Macroeconomics - CH22 GDP and the CPI: Tracking the Macroeconomy

Sectors of economy:

1. government
2. households
3. firms
4. the rest of the world

Three types of markets:

1. markets for goods and services
2. factor markets
3. financial markets

The flows to and from the markets for goods and services represent the “real” economy, shown in the left side of the diagram, in green. The right side of the diagram, in blue, represents the “financial” economy.

A sale of a final goods and services: goods and services sold to the final, or end, user (purchaser = final user)

A sale of an intermediate goods and services: goods and services that are inputs for production of final goods and services. (purchaser ≠ final user)

The GDP, or Gross Domestic Product, is the total value of all final goods and services produced in an economy during a given period, usually a year. Only production that takes place within the borders of a country is included in GDP.

The aggregate spending is the sum of consumer spending, investment spending, government purchases of goods and services, and export minus imports, is the total spending on domestically produced final goods and services in the economy. Which is basically the formula to calculate the GDP.

1. Adding up total value of all final goods and services produced.
2. Adding up spending on all domestically produced goods and services.
3. Adding up total factor income earned by households from firms in the economy.

Because counting the full value of each producer’s sales would cause us to count the same items several times and artificially inflate the calculation of GDP.

The way to avoid double-counting is to count only each producer’s value added in the calculation of the intermediate goods and services it purchases from other businesses. That is, we subtract the cost of inputs – the intermediate goods – at each stage of the production process.

It is a measure to the size of the economy of a country. But one must be careful when using GDP numbers in comparing countries, and especially when making comparisons over time.

In order to accurately measure the economy’s growth, we need a measure of aggregate output, the so called real GDP: the total quantity of final goods and services the economy produces. In other words: It is the total value of final goods and services produced in the economy during a year, calculated as if prices had stayed constant at the level of some given base year.

By tracking real GDP over time, we avoid the problem of changes in prices distorting the value of changes in production of goods and services over time.

A GDP number that has not been adjusted for changes in prices is calculated using the prices in the year in which the output is produced. Economists call this measure nominal GDP, GDP at current prices

Nominal GDP:
Year 1:   (2,000 x $0.25) + (1,000 x $0.50) = $1,000
Year 2:   (2,200 x $0.30) + (1,200 x $0.70) = $1,500
= an increase of 50%   ($1,500 - $1,000 = $500)

Real GDP:
Year 1:   (2,000 x $0.25) + (1,000 x $0.50) = $1,000
Year 2 output at year 1 prices is: (2,200 x $0.25) + (1,200 x $0.50) = $1,150
= an increase of 15%   ($1,150 - $1,000 = $150)

Chained dollars is a method of adjusting real dollar amounts for inflation over time, to allow the comparison of figures from different years. The U.S. Department of Commerceintroduced the chained-dollar measure in 1996. It generally reflects dollar figures computed with 2009 as the base year.

GDP, nominal or real, is a measure of a country’s aggregate output. Other thins equal, a country with a larger population will have higher GDP simply because there are more people working. So if we want to compare GDP across countries but want to eliminate the effect of differences in population size, we use the measure GDP per capita – GDP divided by the size of the population, equivalent to the average GDP per person.

The aggregate price level is a measure of the overall level of prices in the economy. Yet a huge variety of goods and services are produced and consumed in the economy. 

To measure average price changes for consumer goods and services, economists track changes in the cost of a typical consumer’s consumption bundle – the typical basket of goods and services purchased before the price changes.

A hypothetical consumption bundle, used to measure changes in the overall price level, is known as a market basket. 

The inflation rate is the annual percent change in an official price index. Typically the inflation rate is referring to the annual percent change in the consumer price index.

the consumer price index (often referred to simply as the CPI) is intended to show how the cost of all purchases by a typical urban family has changed over time. It is calculated by surveying market prices for a market basket that is constructed to represent the consumption of a typical family of four living in a typical American city.

The base period for the index is currently 1982-1984; that is, the index is calculated so that the average of consumer prices in 1982-1984 is 100.

The producer price index (or PPI, which used to be also known as the wholesale price index) the producer price index measures the cost of a typical basket of goods and services – containing raw commodities such as steel, electricity, coal, and so on – purchased by producers.

In economics, the GDP deflator (implicit price deflator) is a measure of the level of prices of all new, domestically produced, final goods and services in an economy in a year.

The GDP deflator for a given year is equal to 100 times the ratio of nominal GDP for that year to real GDP for that year.

a) $800
b) $30
c) $710
d) yes, both are $810

a) $12,271.90
b) $3,020.60
c) $528.90
d) $3,183.40
e) $17,947.00
f) 67.6%
g) 81.0%
h) 60.5%

a) $50 + $35 + $115 = $200
b) $200
c) $50 + $35 + $115 = $200

a) $100 +$60 +$115 = $275
b) $50 + $25 + $200 = $275
c) $100 + $60 + $115 = $275