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Understanding GDP and Real GDP - A Recap

This lecture recap covers topics such as GDP (primary monetary measure), Personal Income, Nominal GDP vs. Real GDP, Adjusting Nominal GDP, Consumer Price Index, GDP Shortfalls, GDP per capita, and more.

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Understanding GDP and Real GDP - A Recap

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  1. ECO 121 Macroeconomics Spring 2010 Aisha Khan Section L & M Lecture Five

  2. Recap • GDP (primary monetary measure) • Chapter 6 continued

  3. Personal Income • All income received whether earned or unearned • Different from NI because some income earned paid out as social security taxes (payroll taxes), corporate income taxes and undistributed taxes, corporate profits (not received by households) • Transfer payments not earned • PI = NI – income earned but not received + income received but not earned

  4. Disposable income • Disposable income = PI – personal taxes • DI = consumption + saving

  5. Nominal GDP vs. Real GDP • GDP  Total market value of all final goods and services produced in a given year • Measured in money value • Money values may change from year to year  then how do we compare GDP values from year to year? • Must correct for changes due to inflation/deflation

  6. Nominal GDP is calculated at current prices prevailing when output was produced • Real GDP is a figure which is adjusted for price changes

  7. Adjusting Nominal GDP • Two methods • Determine a price index  adjust Nominal GDP by dividing by the price index • Price index = (price of mkt basket /price of mkt basket in base year) * 100 • Real GDP = nominal GDP / price index (hundreths)

  8. Gather separate data on physical output  determine what it would sell for in base year • Next we can identify the price index • Price index = Nominal GDP/ Real GDP

  9. Real GDP • Allows a better and direct comparison of physical output from year to year • Constant “dollar” measuring device • Purchasing power has been standardized

  10. Consumer Price Index • Designed to measure the changes in the cost of a constant standard of living for a typical consumer • Fixed weight approach • Items in the basket remain the same • Less broad and doesn’t change its basket each year

  11. GDP shortfalls • Doesn’t measure some useful output such as • Homemakers’ services • Parental child care • Volunteer efforts • Doesn’t measure improvements in quality or increased leisure time • Doesn’t measure improved living conditions

  12. No value adjustments in the composition of output or income distribution • Underground economy • Illegal activities aren’t counted • Legal activities may also be part of underground activities such as to avoid taxation • Harmful effects of production on the environment aren’t adjusted in GDP

  13. GDP per capita • Better measure of standard of living • Non economic sources of well being (courtesy, crime reduction) not covered in GDP

  14. Reminders • Quiz 1 • Chapters 7, 4, 5, (chapter 6 till Income approach)

  15. Use the following to calculate a) GDP, b) NDP, c) NI d) PI e) DI

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