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Midterm Review_AAP-09_B&W

Depr ni gnp 9 equivalence of the approaches all three

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Unformatted text preview: + Indirect Bus Taxes; GNP = NNP + Depr NI GNP 9 Equivalence Of the Approaches • All three approaches to GDP accounting yield the GDP same result • Fundamental identity of national income accounting: Production = Expenditure = Income Production • First equality arises from using the market value to measure production. Consumers exhaust production with their expenditures • Second equality arises because individuals, businesses, and the government use their incomes to consume and invest 10 Price Indices and Inflation • Consumer Price Index (CPI) is the most commonly cited measure of prices CPI = CPI value of typical basket of goods at current prices current ÷ value of the same basket at base-year prices baseThere are measurement problems with the CPI There CPI which have political repercussions CPI uses a typical basket of consumer goods, while CPI the producer price index (PPI) uses a typical basket of intermediate goods CPI is an example of a fixed-weight price index CPI fixed11 CPI Example With Two Goods CPI 0 = P0, x X 0 + P0, yY0 CPI1 = P , x X 0 + P , yY0 1 1 This shows that CPI is prices weighed by base-year goods CPI baseconsumed 12 GDP , RGDP, and GDPD RGDP GDPD • Real vs Nominal GDP GDP The goal is to measure the increase in GDP coming The GDP from more goods and services and not from higher more prices prices Nominal GDP is the value of output at current Nominal GDP current prices Real GDP is the value of output in base year prices Real GDP (curren...
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