Macro economics

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Macroeconomics ECO 403
VU
LESSON 05
THE DATA OF MACROECONOMICS (Continued...)
Nominal vs. Real GDP
2001
2002
2003
P
Q
P
Q
P
Q
good A
Rs30
900
Rs31
1,000
Rs36
1,050
good B
Rs100
192
Rs102
200
Rs100
205
Compute nominal GDP in each year
·
Compute real GDP in each year using 2001 as the base year.
·
Nominal GDP
·
multiply Ps & Qs from same year
2001: Rs46, 200 = \$30 × 900 + \$100 × 192
2002: Rs51, 400
2003: Rs58, 300
·  Real GDP
multiply each year's Qs by 2001 Ps
2001: Rs46, 300
2002: Rs50,000
2003: Rs52,000 = \$30×1050 + \$100 × 205
GDP Deflator
The GDP deflator, also called the implicit price deflator for GDP, measures the price of output
relative to its price in the base year. It reflects what's happening to the overall level of prices in
the economy
GDP Deflator = Nominal GDP
Real GDP
GDP
inflation
Nom. GDP
Real GDP
deflator
rate
100.0
2001
Rs46,200
Rs46,200
n.a.
102.8
2002
51,400
50,000
2.8%
112.1
2003
58,300
52,000
9.1%
Chain-Weighted Measures of GDP
·  In some cases, it is misleading to use base year prices that prevailed 10 or 20 years
ago (i.e. computers and college). The base year changes continuously over time.
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New chain-weighted measure is better than the more traditional measure because it
·
ensures that prices will not be too out of date.
Average prices in 2001and 2002 are used to measure real growth from 2001 to 2002.
·
Average prices in 2002 and 2003 are used to measure real growth from 2002 to 2003
·
and so on.
These growth rates are united to form a chain that is used to compare output between
·
any two dates.
Components of Expenditures
Y = C + I + G + NX
Y => Total Demand for domestic
C => Consumption Spending by Households
I => Investment spending by businesses and households
G => Govt. purchases of goods and services
NX=> Net exports or net foreign demand
Consumption (C)
Definition: the value of all goods and services bought by households. Includes:
·  durable goods last a long time
ex: cars, home appliances
·  non-durable goods last a short time
ex: food, clothing
·  Services work done for consumers
ex: dry cleaning, air travel.
Investment (I)
Definition 1: spending on [the factor of production] capital.
Definition 2: spending on goods bought for future use.
Includes:
·
Business Fixed Investment spending on plant and equipment that firms will
use to produce other goods & services
·
Residential Fixed Investment spending on housing units by consumers and
landlords
·
Inventory Investment the change in the value of all firms' inventories
Investment vs. Capital
Capital is one of the factors of production.
·
At any given moment, the economy has a certain overall stock of capital.
·  Investment is spending on new capital.
Example (assumes no depreciation):
·  1/1/2002:
economy has Rs500b worth of capital
·  during 2002:
investment = Rs37b
·  1/1/2003:
economy will have Rs537b worth of capital
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Macroeconomics ECO 403
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Stocks vs. Flows
Flow
Stock
More examples:
Stock
flow
a person's wealth
a person's saving
# of people with college degrees
the govt. debt
the govt. budget deficit
What is Investment?
Ali buys for himself a house (9 years old).
·
Saleem built a brand-new house.*
·
Baber buys Rs10 million in ABC stock from someone.
·
An automobile company sells Rs100 million in stock and builds a new car factory in
·
Lahore.*
Which one is INVESTMENT included in GDP? Why?
·
Government spending (G)
G includes all government spending on goods and services.
·
G excludes transfer payments
·
(e.g. unemployment insurance payments), because they do not represent spending on
goods and services.
Net exports (NX = EX - IM)
Definition:
The value of total exports (EX) minus the value of total imports (IM)
Recall
Y = C + I + G + NX
Where
Y = GDP = the value of total output
C + I + G + NX = aggregate expenditure
A question for you:
Suppose a firm
·  produces Rs10 million worth of final goods
·  but only sells Rs9 million worth.
Does this violate the expenditure = output identity?
Why output = expenditure
·  Unsold output goes into inventory,
and is counted as "inventory investment"...
...whether the inventory buildup was intentional or not.
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In effect, we are assuming that
·
firms purchase their unsold output.
GDP: An important and versatile concept
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
GNP vs. GDP
Gross National Product (GNP):
·
total income earned by the nation's factors of production, regardless of where located
Gross Domestic Product (GDP):
·
total income earned by domestically-located factors of production, regardless of
nationality.
In Pakistan,
which would you want
to be bigger,
GDP or GNP?
Why?
(GNP­GDP) as a % of GDP for selected countries, 1997.
USA
0.1%
3.3
Brazil
-2.0
-3.2
Chile
-8.8
Ireland
-16.2
Kuwait
20.8
Mexico
-3.2
Saudi Arabia
3.3
Singapore
4.2
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