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Unformatted text preview: ECN 211 Macroeconomic Principles
L10: National Income Accounting (Nominal Vs Real). 10/05/09 1 Nominal and Real Measures of GDP • Interested in ___________ how much _______ goods and services the economy has produced. • Nominal values tell us very little – Has GDP increased because output has ________ or because prices have ________, or both?? – In simplistic terms GDP= 10/05/09 2 Nominal Vs Real
Nominal GDP … nominal GDP measures output using the __________________of goods and services. Real GDP
… real GDP is adjusted for changing price levels – Uses ______________ – From a “base year” 10/05/09 3 Base Year … the year against which other years are measured – When calculating real GDP the base years prices are used to calculate __________________ – e.g. if 1996 is the base year – Real GDP in 2007: ______ prices (base years prices) and ______ quantities – Nominal GDP in 2007: ______ prices (current prices) and ________ quantities 10/05/09 4 Example
Year 2005 2006 2007 Price of Hot dogs $1 $2 $3 Quantity of hot Price of dogs Hamburgers 100 150 200 $2 $3 $4 Quantity of hamburgers 50 100 150 Nominal GDP 2005 = 2006 = 2007 = yearly growth 200% 100% 10/05/09 5 Example
Year 2005 2006 2007 Price of Hot dogs $1 $2 $3 Quantity of hot Price of dogs Hamburgers 100 150 200 $2 $3 $4 Quantity of hamburgers 50 100 150 Real GDP (base year 2005) • “Constant dollar method” 2005 = 2006 = 2007 =
10/05/09 Yearly Growth 75% 42.9%
6 • Obviously nominal GDP _______________ real GDP for the _____________ – In our example the base year was 2005. • The growth rates for nominal GDP (usually) ____ growth rates of real GDP. • Generally prices are always ________ (inflation) therefore nominal GDP growth is usually an ______________ of economic growth.
10/05/09 7 10/05/09 8 Price Indices
_____________ … measure the average level of prices in an economy and show how they have changed against __________ – Used to measure the _____________ • The value of the price index in the base year is ______ • Formula: • Price index in a given year = 100 +/ percentage change in prices ____________ • Ex: suppose the base year was 2000 and in 2007 the price index was 127. Then prices have increased by 27% __________________
10/05/09 9 Calculating a Price Index (one price)
Year Price 1 2 3 4 5 $9 $10 $11 $12 $13 Converting Price Index (base year 2) Converting Price Index (base year 1) Price Index More than one good (basket of goods)
•Weighted average approach: •Assume apples account for 75% of all expenditure. Year Price of apples 1 2 $8 $10 Price of bananas $1 $2 “weighted average price of Converting basket” (base yr 2) (6/8)*100 (8/8)*100 Price Index (base yr 2) 78.125 100 3 $14 $3 (11/8)*100 140.625 4 $18 $4 (15/8)*100 181.25 Types of Price Index
GDP Price Index (GDPPI) … a _______________of the prices of goods and services included in GDP Consumer Price Index (CPI) … a measure of the average price of goods and services purchased by the _________________ Producer Price Index (PPI) … a measure of average prices received by ________________e.g. materials etc. – Can give an indication of what will happen to the CPI as this index reflects ___________which will ___________________
10/05/09 12 10/05/09 13 Is GDP a good measure of society’s welfare?
• • • • • Certain productive activities do not appear DIY, housework _________________– Europeans work less than Americans No account of __________ changes – computers/cars etc Composition of ________ – guns and tobacco ____________ – pollution, congestion these are not “priced in the market _________________– per capita better? a lot of discussion about the distribution recently. – Lorenz Curves.
14 • 10/05/09 Standard measure of wellbeing: • But does not tell us that much about the distribution of income! 10/05/09 15 Income Distribution
• In all market economies the distribution of income is _______ equal. • Remember individuals receive compensation for the factors of production they provide to the market.
– Therefore individuals with ________ valued resources receive ___________ levels of income. Income Distribution: Lorenz Curve • Measures the ___________________ within an economy.
– Allows us to compare income inequalities across countries Lorenz Curve
100 85 75 Total income (cumulative %) 50 B A X D 20 10 0 Y 95 100 50 C Total population (cumulative %) Points to Note
• The line 0AB is the line of perfect income __________
– It is the 45 degree line. – 50% of the population accounts for 50% of the total income etc. • The line 0CDB is the line of perfect income _________
– The last person accounts for 100% of the total income. • The more _________the Lorenz curve is the ____________ _________in the distribution of income.
– Therefore country X has a ____________ distribution of income then country Y. Gini Coefficient
• Another measure of income inequality.
C D A G= O B Points to Note
• If G=1 then incomes are perfectly __________________ • If G=0 then incomes are _____________ • The higher the value of G the higher the level of income _______________ ...
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This note was uploaded on 03/16/2009 for the course ECN 211 taught by Professor Kingston during the Spring '08 term at ASU.
 Spring '08
 Kingston
 Macroeconomics, National Income

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