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MACROECONOMICSL PhngThoQunh
FACULTY OF INTERNATIONAL ECONOMICS
Mobile: 0987027398
Email: [email protected]
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LECTURE2:
MEASURINGMACROECONOMICVARIABLES
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MEASURING A NATIONS INCOME
Macroeconomics answers questions such as:
Why is average income high in some countries andlow in others?
Why do prices rise rapidly in some periods whilethey are more stable in other periods?
Why do production and employment expand insome years and contract in others?
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THE ECONOMYS INCOME ANDEXPENDITURE
When judging whether the economy 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 ECONOMYS INCOME ANDEXPENDITURE
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 dollarof income for some seller.
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THE MEASUREMENT OF GDP
Gross domestic product (GDP) is a measure of the
total income and expenditures of an economy.
It is the total market value of all final goods andservices produced within a country in a given period
of time.
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THE MEASUREMENT OF GDP
GDPis the market value ...
Output is valued at market prices.
... of all final ... It records only the value of finalgoods, not intermediate goods (the value is counted
only once).
... goods and services ...It includes both tangiblegoods (food, clothing, cars) and intangible services
(haircuts, house cleaning, doctorsvisits).
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THE MEASUREMENT OF GDP
... produced ... It includes goods and servicescurrently produced, not transactions involving
goods produced in the past.
... within a country ... It measures the value ofproduction within the geographic confines of a
country.
... in a given period of time.It measures the valueof 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.
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 asillegal drugs.
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THE CIRCULAR-FLOW DIAGRAM
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THE CIRCULAR-FLOW DIAGRAM
Sectors of a simple economy:
1) Households contain all the people2) Firms all the business enterprises
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THE CIRCULAR-FLOW DIAGRAM
Sectors are connected by 2 markets: factor and product market:
1) Households sell productive services to firms through factor
markets
- The factors of production are land, labor, capital.- When households sell productive services to firms, they
receive income: wages, rent, profits, interest
2) Firms sell goods & services in product markets
- The income of firms in this market is also the expenditure of
households
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THE CIRCULAR-FLOW DIAGRAM
- Underlying principle of the circular flow: the dollar
inflow into each market or sector must equal the
dollar outflow from each market or sector
- So, total production = total spending = total income
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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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COMPONENTS OF GDP
Consumption (C):
The spending by households on goods andservices, with the exception of purchases of new
housing.
Investment (I):
The spending on capital equipment, inventories
and structures, including household purchases ofnew housing.
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COMPONENTS OF GDP
Government purchases (G):
The spending on goods and services by local,State and federal governments
Does not include transfer payments because theyare not made in exchange for currently producedgoods or services
Net exports (NX): Exports minus imports.NX = X - M
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REAL VERSUS NOMINAL GDP
Nom inal GDP:
Nominal GDP values the production of goods and
services at current prices.
q: quantity
p: pricet: current year
i: good number i in n products
n
t
GDP = it
qi=1
n
i
t
p
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REAL VERSUS NOMINAL GDP
In reality, GDPn often increases from year to year.
Only looking at GDPn we can not know whether the
increase comes from price or quantity.
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REAL VERSUS NOMINAL GDP
Real GDP (GDPr) values the production of goods
and services at constant prices.
t = 0 is base year
r
t
GDP=
i
t
qi=1
n
i
0
p
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REAL VERSUS NOMINAL GDP
If GDPr increases, it exactly comes from the
increase in quantity
=> GDPr is used to measure economic growth
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GDP DEFLATOR
GDP Deflator-D GDP): 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..
GDP
t
D=
n
t
GDP
r
t
GDP 100
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GDPN, GDPRANDGDP DEFLATOR
P book Q book P pen Q pen
2011 5 100 3 75
2012 6 150 4 100
2013 7 200 5 150
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GDPN, GDPRANDGDP DEFLATOR
2011 is base year
Year Nominal GDP
2011 100 x 5 + 3 x 75 = 725
2012 6 x 150 + 4 x 100 = 1300
2013 7 x 200 + 5 x 150 = 2150
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GDPN, GDPRANDGDP DEFLATOR
Year Real GDP
2011 5 x 100 + 3 x 75 = 725
2012 5 x 150 + 3 x100 = 1050
2013 5 x 200 + 3 x 150 = 1450
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GDPN, GDPRANDGDP DEFLATOR
Year D GDP = (GDPn/GDPr) x 100
2011 D GDP = 725/725 x 100 = 100
2012 D GDP = 1300/1050 x 100 = 124
2013 D GDP = 2150/1450 x 100 = 148
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GDPN, GDPRANDGDP DEFLATOR
Inflation rate in 2012 = (124100)/100 = 24%
Inflation rate in 2013 = (148124)/124 = 19.35%
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GDP AND ECONOMIC WELLBEING
Some things that contribute to wellbeing are not
included in GDP:
the value of leisure
the value of a clean environment
the value of almost all activity that takes placeoutside of markets, such as the value of the time
parents spend with their children and the value of
volunteer work.
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GDP PERCAPITAOFSOMENATIONSIN2012
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GDP ANDQUALITYOFLIFE
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CONSUMERPRICEINDEX- CPI
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CPI
The consumer price index (CPI) is a measure of the
overall cost of the goods and services bought by a
typical consumer.
- When the CPI rises, the typical family has to spend
more dollars to maintain the same standard of
living.
- The Vietnamese Bureau of Statistics reports the
CPI each month.
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HOWTHECPIISCALCULATED?
B1: Fix the base year and the basket
of goods and services
- Year 2010
- Basket: 10kg rice v 5kg fish
B2: Determine the prices of each of
the goods and services in the basket
for each point in time.
Nm Gi go Gi c2010 3 15
2011 4 17
2012 5 22
B3: Calculate the baskets cost: Usethe data on prices to calculate the
cost of the basket of goods and
services at different times. CP t =
2010: 3 x 10kg go+ 15 x 5kg c = 1052011: 4 x 10kg go+ 17 x 5kg c = 1252012: 5 x 10kg go+ 22 x 5kg c = 160
B4: Compute the index 2010: = (105/105) X 100 = 100
2011: = (125/105) X 100 = 1192012: = (160/105) X 100 = 152.4
B5: Compute inflation rate T llmpht nm2011:(119 - 100)/100 x 100% = 19%
T llmpht nm2012:
(152.4119)/119 x 100% = 28%
i
0q
i
t
p
i
t
p i
0
q
t
CPI = ( it
pi
t
qi
0
pi
0
q ) 100
t
CPI t 1
CPIt 1
CPI 100%
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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
substitution bias
introduction of new goods
unmeasured quality changes
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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
Unmeasured quality changes
If the quality of a good rises from one year to thenext, the value of a dollar rises, even if the price of
the good stays the same.
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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
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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.
The nominal interest rate is the interest rate usuallyreported 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
Real interest rate = Nominal interest rateInflation rate
r = i -
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QUESTIONS
1. GDP is equal to
a. The total value of goods and services produced in an economy
during a given period
b. C + I +G +IM
c. The total value of intermediate goods plus final goods
d. The total income received by producers of final goods and services
2. Which of the following is included in GDP?
a. Changes to inventories
b. Intermediate goods
c. Used goodsd. Financial assets
e. Foreign produced goods
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QUESTIONS
3. Which is the following is not included in GDP:
a. Capital goods such as machinery
b. Imports
c. The value of domestically produced services
d. Government purchases of goods and services
e. The construction of structures