $200 x 1 = $200.
RGDP (2002, base year 2001) = $200 + $200 x 0.25 = $200 (1 + 0.25) = $250.
8.
NGDP
RGDP
GDP deflator
2001
$200
$200
100
2002
$575
$250
230
.
Example: a simplified calculation of CPI.
(a) Base Period: 2000 Current Period: 2001
(b)
Good
Q (2000)
P (2000)
PQ
P’(2001)
Orange
10
$1.00
$10
$2.00
Haircut
5
$8.00
$40
$10.00
Cost of CPI basket: PQ = $10+$40 = 50. P’Q = $20+$50 = $70
P’Q
$20
$50
CPI = (cost of CPI basket at current period prices/cost of CPI basket at base period prices)x100%
CPI (2000) = ($50/$50) x 100% = 100% = 100
CPI (2001) = ($70/$50) x 100% = 140% = 140
Inflation rate = [(CPI current period -CPI last period)/(CPI last period)]x100%
= [(140 – 100)/100]x100% = 40%