Measuring the Circular Flow GDP, GNP, NNP, NI, PI, & DI CHAPTER: 7 & 8.
Transcript of Measuring the Circular Flow GDP, GNP, NNP, NI, PI, & DI CHAPTER: 7 & 8.
Measuring the Circular FlowMeasuring the Circular FlowGDP, GNP, NNP, NI, PI, & DIGDP, GNP, NNP, NI, PI, & DI
CHAPTER: 7 & 8
AP Macro Outline – 2005-2006 I. Basic economic concepts 8 – 12 % Chapters 1, 2, 3, 4, 5 & parts of 20 A. Scarcity, choice and opportunity costsB. Production possibilities curveC. Comparative advantage, specialization and exchangeD. Demand, supply, and market equilibriumE. Macroeconomic issues: business cycle, unemployment, inflation, growth II. Measurement of economic performance 12 – 16 % Chapters 4, 5, 7, 8A. National Income Accounts (4-6%)1. Circular flow2. Gross Domestic Product3. Components of GDP4. Real versus Nominal GDPB. Inflation measurement and adjustment (4-5%)1. Price indices2. Nominal versus real values3. Costs of inflationC. Unemployment (4-5%)1. Definition and measurement2. Types of unemployment3. Natural rate of unemployment
V. Inflation, Unemployment and Stabilization Policies 20 – 30% Chapters 16, 17, 18, 19A. Fiscal and Monetary policies (15-20%)1. Demand side effects2. Supply side effects3. Policy mix4. Government deficits and debtB. Inflation and unemployment (5-10%)1. Types of inflation a) Demand-pullb) Cost-push2. The Phillips Curve: short run versus long run3. Role of expectations VI. Economic Growth and Productivity 4 – 6% Mix of all chaptersA. Investment in Human capitalB. Investment in physical capitalC. Research and development and technological progressD. Growth policy VII. Open economy: International Trade and Finance 10 – 12% Chapters 6, 37, 38A. Balance of payment accounts1. Balance of trade2. Current account3. Capital accountB. Foreign exchange market1. Demand for and supply of foreign exchange2. Exchange rate determination3. Currency appreciation and depreciationC. Net Exports and Capital flowsD. Links to financial and goods markets.
AP Macro Outline – 2005-2006 I. Basic economic concepts 8 – 12 % Chapters 1, 2, 3, 4, 5 & parts of 20 A. Scarcity, choice and opportunity costsB. Production possibilities curveC. Comparative advantage, specialization and exchangeD. Demand, supply, and market equilibriumE. Macroeconomic issues: business cycle, unemployment, inflation, growth II. Measurement of economic performance 12 – 16 % Chapters 4, 5, 7, 8A. National Income Accounts (4-6%)1. Circular flow2. Gross Domestic Product3. Components of GDP4. Real versus Nominal GDPB. Inflation measurement and adjustment (4-5%)1. Price indices2. Nominal versus real values3. Costs of inflationC. Unemployment (4-5%)1. Definition and measurement2. Types of unemployment3. Natural rate of unemployment
NEXT!!!!
The Circular Flow RevisitedThe Circular Flow Revisited
BUSINESSESBUSINESSES HOUSEHOLDSHOUSEHOLDS
RESOURCERESOURCEMARKETMARKET
RESOURCESRESOURCES INPUTSINPUTS
$ COSTS$ COSTS $ INCOMES$ INCOMES
PRODUCTPRODUCTMARKETMARKET
GOODS &GOODS &SERVICESSERVICES
GOODS &GOODS &SERVICESSERVICES
$ CONSUMPTION$ CONSUMPTION$ REVENUE$ REVENUE
GOVERNMENTGOVERNMENT
REST OFREST OF THE WORLDTHE WORLD
U.S. ImportsU.S. ImportsU.S. ExpendituresU.S. Expenditures
U.S. ExportsU.S. ExportsForeign ExpendituresForeign Expenditures
I. The Importance ofI. The Importance of
Macroeconomic Macroeconomic MeasurementMeasurement
A. National Income Accounting:•1. Economic Pulse of the Nation1. Economic Pulse of the Nation
I. The Importance ofI. The Importance of
Macroeconomic Macroeconomic MeasurementMeasurement
I. The Importance ofI. The Importance of
Macroeconomic Macroeconomic MeasurementMeasurement
A. National Income Accounting:
•1. Economic Pulse of the Nation1. Economic Pulse of the Nation•2. Comparisons Over Time2. Comparisons Over Time
I. The Importance ofI. The Importance of
Macroeconomic Macroeconomic MeasurementMeasurement
I. The Importance ofI. The Importance of
Macroeconomic Macroeconomic MeasurementMeasurementA. National Income Accounting:
•1. Economic Pulse of the Nation1. Economic Pulse of the Nation•2. Comparisons Over Time2. Comparisons Over Time•3. Basis For Public Policy3. Basis For Public Policy
The Importance ofThe Importance of
Macroeconomic Macroeconomic MeasurementMeasurement
The Importance ofThe Importance of
Macroeconomic Macroeconomic MeasurementMeasurement
National Income Accounting:
•Economic Pulse of the NationEconomic Pulse of the Nation•Comparisons Over TimeComparisons Over Time•Basis For Public PolicyBasis For Public Policy
What Are These Accounting Measures?
B. GROSS DOMESTIC PRODUCT...
the total market value of all final goods and services produced inside the USA in one year no matter who owns the company!!!!
C. GROSS NATIONAL PRODUCT...the total market value of all final goods and services produced in the economy in one year...INCLUDES: the value of US owned production inforeign countries, but EXCLUDES: foreign owned companies inside
the USA.
GROSS DOMESTIC PRODUCT...the total market value of all final goods and services produced in the economy in one year...
GNP vs. GDPAP Essay
2001GNP=
GDP + net receiptsOf American Companies
Abroad
NOTES:NOTES:
GROSS Domestic &National PRODUCT...
the total market value of all final goods and services produced in the economy in one year...•D. CharacteristicsD. Characteristics
• 1. Final Goods – to measure1. Final Goods – to measureaccurately we want to take careaccurately we want to take careto ensure that goods and servicesto ensure that goods and services
are only counted once.are only counted once.
GROSS DOMESTIC/NATIONAL PRODUCTthe total market value of all final goods and services produced in an economy in one year...
•Final Goods vs.Final Goods vs.•2. Intermediate Goods2. Intermediate GoodsGoods and services that Goods and services that are purchased for furtherare purchased for furtherprocessing and processing and manufacturing.manufacturing.
GROSS DOMESTIC PRODUCT...
•Final Goods - onlyFinal Goods - only•Intermediate Goods - excludedIntermediate Goods - excluded
•3. Value Added - Approach3. Value Added - Approach
the total market value of all final goods and services produced in the economy in one year...
Calculating the GDP by this Method!
•4. A Monetary Measure•5. Avoid Double Counting•6. Excludes Nonproduction Transactions
GROSS DOMESTIC & NATIONAL PRODUCTS ...
the total market value of all final goods and services produced in the economy in one year…only in the USA for GDP or by US companies abroad for GNP.GDP and GNP are both:
•A Monetary Measure•To Avoid Double Counting: GDP Excludes Nonproduction Transactions
GROSS DOMESTIC PRODUCT...
7. Examples of Nonproduction Transactions7. Examples of Nonproduction Transactions - Financial Transactions are excluded:- Financial Transactions are excluded:
- Public Transfer Payments- Public Transfer Payments(welfare, social security, veteran’s benefits)(welfare, social security, veteran’s benefits)
- Private Transfer Payments- Private Transfer Payments ($ money from parents or rich relative)($ money from parents or rich relative)
- Security Transactions- Security Transactions(Buying or selling existing stocks and bonds)(Buying or selling existing stocks and bonds)
GROSS DOMESTIC& NATIONAL PRODUCT...
the total market value of all final goods and services produced in the economy in one year...Excludes:Excludes:Financial TransactionsFinancial Transactions - Secondhand Sales – they have - Secondhand Sales – they have already been counted in already been counted in previous years.previous years.
GROSS DOMESTIC& NATIONAL PRODUCT...
the total market value of all final goods and services produced in the economy in one year...Excludes:Excludes:Financial TransactionsFinancial TransactionsSecondhand Sales Secondhand Sales Services for which no Services for which no compensation is given.compensation is given.
GROSS DOMESTIC PRODUCT...the total market value of all final goods and services produced in the economy in one year...•A Monetary Measure,
Avoids Double Counting, & Excludes Nonproduction Transactions
•II. Two Sides to GDP
B. Expenditures ApproachB. Expenditures Approach
Amount spent to purchasethis year’s total output
Amount spent to purchasethis year’s total output
GROSS DOMESTIC PRODUCT...
C. Income ApproachC. Income ApproachThe money income derived from production of this year’s output
The money income derived from production of this year’s output
B. Expenditures ApproachB. Expenditures ApproachAmount spent to purchasethis year’s total output
Amount spent to purchasethis year’s total output
GROSS DOMESTIC PRODUCT...
1. GDP = C + I + G + X - M
1. GDP = W + P + i + R + Inbt + Dep
Expenditures ApproachExpenditures Approach
1.1. Back to ExpendituresBack to Expenditures2.2. C + I + G + X - MC + I + G + X - M- - Personal Consumption ExpenditurePersonal Consumption Expenditure ( ( C ))
1.1. Back to ExpendituresBack to Expenditures2.2. C + I + G + X - MC + I + G + X - M- - Personal Consumption ExpenditurePersonal Consumption Expenditure ( ( C ))
Expenditures ApproachExpenditures Approach
Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))
• DurablesDurables• DurablesDurables
Expenditures ApproachExpenditures Approach
Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))
• DurablesDurables• NondurablesNondurables• DurablesDurables• NondurablesNondurables
Expenditures ApproachExpenditures Approach
Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))
• DurablesDurables• NondurablesNondurables• ServicesServices
• DurablesDurables• NondurablesNondurables• ServicesServices
Expenditures ApproachExpenditures Approach
Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))
Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))
Gross – Total investment (added and replacement)Private – Individual firms, not the governmentDomestic – in the U.S. not overseasInvestment??? See next slide
Expenditures ApproachExpenditures Approach
Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))
• Machinery, Equipment, & Tools• Machinery, Equipment, & Tools
Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))
Expenditures ApproachExpenditures Approach
Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))
• Machinery, Equipment, & Tools• All Construction – residential and commercial
• Machinery, Equipment, & Tools• All Construction – residential and commercial
Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))
Expenditures ApproachExpenditures Approach
Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))
• Machinery, Equipment, & Tools• All Construction• Changes in Inventories - GDP measures this year’s total Output/production. - Even though a good may sit in inventory and not be sold it was still produced so it is counted. - Increase in inventories is an addition to GDP - Decrease in inventories is a subtraction to GDP
• Machinery, Equipment, & Tools• All Construction• Changes in Inventories - GDP measures this year’s total Output/production. - Even though a good may sit in inventory and not be sold it was still produced so it is counted. - Increase in inventories is an addition to GDP - Decrease in inventories is a subtraction to GDP
Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))
Expenditures ApproachExpenditures Approach
Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))
• Machinery, Equipment, & Tools• All Construction• Changes in Inventories
• Machinery, Equipment, & Tools• All Construction• Changes in Inventories
Gross vs. Net InvestmentGross vs. Net Investment
Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))
Gross Private Domestic Investment
Total investment in a year.
Net Private Investment:
Gross private domestic investment – (minus) depreciation!
Expenditures ApproachExpenditures Approach
Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))
• Machinery, Equipment, & Tools• All Construction• Changes in Inventories
• Machinery, Equipment, & Tools• All Construction• Changes in Inventories
Gross vs. Net InvestmentGross vs. Net Investment
Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))
NOTES:NOTES:
Net InvestmentNet Investment& Economic Growth& Economic Growth
Expenditures ApproachExpenditures Approach
Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))
• Machinery, Equipment, & Tools• All Construction• Changes in Inventories
• Machinery, Equipment, & Tools• All Construction• Changes in Inventories
Gross vs. Net InvestmentGross vs. Net Investment
Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))
NOTES:NOTES:
Net InvestmentNet Investment& Economic Growth& Economic Growth
Expanding EconomyExpanding Economy
Expenditures ApproachExpenditures Approach
Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))
• Machinery, Equipment, & Tools• All Construction• Changes in Inventories
• Machinery, Equipment, & Tools• All Construction• Changes in Inventories
Gross vs. Net InvestmentGross vs. Net Investment
Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))
NOTES:NOTES:
Net InvestmentNet Investment& Economic Growth& Economic Growth
Expanding EconomyExpanding EconomyStatic EconomyStatic Economy
Expenditures ApproachExpenditures Approach
Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))
• Machinery, Equipment, & Tools• All Construction• Changes in Inventories
• Machinery, Equipment, & Tools• All Construction• Changes in Inventories
Gross vs. Net InvestmentGross vs. Net Investment
Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))
NOTES:NOTES:
Net InvestmentNet Investment& Economic Growth& Economic Growth
Expanding EconomyExpanding EconomyStatic EconomyStatic EconomyDeclining EconomyDeclining Economy
Economies Grow as Investment rises:
Investment
Shifts PPC’s to
the right!
Economies grow in
The Long and
Short Run
Because of Investment!
AmericanBusiness
Investment is Volatile!!!!
Keynes the father of MACRO believed business Investment to be the most volatile of the factors in GDP!
Can your family stop paying its bills?
Can government not pay social security?
Recession2000-2001
Fear9/11
Y-2K
Expenditures ApproachExpenditures Approach
Government Purchases (Government Purchases ( G ))Government Purchases (Government Purchases ( G ))
Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))
Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))
Expenditures ApproachExpenditures Approach
Government Purchases (Government Purchases ( G ))Government Purchases (Government Purchases ( G ))
Net Exports (Net Exports ( Xn ) = ) = (X – M)(X – M)Net Exports (Net Exports ( Xn ) = ) = (X – M)(X – M)
Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C ))
Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))Gross Private Domestic Investment ( Gross Private Domestic Investment ( Ig ))
The Circular Flow RevisitedThe Circular Flow Revisited
BUSINESSESBUSINESSES HOUSEHOLDSHOUSEHOLDS
RESOURCERESOURCEMARKETMARKET
RESOURCESRESOURCES INPUTSINPUTS
$ COSTS$ COSTS $ INCOMES$ INCOMES
PRODUCTPRODUCTMARKETMARKET
GOODS &GOODS &SERVICESSERVICES
GOODS &GOODS &SERVICESSERVICES
$ CONSUMPTION$ CONSUMPTION$ REVENUE$ REVENUE
GOVERNMENTGOVERNMENT
REST OFREST OF THE WORLDTHE WORLD
U.S. ImportsU.S. ImportsU.S. ExpendituresU.S. Expenditures
U.S. ExportsU.S. ExportsForeign ExpendituresForeign Expenditures
GDP = C + I + G + (X – M)
GDP = W + P + i + R + InBT + Dep
SummarySummary
C + Ig + G + Xn = GDPC + Ig + G + Xn = GDP
Expenditures ApproachExpenditures Approach
Next: The Income ApproachNext: The Income Approach
SummarySummary
C + Ig + G + Xn = GDPC + Ig + G + Xn = GDP
Expenditures ApproachExpenditures Approach
• 1. Compensation of Employees1. Compensation of Employees
C. Incomes ApproachC. Incomes Approach
Largest, includes not only wages but other compensationcosts such as social security, pensions, health funds etc…
• 1. Compensation of Employees• 2. Rents2. Rents
Incomes ApproachIncomes Approach
Payments to landlords, rent on office space.It is net rental income – depreciation. This will always be calculated for you as final rents.
• 1. Compensation of Employees• 2. Rents• 3. Interest3. Interest
Incomes ApproachIncomes Approach
Payments to households on savings, CD’s, corporate bonds.
• 1. Compensation of Employees• 2. Rents• 3. Interest• 4. Proprietors’ Income4. Proprietors’ Income
Incomes ApproachIncomes Approach
Profits of the small business owner.
• 1. Compensation of Employees• 2. Rents• 3. Interest• 4. Proprietors’ Income• 5. Corporate Profits5. Corporate Profits
Incomes ApproachIncomes Approach
Corporate earnings can be distributed in three ways.
• Compensation of Employees• Rents• Interest• Proprietors’ Income• Corporate Profits 1- Corporate Income Taxes1- Corporate Income Taxes
Incomes ApproachIncomes Approach
• Compensation of Employees• Rents• Interest• Proprietors’ Income• Corporate Profits 1- Corporate Income Taxes1- Corporate Income Taxes 2- Dividends2- Dividends
Incomes ApproachIncomes Approach
• Compensation of Employees• Rents• Interest• Proprietors’ Income• Corporate Profits 1- Corporate Income Taxes1- Corporate Income Taxes 2- Dividends2- Dividends 3- Undistributed Corporate Profits3- Undistributed Corporate Profits
Incomes ApproachIncomes Approach
So far we have something called national income
• 1. Compensation of Employees• 2. Rents• 3. Interest• 4. Proprietors’ Income• 5. Corporate Profits - Corporate Income Taxes- Corporate Income Taxes - Dividends- Dividends - Undistributed Corporate Profits- Undistributed Corporate Profits• 6. 6. Indirect Business Taxes &Indirect Business Taxes & DepreciationDepreciation
Incomes ApproachIncomes Approach
Depreciation is also....Depreciation is also....
Consumption of Fixed CapitalConsumption of Fixed Capital
Net American Factor IncomeNet American Factor IncomeEarned Abroad less foreignEarned Abroad less foreignIncomes in the US = GNPIncomes in the US = GNP
Value Added Approach
Sum of the value added in each step of the production….with round about production this may include many, many steps!
Gross Domestic Product’s 3 methods of calculation: GDP = C + I + G + (X – M) GDP = W + i + R + P + Inbt + Dep Value Added GNP = GDP + (US production in
foreign countries – Foreign
production in the US)Most Famous and Largest of the National Income Accounts!!!!!
Gross National Product GNP = GDP – Foreign
production in the US + US production in foreign
countries Net Foreign Factors (NFF) GNP = GDP + NFF
Significance – shows how much foreign production takes placein the U.S compared to U.S. production overseas.Not an indicator relied on by economists as much today.Economists are concerned with output with in each respective Country no matter who owns the company.
Net National ProductNet Domestic Product
NNP = GNP – DepreciationDepreciation: the loss in value from use of a capital good.
NDP = GDP – DepreciationDepreciation: the loss in value from use of a capital good.
Many Economist Consider these the best measures of the national economy!!!!
Why???? Investment in capital is what pushes us beyond that PPC!!!!
National Income
NI = W + P + i + R NI = GDP – (Dep +
Inbt)
NI = NDP - Inbt
Remember, Weasel Puss is Red!!!
This shows us what Households andBusinesses made as income.It takes out depreciation ($ spent toreplace worn out capital) andSales and Excise taxes that go tothe government.
Personal Income
PI = NI – (RE + CPT + FICA) + TP• RE: Retained Earnings/ Corporate Earnings• CPT: Corporate Profit Taxes• FICA: Federal Insurance Corporation of
America ( Social Security )• TP: Transfer Payments
This shows what Households earned as income!!!
Disposable Income
DI = PI – PT DI = C + S This shows what householdshave to spend. Remember what isn’t taken awayin taxes we either spend or save.
Spending is a big indicator of economic growth!!!!
Do you get it?????? Use the following information to calculate GDP,
GNP and NNP, NDP and NI. Profits 1150, consumer consumption 8000, net
exports (-150), wages 7250, depreciation 359, Investment 635, interest 311, indirect business taxes 200, rent 101, net foreign factors 40, government expenditures 886.
GDP – expenditure approach?? GDP – income approach?? GNP?? NNP?? NDP?? NI – income approach?? Congratulations you just completed question 7 of your
homework for 10 points.
Marginal Propensity to Consume & Marginal Propensity to Save
$1.00 = MPC + MPS MPC = ^C/^DI MPS = ^S/^DI
A measurement that attempts to ask thequestion, to what extent does consumptionspur economic growth?
II. Comparing GDP’sII. Comparing GDP’s
A. NOMINAL vs. REAL GDPA. NOMINAL vs. REAL GDPCurrent priced GDP’s or Nominal GDP’s cannot be compared!
GDP’s corrected for inflation or Real GDP’s can be compared!
Measuring the Price LevelMeasuring the Price Level
B. The GDP Deflator/Index....
NOMINAL & REAL GDPNOMINAL & REAL GDP
Measuring the Price LevelMeasuring the Price Level
The GDP Deflator/Index....
NOMINAL & REAL GDPNOMINAL & REAL GDP
......inflating for falling pricesinflating for falling prices
Measuring the Price LevelMeasuring the Price Level
The GDP Deflator/Index....
NOMINAL & REAL GDPNOMINAL & REAL GDP
......inflating for falling pricesinflating for falling prices
......deflating for rising pricesdeflating for rising prices
Converting a Nominal to a Real
=PI of year
you want to compare
x 100RGDP2005 NominalGDP 2005
Inflating & Deflating GDPInflating & Deflating GDP
or GDP Deflator/GDP index
Top 10 Economic Powers in the World By GDP
1. United States $10,910,000,000,000
2. Japan $4,765,000,000,000
3. Germany $1,866,000,000,000
4. Britain $1,427,000,000,000
5. France $1,294,000,000,000
6. China $1,080,000,000,000
7. Italy $1,074,000,000,000
8. Canada $704,000,000,000
9. Brazil $701,000,000,000
10. Mexico $575,000,000,000
Per capita RGDP or RGDP/Person
RGDP/Population If RGDP is rising
slower than population, standard of living is falling!
If RGDP is rising faster than population standard of living is rising!
Top Countries in GDP Per Capita
1. Norway $38,500
2. USA $37,500
3. Switzerland $31,000
4. Denmark $30,500
5. Iceland $30,000
6. Finland $27,500
7. Britain $27,300
8. Germany $27,200
9. Sweden$27,100
10. France $27,000
11. Italy $26,900
12. Japan $26,800
13. Spain $23,000
Source – The Economist
Bottom 10 Countries GDP Per Capita
1. Sierra Leone $480
2. Tanzania $501
3. Burundi $578
4. Malawi $586
5. Ethiopia $628
6. Sudan $664
7. Guinea-Bissau $678
8. Congo $727
9. Mali $753
10. Niger $753Source – United Nations
INFLATION: INFLATION: INFLATION: INFLATION:
A sustained increase in theA sustained increase in the average/general level of pricesaverage/general level of pricesA sustained increase in theA sustained increase in the average/general level of pricesaverage/general level of prices
Rate of inflation (CPI and PPI)Rate of inflation (CPI and PPI)calculated using index numbers calculated using index numbers based on a fixed/weighted based on a fixed/weighted Market BasketsMarket Baskets
Rate of inflation (CPI and PPI)Rate of inflation (CPI and PPI)calculated using index numbers calculated using index numbers based on a fixed/weighted based on a fixed/weighted Market BasketsMarket Baskets
CPI – PPI – GDP DeflatorCPI – PPI – GDP Deflator
The big 3 measures of inflation! CPI – consumer prices PPI – producer prices GDP deflator – all prices
Inflationary Measures
Consumer Price Index: 250 – 400 item weighted market basket of goods and services purchased by urban/suburban families of moderate income.
Producer Price Index: a similar weighted market basket purchased by businesses
GDP Index: all items purchased in the American economy
Consumer Price Index
= Price of same marketbasket in base year
x 100CPI
Price of 2005 market basket
Measuring the Price LevelMeasuring the Price Level
Consumer Price Index is aBase year average of 1982-4
= Price of same marketbasket in base period
(1982-1984)
x 100CPI
Price of 1982-1984 market basket in
specific year (2005)
Measuring the Price LevelMeasuring the Price Level
CPI82-84 = 100
Producer Price Index
= Price of same marketbasket in base period
(1982-1984)
x 100PPI
Price of the 2005market basket
Measuring the Price LevelMeasuring the Price Level
CPI Calculated using
the same method but different market baskets!!!
See Excel Spread Sheets on CPI.
My family was a CPI family and you’re not!
http://minneapolisfed.org/research/data/us/calc/index.cfm
Speed of Inflation Creeping
• 3-5 % Galloping
• 8-15% Hyper
• 100+%
In the American Economy Inflation at Greater Than 5% is consideredA problem that the Federal Government or the Fed should Fix!
Hyperinflation was rare before the 20th century; older economies would revert to either specie metals or barter once inflation reached a certain level. The widespread use of fiat money created the possibility of hyperinflation as governments often tended to print larger
amounts of money to finance their expenses. Inflation results where such an increase in money supply occurs without regard for the actual market demand. Rates of inflation of several hundred percent per month are often seen.
Extreme examples include Germany in the early 1920s when the rate of inflation hit 3.25 million percent per month; Greece in the mid-1940s with 8.55 billion percent per month; and Hungary during the same approximate time period at 4.19 quintillion percent per month. Other more moderate examples include Eastern European countries in the period of economic transition in the early 1990s and in Bolivia and Peru in 1985 and 1988, respectively.
Nations such as Ghana in North Western Africa continue to this day to have inflation in the order of 30% per annum.
Inflation 1923/24: a woman feeds her tiled stove with money.The Democratic Weimer Republic created by Versailles is blamed.
Money was printed to pay Versailles’s imposed reparations!
Value of moneyDramaticallyDeclines inHyperInflation!
4 years tuition Saved in 1922,Buys a postageStamp in 1923!
Money wasCheaper thanCoal!
Hyperinflation!
Various workers also had to be paid by the Weimar Government, additional currency was printed, which fueled a period of hyperinflation. The value of the Mark declined from 4.2 per US dollar to 1,000,000 per dollar by August 1923 and 4,200,000,000,000 per dollar on November 20. On December 1, a new currency was established at the rate of 1,000,000,000,000 old marks for 1 new mark, the Rentenmark.
1 - Measuring Inflation & 1 - Measuring Inflation & DeflationDeflation
Measuring the Price LevelMeasuring the Price Level
1 - Measuring Inflation & 1 - Measuring Inflation & DeflationDeflation
2 - Comparing GDPs2 - Comparing GDPs
Measuring the Price LevelMeasuring the Price Level
Consumer Price Index Question 11 – Randy’s Year!
= x 100100Year #1 Market Basket
$150
Measuring the Price LevelMeasuring the Price Level
CPI base year = 100
Year #1 Market Basket$150
Price Indexin a given
year=
Price of market basket
in a specific year2005
Price of the same marketbasket in the base year 1982-1984
x 100
Measuring the Price LevelMeasuring the Price Level
Price Index: CPI, PPI, GDPD
Price of Randy’s market basket year 2 = $153
Price of Randy’s market basket year 1 = $150
x 100=102
Price Indexin a given
year =
Price of market basket
in a specific year
Price of the same marketbasket in the base year
x 100
Measuring the Price LevelMeasuring the Price Level
Price Index
Consumer Price Index
= Price of same weighted market basket in base period (1982-1984)
x 100CPI
Price of 2005 weighted
market basket
Measuring the Price LevelMeasuring the Price Level
Producer Price Index
= Price of same marketbasket in 1982-84
x 100PPI
Price of some market basket in specific year -
2005
Measuring the Price LevelMeasuring the Price Level
GDP, Social Welfare, FlawsGDP, Social Welfare, Flaws Nonmarket TransactionsLeisureImproved Product QualityComposition and Distribution of
OutputPer Capita OutputGDP and the EnvironmentThe Underground Economy
THE UNDERGROUND ECONOMY AS A PERCENT OF GDPTHE UNDERGROUND ECONOMY AS A PERCENT OF GDP
GLOBAL PERSPECTIVE
0 5 10 15 20 25 30
GreeceSpain
ItalyPortugalBelgiumSweden
GermanyFrance
HollandBritain
United StatesJapan
Switzerland
0 5 10 15 20 25 30
GreeceSpain
ItalyPortugalBelgiumSweden
GermanyFrance
HollandBritain
United StatesJapan
Switzerland
THE UNDERGROUND ECONOMY AS A PERCENT OF GDPTHE UNDERGROUND ECONOMY AS A PERCENT OF GDP
GLOBAL PERSPECTIVE
national income accounting
gross domestic productfinal goodsintermediate goodsmultiple countingvalue addedexpenditures approachincome approachpersonal consumption
expendituresgross private domestic
investmentnet private domestic
investmentgovernment purchases
net exportsnational incomeindirect business
taxesconsumption of fixed
capitalnet domestic productpersonal incomedisposable incomenominal GDPreal GDPprice indexconsumer price indexCopyright McGraw-Hill, Inc.
1999
Quiz – Thursday, December 1
8- points multiple choice from chapter 23- points GDP, GNP, NDP, NI, PI, DI –
formulas. 4 points – Calculating RGDP and CPI’s –
formulas. 35 points total Happy December No notes for quiz!