MacroEcon Midterm1 MasterDoc

University of Notre Dame **We aren't endorsed by this school
MARS 2020
Oct 16, 2023
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Measuring GDP - Total Expenditure = Total Income - GDP is the market value of all final goods and services produced within a country in a given period of time - Market Value: does not include goods not sold on the market (home production, black market, volunteer work are not included) - Final Goods and Services: does not include intermediate goods to avoid double counting (ingredients used to make a sandwich that is sold is not counted) - Only goods produced within the home country - Components of GDP : - Consumption (C) - Investment (I) - Does not include spending on stocks and bonds - Government (G) - Does not include transfer payments (welfare, social security) - Net Exports (NX) - Purchases in the US of a product in another country is an IMPORT - Purchases of a US product from another country is an EXPORT - NX = Exports - Imports - Y = C+I+G+NX - GNP: production by the citizens of a country - Types of GDP: - Nominal GDP (NGDP) : current value of GDP - Price in current year * quantity in current year - Real GDP ( RGDP) : GDP corrected for changes in price (inflation) - Price in fixed base year * quantity in current year - NGDP = Price Level * RGDP - GROWTH RATE FORMULA: GDPfinal GDPinitial − 1
- Inflation and the Cost of Living - Inflation: the change in the overall price level - Goods in 2020 cost $100 now cost $102 in 2021 (2% inflation) - Only want to measure changes in overall price level, not changes in relative prices - Two Methods for Measuring Inflation: - GDP Deflator Approach - CPI approach - Two Reasons for an Increase in GDP - An increase in real output - An increase in prices - GDP DEFLATOR FORMULA: 00 RGDP NGDP * 1 - Inflation: 00 Deflator ( year 2) Deflator ( year 1) − Deflator ( year 2) * 1 - CPI (Consumer Price Index) : usually overstates inflation - Fix basket of goods, find price of basket, compare with base year - CPI FORMULA: 00 CPIbase CPIyear * 1 - Inflation: 00 CPI ( year 2) CPI ( year 1) − CPI ( year 2) * 1
- GDP Deflator vs CPI: - CPI fixes the basket - GDP allows for set of goods to change - CPI only contains goods purchased by consumers - GDP includes all goods that are part of GDP - CPI can include imported goods - GDP does not - - PCE Deflator is measured in the same way as the GDP deflator but restricted only to consumption goods - Allows for a changing basket of consumption goods - Preferred inflation measure for the Federal Reserve - Often overstates inflation - CORRECTING FOR INFLATION FORMULA: mount in year T dollars A * CPI today CPI in year T - Real Interest Rate = Nominal Interest Rate - Inflation Rate Production and Growth - Productivity : the amount of output that one unit of labor can produce - Increasing productivity is essential for growth - FORMULA : Y/L - What causes productivity is a much harder question to answer
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