101-2010-L3

101-2010-L3 - Econ 101 Lecture 3 Measurement of Economic...

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Unformatted text preview: Econ 101 Lecture 3 Measurement of Economic Activities PROBLEM SET 1 On the Web Due Next Monday in class Shortcomings of GDP As a measure of production black market sector not included household production not included government expenditures valued at its cost quality of products not taken care of As a measure of welfare Value of leisure not included Part of GDP is invested and does not affect current living standards Does not account for distribution of income GDP as a measure of welfare Read: The Economist, Grossly Distorted Picture (read: on the web) Decomposing Nominal GDP How to decompose between these two? Change in Nominal GDP Change in Prices Change in Quantities Price Indexes Measures increases in price level Weighted average of the prices of a set of goods 2 indexes Implicit GDP Price deflator Consumer Price Index Differ in Which goods are considered How the goods are weighted 1. Implicit GDP Price Deflator The result depends on the way Real GDP is computed 100 GDP Real GDP Nominal deflator Price GDP Implicit = Example 2. Consumer Price Index Base year method Only selected consumer goods included 100 prices year base at quantities year base of Cost prices current at quantities year base of Cost CPI = Example Year 1 is base year Include both apples and oranges 2 . 171 130 5 . 222 100 100 100 1 1 1 1 1 2 1 2 ) 1 ( 2 1 1 1 1 1 1 1 1 ) 1 ( 1 = = + + = = + + = o o a a o o a a o o a a o o a a Q P Q P Q P Q P CPI Q P Q P Q P Q P CPI Figure 2.2 Inflation Rate Calculated from the CPI (blue line), and Calculated from the Implicit GDP Price Deflator (black line). Problem with CPI Overstates the cost of living price of a good increases consumers substitute...
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101-2010-L3 - Econ 101 Lecture 3 Measurement of Economic...

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