Chapter 5 Macroeconomics the Big Picture Hossain: MSMC.
-
Upload
roxanne-fowler -
Category
Documents
-
view
229 -
download
0
Transcript of Chapter 5 Macroeconomics the Big Picture Hossain: MSMC.
Chapter 5
Macroeconomics the Big Picture
Hossain: MSMC
Gross Domestic Product In simple terms, GDP is the total
output produced in an economy It is often used to measure:
Hossain: MSMC 2
The size of an economy USA: 14.59 trillion
Japan: 4.91 trillion
Germany: 3.65 trillion
The performance of an economy
US GDP shrunk by 4% in the 3rd quarter of 2009
US GDP grew by 2% in the 1st
quarter of 2010
Standard of living in an economy
Commonly measured by per capital GDP
2008 GDPs
Hossain: MSMC 3
Gross Domestic Product Formal definition: Nominal GDP
Total value of all final goods and services produced in an economy in given year valued at the current price
Real GDP
Hossain: MSMC 4
Total value of all final goods and services produced in an economy in given year valued at the current price
Total value of all final goods and services produced in an economy in given year adjusted to eliminate the effect of price change
final
current price
adjusted to eliminate the effect of price change
Nominal and Real GDP Consider the following table
Hossain: MSMC 5
Nominal GDP in 2008
Goods and Services
2008 2009
P Q P Q
Text Book 100 500
Hair Cuts 10 400
100 X 500 + 10 X 400 = 54,000
Nominal and Real GDP
Hossain: MSMC 6
Nominal GDP in 2008
Goods and Services
2008 2009
P Q P Q
Text Book 100 500 150 400
Hair Cuts 10 400 15 300
100 X 500 + 10 X 400 = 54,000
Nominal GDP in 2009
150 X 400 + 15 X 300 = 64,500
Nominal and Real GDP
Hossain: MSMC 7
Real GDP in 2008
Goods and
Services
2008 2009 1985
P Q P Q P
Text Book 100 500 150 400 75
Hair Cuts 10 400 15 300 5
75 X 500 + 5 X 400 = 39,500
Real GDP in 2009
75 X 400 + 5 X 300 = 31,500
Business Cycle Economy does not grow at a
constant rate Rather, it has a cyclical pattern,
which can be described by following components:
Hossain: MSMC 8
Expansion
Recession
Peak
Trough
Business Cycle
An expansion is a sustained period in which real GDP is rising.
A recession is a sustained period in which real GDP is falling.
A peak is the point of the business cycle at which an expansion ends and a recession begins.
A trough is the point of the business cycle at which a recession ends and an expansion begins.
Business Cycle
Hossain: MSMC 10
U.S. Real GDP
Hossain: MSMC 11
Changes in Price Level
Price Levels are different from Price we learned in chapter 3
It is NOT the price of apple, orange or banana
It is the average price of all goods and services in an economy
Usually, measured by a basket of representative goods and services
Hossain: MSMC 12
Changes in Price Level
For example CPI or Consumer Price Index tracks the prices of goods and services purchased by a typical urban family of four.
When price level rises, we call this Inflation
When price level falls, we call this deflation
Hossain: MSMC 13
Inflation in the U.S.
Hossain: MSMC 14
Impacts of Inflation
Unanticipated inflation has following adverse impacts:
Fall of purchasing power Redistributes wealth Creates uncertainty Hurts lenders and benefits
borrowers
Hossain: MSMC 15
Impacts of deflation
Unanticipated deflation has following adverse impacts:
Redistributes wealth Creates uncertainty Hurts borrowers and benefits
lenders
Hossain: MSMC 16
Computation of CPI
Price Index is a number whose movement reflects the changes in average price level
In any index system, we select a base period and compare the changes in price levels from the base period
Typically, indexing is done in such a way that,
Price Index for the Base Period= 100
Hossain: MSMC 17
Computation of CPI Lets assume that Base period is 1985.
So, CPI1985 = 100
Now, if I tell you that CPI2000 = 150 What can we say about price level in
2000? Clearly, price level has increased from 1985 Therefore, economy observed inflation By how much? It is 50% compared to the base year This is the advantage of indexing to 100
Hossain: MSMC 18
Another Example Lets assume again, CPI1985 = 100
Now, if I tell you that CPI2005 = 160 What can we say about price level in
2005? Again, price level has increased from 1985 Therefore, economy observed inflation By how much? It is 60% compared to the base year Can we say anything about inflation
compared to 2000 (CPI2000=150)?
Hossain: MSMC 19
Another Example To compute inflation compared to non-
base years, we need some simple computations
Note we have, CPI1985 = 100 CPI2000 = 150 CPI2005 = 160 We like to know how price level had changed
form 2000 to 2005 Again looks like its an inflation. But how
much? We want to know, 150 to 160 is an increase
of how many percentage points?Hossain: MSMC 20
Percentage Computation All percentage computations, use the
same formula:
So, computing percentage change in CPI from 2000 (150) to 2005 (165)
160 – 150 150
Hossain: MSMC 21
NEW OLD
OLDX 100
X 100 = 6.67%
In class Exercise Assume,
CPI1985 = 100 CPI1975 = 88 CPI2002 = 138 Compute the inflation rate in 1975
compared to the base year Compute the inflation rate in 2002
compared to the base year Compute the inflation rate in 2002
compared to 1975 Note inflation rate means percentage
change in CPIHossain: MSMC 22
Construction of CPI BLS surveys, computes and publishes CPI
To compute CPI, we first compute the Cost of basket (COB)
Here, COB2000 =10x4 + 15x1 + 2x3 = 61
Hossain: MSMC 23
Price Data
Goods and Services Market Basket 2000Price
1985 Price
Apple 10 pounds $4.00 $2.00
Banana 15 pounds $1.00 $0.50
Cat food 2 bags $3.00 $0.25
Construction of CPI
Here, COB2000 =10x4 + 15x1 + 2x3 = 61
Here, COB1985 =10x2 + 15x.50 + 2x.25 = 28
Hossain: MSMC 24
Price Data
Goods and Services Market Basket 2000Price
1985 Price
Apple 10 pounds $4.00 $2.00
Banana 15 pounds $1.00 $0.50
Cat food 2 bags $3.00 $0.25
Formula for CPI Use COB numbers to the formula for
CPI
Using this formula compute CPI of 1985 (the base year) CPI of 2000
Hossain: MSMC 25
CPI xxxx =COBxxxx
COBBaseYear
X 100