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Measuring National Income and The Cost of Living
Measuring National Income and The Cost of Living
DEFINE GDP
DISCUSS COMPONENTS
REAL VS NOMINAL VARIABLES
MEASURING THE COST OF LIVING
GDP DEFLATOR
CONSUMER PRICE INDEX
Expenditure Approach
Four components:
Consumption (C)
Investment (I)
Government Purchases (G)
Net Exports (NX)
Consumption (C)
definition: The value of all
goods and services bought
by households. Includes:
durable goods
last a long time
e.g., cars, home
appliances
nondurable goods
last a short time
e.g., food, gas
services
work done for
consumers
e.g., dry cleaning,
air travel
$11,484
% of GDP
68.5%
Durables
1,249
7.5
Nondurables
2,602
15.5
Services
7,633
45.5
Investment (I)
Spending on goods bought for future use
(i.e., capital goods)
Includes:
Business fixed investment
Spending on plant and equipment
Note:
does
Residential
Note: Investment
Investment
does not
not
fixed investment
mean
the
purchase
of
Spending
consumers
landlords on
meanby
the
purchaseand
of financial
financial
housing
unitslike
assets
assets
like stocks
stocks and
and bonds.
bonds.
Inventory investment
The change in the value of all firms
inventories
$2,648
% of GDP
15.8%
2,054
12.2
520
3.1
74
0.4
Stocks vs.
Flows
Flow
Stock
A stock is a
quantity measured
at a point in time.
E.g.,
The U.S. capital stock
was $26 trillion on
January 1, 2010.
flow
a persons wealth
a persons
annual saving
# of people with
college degrees
# of new college
graduates this year
QUIZ:
Stock or Flow?
the balance on your credit card statement
how much you study economics outside of
class each week
the size of your DVD collection
the inflation rate
the unemployment rate
Government purchases(G)
G includes all government purchases on
goods and services.
G excludes transfer payments
(e.g., unemployment insurance
payments), because they do not represent
spending on goods and services.
$3,144
% of GDP
18.7%
1,232
7.3
Non-defense
462
2.8
Defense
770
4.6
1,912
11.4
% of GDP
$508
3.0%
2,262
13.5%
1,563
9.3%
699
4.2%
2,770
16.5%
2,302
13.7%
468
2.8%
QUIZ
In each of the following cases, determine how much
GDP and each of its components is affected (if at all).
A. Debbie spends $200 to buy her husband dinner
at the finest restaurant in Boston.
B. Sarah spends $1800 on a new laptop to use in her
publishing business. The laptop was built in China.
C. Jane spends $1200 on an used computer to use in
her editing business.
D. General Motors builds $500 million worth of cars,
but consumers only buy $470 million worth of
them.
QUIZ
Answers
A. Debbie spends $200 to buy her husband dinner
at the finest restaurant in Boston.
Consumption and GDP rise by $200.
B. Sarah spends $1800 on a new laptop to use in
her publishing business. The laptop was built in
China.
Investment rises by $1800, net exports fall
by $1800, GDP is unchanged.
QUIZ
Answers
C. Jane spends $1200 on an used computer to
use in her editing business.
Current GDP and investment do not change.
D. General Motors builds $500 million worth of
cars, but consumers only buy $470 million of
them.
Consumption rises by $470 million,
inventory investment rises by $30 million,
and GDP rises by $500 million.
QUIZ:
Identifying value-added
A farmer grows a bushel of wheat
and sells it to a miller for $1.00.
The miller turns the wheat into flour
and sells it to a baker for $3.00.
The baker uses the flour to make a loaf of
bread and sells it to an engineer for $6.00.
The engineer eats the bread.
Compute value added at each stage
of production and GDP
QUIZ:
Identifying value-added
A farmer grows a bushel of wheat
and sells it to a miller for $1.00.+$1
The miller turns the wheat into flour
and sells it to a baker for $3.00. +$2
The baker uses the flour to make a loaf of
bread and sells it to an engineer for
$6.00.=$3
Total of $6 in value added!
GDP: SUMMARY
We have now seen that GDP measures:
total income
total output
total expenditure
the sum of value-added at all stages
in the production of final goods
Japan
Mexico
U.S.
Germany
Brazil
Pakistan
India
Russia
Bangladesh
Nigeria
Russia
Adult Literacy
(% of population)
Mexico
Germany
Japan
Brazil
Indonesia
Nigeria
India
Pakistan
Bangladesh
U.S.
Internet Usage
(% of population)
Japan
Pakista
n
Nigeria
Germany
Indonesia
Brazil
Mexico
Russia
China
India
Bangladesh
U.S.
EXAMPLE:
year
2005
2006
2007
Pizza
P
$10
$11
$12
Q
400
500
600
Latte
P
$2.00
$2.50
$3.00
$2 x 1000
Q
1000
1100
1200
Increase:
= $6,000
= $8,250
$3 x 1200 = $10,800
37.5%
30.9%
EXAMPLE:
year
2005
2006
2007
Pizza
P
$10$10
$11
$12
Q
400
500
600
Latte
P
$2.00
$2.00
$2.50
$3.00
Q
1000
1100
1200
Increase:
20.0%
16.7%
EXAMPLE:
Nominal
year
GDP
2005
$6000
2006
$8250
2007 $10,800
Real
GDP
$6000
$7200
$8400
In each year,
nominal GDP is measured using the
(then) current prices.
real GDP is measured using constant
prices from the base year (2005 in this
example).
EXAMPLE:
Nominal
Real
year
GDP
GDP
2005
$6000
$6000
37.5%
2006
$8250
$7200
30.9%
2007 $10,800
$8400
20.0%
16.7%
Real GDP
(base year
2000)
Nominal
GDP
EXAMPLE:
year
2005
2006
2007
Nominal
Real
GDP
GDP
$6000 $6000
$8250 $7200
$10,800 $8400
GDP
Deflator
100.0
114.6
128.6
14.6%
12.2%
2006:
2007:
100 x (10,800/8400) =
128.6
QUIZ
Computing GDP
2007 (base
yr)
P
Q
Good
A
$30
Good
B
$100
900
2008
P
2009
$31 1,000
192 $102
200
$36 1050
$100
205
QUIZ
Answers
Good A
Good B
2008
P
$31
$102
Q
1,000
200
2009
P
$36
$100
Q
1050
205
QUIZ
Answers
2007 (base yr)
Good A
Good B
P
$30
$100
Q
900
192
2008
P
$31
$102
Q
1,000
200
2009
P
$36
$100
Q
1050
205
Comparison of countries:
In general, rich countries tend to have higher
price levels than poor countries.
This is mainly because poor countries have
lower wages.
EXAMPLE
year
price of
pizza
price of
latte
2007
$10
$2.00
$10 x 4 + $2 x 10
2008
$11
$2.50
2009
$12
$3.00
$12 x 4 + $3 x 10
cost of basket
= $60
= $78
115 100
x 100%
100
130 115
x 100%
13% =
115
15% =
QUIZ
price
price of
of
chicken
beef
2004
$4
$4
2005
$5
$5
2006
$9
$6
QUIZ
Answers
CPI basket:
{10 lbs beef,
20 lbs chicken}
The CPI basket cost
$120 in 2004, the base
year.
price
price of
of
chicken
beef
2004
$4
$4
2005
$5
$5
2006
$9
$6
QUIZ
Answers
CPI basket:
{10 lbs beef,
20 lbs chicken}
The CPI basket cost
$120 in 2004, the base
year.
price
price of
of
chicken
beef
2004
$4
$4
2005
$5
$5
2006
$9
$6
QUIZ
QUIZ
Answers
A. Starbucks raises the price of Frappuccinos.
The CPI and GDP deflator both rise.
B. Caterpillar raises the price of the industrial
tractors it manufactures at its Illinois factory.
The GDP deflator rises, the CPI does not.
C. Armani raises the price of the Italian jeans it
sells in the U.S.
The CPI rises, the GDP deflator does not.