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Macro Chapter 6

Macro Chapter 6. Presentation 3. Shortcomings of GDP. 1. Nonmarket Activities Excluded- ex. The work of a housewife or a carpenter fixing his own home 2. Improved Product Quality- a $200 cell phone now is much better than one from 2000

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Macro Chapter 6

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  1. Macro Chapter 6 Presentation 3

  2. Shortcomings of GDP • 1. Nonmarket Activities Excluded- ex. The work of a housewife or a carpenter fixing his own home • 2. Improved Product Quality- a $200 cell phone now is much better than one from 2000 • 3. Underground Economy- illegal and off the books activities such as gambling and under the table work • 4. No accounting for the negative pollution caused by work • 5. Raising GDP does not necessarily improve a country

  3. Disposable Income • Personal income minus taxes (state, local, federal income tax, property tax, and inheritance tax)--- Save or Spend what’s left

  4. Change in Prices • Inflation- a rise in the general level of prices in an economy • Deflation- a decline in the economy’s price level

  5. Nominal GDP • The GDP measured using the price of the goods purchased • = the sum of: # of units Sold x Price • Not adjusted for inflation

  6. Real GDP • Adjusted for inflation • Inflated (when prices fall) or deflated (when prices rise) to show changes in price level • Ex- a hamburger in 1970 sold for $.50 now may sell for $4.00- this is the same amount of output at a higher $$ (deflate this to compare with 1970)

  7. GDP Price Index (GDP Deflator) • A measure of the price of a specific collection of goods and services, called a “market basket,” in a given year as compared to the price of an identical or very similar basket in a reference year • The reference year is known as the “base year”

  8. GDP Price Index Contd. • Price index in a given year = (price of market basket in specific year/ price of same basket in base year) x100

  9. Example of Price Index • A pizza costs $10 in year 1, the base year. In year 2 the price goes to $20. • Price Index = ??? • PI = 20/10 x 100 = 200 • Rate of change = (new – old)/old x 100 • = ((200-100)/100) x 100 • That is, the price rose by 100%, since the base year price index always = 100

  10. Finding Real GDP • Real GDP = nominal GDP/price index (in hundredths)

  11. Alternative Method • Price index (in hundredths) = nominal GDP/Real GDP ***manipulation of the previous formula

  12. GDP Index Example • Year Units $ Nominal Real Price In. • 1 5 10 $50 $50 100 • 2 7 20 $140 $70 200 • 3 8 25 $200 $80 250 • 4 10 30 ____ ____ ____ • 5 11 28 ____ ____ ____

  13. Answers- Year 4 • Nominal GDP = $30 x 10 units = 300 • Price index = price of market basket/basket price base year x 100 = 30/10 x 100= 300 • Real GDP = nominal GDP/ price index (hund.) = 300/3.00 = $100

  14. Year 5 • Nominal GDP = 11 units x $28 = $308 • Price index = (basket price given yr./price of basket in base year) x 100 • = 28/10 x 100 = 280 • Real GDP = Nominal GDP/price index (hund.) = 308/2.80 = $110

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