We simply Economics 23 012 751 7588 • Imports (IM) are goods purchased by economic units in the country but produced in other countries. • Net exports (X) equal the difference between exports and imports, also called the trade balance. Value added definition: A firm’s value added is the value of its output minus the value of the intermediate goods the firm used to produce that output. Illustration – The miller turns the wheat into flour and sells it to a baker for $3.00. – The baker uses the flour to make a loaf of bread and sells it to an engineer for $6.00. – A farmer grows a bushel of wheat and sells it to a miller for $1.00. – The engineer eats the bread. Compute & compare value added at each stage of production and GDP

We simply Economics 25 012 751 7588 – changes in prices. – changes in quantities of output produced. Changes in real GDP can only be due to changes in quantities, because real GDP is constructed using constant base-year prices. The price level • The price level measures the purchasing power of the currency. • Deflators computed from GDP and the Consumer Price Index are alternative measures of the price level. • The percentage change in the price level from one year to the next is the rate of inflation or deflation, depending on the sign. GDP Deflator • The inflation rate is the percentage increase in the overall level of prices. • One measure of the price level is the GDP deflator , defined as GDP Deflator =100*Nominal GDP/Real GDP Consumer Price Index (CPI) • A measure of the overall level of prices

We simply Economics 26 012 751 7588 • Published by the Bureau of Labor Statistics (BLS) • Uses: – tracks changes in the typical household’s cost of living – adjusts many contracts for inflation (“COLAs”) – allows comparisons of dollar amounts over time • The CPI measures the cost of a fixed basket of goods and services in the current year compared to a base year. It measures the cost of living of a typical urban household. It is published monthly by the Dept of Stats Measuring Inflation CPI is a measure (index) of changes in the average price of consumer goods and services. Inflations rate is the annual (monthly or quarterly) of increase in the average price level. Calculating the CPI