Macro Session 2

7/27/2019 Macro Session 2

1/21

Ace Institute of Management

Session 2

Instructor

Rijan [email protected]

98510 69004


2/21

Other derivations from GDP

Gross National Product (GNP)

Net National Product (NNP)

National Income (NI)

Personal Income (PI) Personal Disposable Income (DI)


3/21

National Income Accounting contd..

GDP + Income earned from domestic national abroad

Income paid to foreign national at home = GNP

GNP is the monetary value of final goods and services

produced by the nationals (income earned by the nationals

on foreign countries minus income earned by foreigners athome)

GNP Depreciation (Capital Consumption) = NNP

Depreciation is the net capital consumption during the

accounting year

NNP Indirect Business Tax = NI (National Income)


4/21

Practice Problem-1.2

Consumption : 8746.2

Income earned by the national abroad : 587.8Investment : 2103.1

Income earned by foreigners at home : 287

Capital consumption : 86.6

Indirect Business Tax : 700Government Purchase : 2363.4

Net Export : - 726.9

Undistributed corporate profit : 350

Personal tax payment : 1650

Calculate National Income (NI) from the above data

Answer: 12000


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6/21

National Income Accounting

(Narrowing to personalized Income)

Personal Income Personal tax (Income Tax)

Non-tax payments (such as parking tickets)

= DI (Disposable Income)

Disposable income is the final income that a consumerspends on the purchase of goods and services

DI Personal Consumption Expenditure = Saving

Or, DI Saving = Personal Consumption Expenditure

(Note: PCE is the one we add in GDP)


7/21

Real vs. nominal GDP

GDP is the value of all final goods and services

produced.

Nominal GDP measures these values using

current prices.

Real GDPmeasure these values using the

prices of a base year.

(Indicates how much prices have increased

over time- Inflation)


8/21

Practice problem, part 1

Compute nominal GDP in each year. (Multiply Ps &Qs from same year)

Compute real GDP in each year using 2006 as thebase year. (Multiply each years Qs by 2006 Ps)

2006 2007 2008

P Q P Q P Q

good A $30 900 $31 1,000 $36 1,050

good B $100 192 $102 200 $100 205


9/21

Answers to practice problem, part 1

nominal GDP multiply Ps & Qs from same year

2006: $46,200 = $30 900 + $100 192

2007: $51,400

2008: $58,300

real GDP multiplyeach years Qs by 2006 Ps

2006: $46,2002007: $50,000

2008: $52,000 = $30 1050 + $100 205


10/21

U.S. Nominal and Real GDP,19502006

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1950 1960 1970 1980 1990 2000

(billions

)

Nominal GDP

Real GDP

(in 2000 dollars)


11/21

GDP Deflator

The inflation rateis the percentage increase in

the overall level of prices.

One measure of the price level is

the GDP deflator, defined as

Nominal GDPGDP deflator = 100

Real GDP


12/21

Practice problem, part 2

Use your previous answers to computethe GDP deflator in each year.

Use GDP deflator to compute the inflation rate from

2006 to 2007, and from 2007 to 2008.

Nom. GDP Real GDP GDPdeflator

Inflationrate

2006 $46,200 $46,200 n.a.

2007 51,400 50,000

2008 58,300 52,000


13/21

Answers to practice problem, part 2

NominalGDP

Real GDP GDPdeflator

Inflationrate

2006 $46,200 $46,200 100.0 n.a.

2007 51,400 50,000 102.8 2.8%

2008 58,300 52,000 112.1 9.046


14/21

Consumer Price Index (CPI)

A measure of the overall level of prices

Uses:

tracks changes in the typical households

cost of living

Adjusts for inflation

allows comparisons of monetary value over time


15/21

How to compute CPI

1. Survey consumers to determine composition ofthe typical consumers basket of goods.

2. Every month, collect data on prices of all items

in the basket; compute cost of basket

3. CPI in any month equals

Cost of basket in that monthCost of basket in base period

100


16/21

Exercise: Compute the CPI

Basket contains 20 pizzas and 10 compact discs.

prices:

pizza CDs

2002 $10 $15

2003 $11 $15

2004 $12 $16

2005 $13 $15

For each year, compute

the cost of the basket in

each year

the CPI (use 2002 as the

base year)

the inflation rate from thepreceding year


17/21

Cost of Inflationbasket CPI rate

2002 $350 100.0 n.a.

2003 370 105.7 5.7%

2004 400 114.3 8.136%

2005 410 117.1 2.449%

Answers:


18/21

CPI vs. GDP Deflator

prices of capital goods included in GDP deflator (if produced domestically)

excluded from CPI

prices of imported consumer goods included in CPI

excluded from GDP deflator

the basket of goods CPI: fixed

GDP deflator: changes every year


19/21

Categories of the population

employedworking at a paid job

unemployednot employed but looking for a job

labor forcethe amount of labor available for producinggoods and services; all employed plus

unemployed persons not in the labor force

not employed, not looking for work


20/21

Two important labor force concepts

unemployment rate

percentage of the labor force that is

unemployed

labor force participation rate

the fraction of the adult population

that participates in the labor force


21/21

Thank You

Documents

Macro Session 2