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Definition of GDP
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Gross Domestic Product, in general measures total income of everyone in the economy. Also measures total expenditure on the economy's output of goods and services
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The GDP identity and the three approaches for measuring GDP
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Expenditure Approach -
C+I+G+NX
Income method -
Wages + Profit + Rent
Production method -
Final value of all goods and services - intermediate costs
C+I+G+NX
Income method -
Wages + Profit + Rent
Production method -
Final value of all goods and services - intermediate costs
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How to calculate the GDP using the spending approach
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Y = C + I + G + NX
Y = GDP
C = Consumption is total spending by the households sector on goods and services
I = Investment is the total spending on the goods that will be used in the future to produce more goods
G = Government Spending is the total spending on the goods and services purchased by Gov't at the federal, state, and local level
NX = net exports - imports.
Exports represent foreign spending on the economy's goods and services (spending on the goods and services is produced domestically by the U.S)
Imports are the portions of C, I, G that are spent on the goods and services produced abroad. (spending by locals on goods and services that are produced abroad)
Y = GDP
C = Consumption is total spending by the households sector on goods and services
I = Investment is the total spending on the goods that will be used in the future to produce more goods
G = Government Spending is the total spending on the goods and services purchased by Gov't at the federal, state, and local level
NX = net exports - imports.
Exports represent foreign spending on the economy's goods and services (spending on the goods and services is produced domestically by the U.S)
Imports are the portions of C, I, G that are spent on the goods and services produced abroad. (spending by locals on goods and services that are produced abroad)
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GNP vs GDP
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GDP tracks within the borders. GNP includes Americans no matter where they stand in the world
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Know the difference with Real vs Nominal GDP
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inflation can distort economic variables like GDP, so we have two versions of GDP: one is corrected for inflation, the other is not.
Nominal GDP - values output using current prices. it is not corrected for inflation.
Real GDP - values output using the prices of a base year. Real GDP is corrected for inflation
Nominal GDP - values output using current prices. it is not corrected for inflation.
Real GDP - values output using the prices of a base year. Real GDP is corrected for inflation
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Know the formula for calculating nominal and real GDP
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Nominal GDP = (Price x quantity)1 + (Price Quantity)2
Percentage Change = 100 x (NGDP t - (NGDP t-1))/NGDP t-1
Real GDP (Base Year BY) = (price BY x quantity t)1 +(P BY x Qt)2
t - any year (-1 means the year before)
Percentage Change = 100 x (NGDP t - (NGDP t-1))/NGDP t-1
Real GDP (Base Year BY) = (price BY x quantity t)1 +(P BY x Qt)2
t - any year (-1 means the year before)
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What is the GDP Deflator and how is it measured (formula)
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The GDP deflator is a measure of the overall level of prices
GDP = 100 x (NGDP/RGDP)
one way to measure the economy's inflation rate is to compute the percentage increase in the GDP deflator from one year to the next.
GDP = 100 x (NGDP/RGDP)
one way to measure the economy's inflation rate is to compute the percentage increase in the GDP deflator from one year to the next.
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Formula how to calculate the inflation rate from the deflator
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(Deflator {t} - Deflator {t-1}) / Deflator t-1 x 100
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Limitation or the problem with the gdp
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GDP does not value the quality of the environment, leisure time, non-market activity, such as the child care a parent provides his or her child at home, an equitable distribution of income
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What is the CPI and what does it really measure?
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an important measure of inflation and measures the typical consumer cost of living.
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Know who prepares the data in the us and how is it prepared
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Fix the basket, the beureau of labor statistcs (BLS) surveys consumers to determine what's in the typical consumer's "shopping basket"
Find the prices, the BLS collects data on the prices of all goods in the basket
Compute the basket's cost, use the prices to compute the total cost of the basket
Choose base year and compute the index, The CPI in any year equals =
cost of the basket in the current year / cost of the basket in base year x 100
Compare inflation rate the percentage change in the CPI from the proceeding period =
CPI this year - CPI last year / CPI Last year x 100
Find the prices, the BLS collects data on the prices of all goods in the basket
Compute the basket's cost, use the prices to compute the total cost of the basket
Choose base year and compute the index, The CPI in any year equals =
cost of the basket in the current year / cost of the basket in base year x 100
Compare inflation rate the percentage change in the CPI from the proceeding period =
CPI this year - CPI last year / CPI Last year x 100
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Formula for measuring the CPI and how to measure the cost of the consumption basket
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...
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How to measure inflation rate using the CPI
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...
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Problems with CPI
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substitution bias, introduction of new goods, unmeasured quality change, CPI overstates
CPI probably still overstates inflation by about 0.5 % per year
CPI probably still overstates inflation by about 0.5 % per year
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Indexation
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a dollar amount is indexed for inflation if it is automatically corrected for inflation by law or in a contract
for example, the increase in the CPI automatically determines the COLA in many multi year contracts
(COLA basis of cost of living adjustment)
The adjustment in social security payments and federal income tax brackets
for example, the increase in the CPI automatically determines the COLA in many multi year contracts
(COLA basis of cost of living adjustment)
The adjustment in social security payments and federal income tax brackets
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Formula for comparing ($) amounts in different time periods (_ for needs )
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amount today in$ = amount in year t $ x (Price level today / price level in year t) (using CPI)
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Formula for nominal vs real interest rate
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Real Interest Rate = Nominal interest rate - Inflation Rate
Nominal interest rate = Real interest rate + inflation rate
NGDP/RGDP x 100 = inflation rate
Nominal interest rate = Real interest rate + inflation rate
NGDP/RGDP x 100 = inflation rate
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factors of production
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land, labor, capital, entrepreneurship
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