Macroeconomics: New concepts

Transcription

1 Macroeconomics: New concepts Fatma September 2014

2 How to measure total output in an economy Gross Domestic Product (GDP) The value of final goods and services, produced in an economy during a given period (such as year). definition How do we compute value of one good? price quantity Which price do we use? Current price. Why only count the final goods? To avoid double counting.

3 Let s see how this product is created... CIRCULAR FLOW- Representation of an economy Who are present in the economy? Households - Consumers of goods and services Firms - Producer of goods and services Government - External World - Additional assumptions All factors of production are owned by the households. Households rent the services to the firms. In return earn wages, salaries, rent and profits. Firms hire or employ or rent factors of production owned by household, produce goods and services. They make wage, salaries, rent and profit payments to households. Government also buys goods and services, they collect taxes as revenues. Each country buys and sells goods and services from other countries. (open economy)

4 GDP Computation Methods 1 GDP Computation methods 2 Some details in GDP computation Nominal versus Real GDP Other Problems with GDP computations 3 General price level measurements Price Level Measurement 4 Growth rate and Inflation rate Growth rate and inflation rate

5 Expenditure Approach What are typical expenditures in the economy? ie. What are the group of demand in the goods and services market? C + I + G + NX Remember to count only the final goods. If the current prices are used then this is nominal GDP. Hence, nominal GDP carries the effect of both output and price change effects

6 Income Approach Total income generated during the creation (production) of the goods and services. GDP = salaries + wages + rents + profits the total value of goods and services is equal to the total income generated during the production process.

7 Value Added Approach Value added is the additional value created due to the production activity by the use of labor and capital. Every production takes the intermediate goods and by using factors of production increased its value, hence valueadded = valueofgoodsproduced thecostofintermediategoods GDP is the total of all value added in an economy. GDP = valueadded i i=1

8 Nominal versus Real GDP If in computing the value of final goods we keep the prices constant and only change the quantity from one year to another, we will be able to just compute the effect of the change in output. This measure giives us the Real GDP Real GDP will be defined as GDP = price i,2010 quantity i,2014 i=1 This Real GDP is the value of goods produced in 2014 with 2010 prices. If you repeat the same calculation for 2013, then the two Real GDP of 2013 and Real GDP of 2014 only captures the effect of the quantity change.

9 Other Problems with GDP computations Non marketed activities are not included. Does not show welfare or income distribution. Does not include the quality of life such as pollution versus clean air; producsing military goods versus food.

10 Price Level Measurement There are many many goods produced in an economy but we have to come up with a measure that respresents the general price level in the economy. We use price index to represent the general price level in an economy. Price index is a weighted average of all prices.

11 Price Level Measurement-Price Index There are two price indicies that we will see in this class. 1) Consumer Price Index is the weighted average of the prices of the goods consumed by a typical consumer in a country. The formula is i=1 CPI = price i,2014 quantity i,2014 i=1 price 100 i,baseyear quantity i, ) GDP Deflator is the weighted average of the prices of all the goods included into the GDP computation in a country.the formula is i=1 GDPDeflator = price i,2014 quantity i,2014 i=1 price 100 i,baseyear quantity i,2014

12 Growth rate of the economy How do we measure the real growth rate of the economy? How fast the total output is expanding? Growthrate = GDP t,real GDP t 1,real GDP t 1,real 100 The last year the growth rate of Turkey was 4.7 percent.

13 Inflation rate We are interested in finding how fast the prices are increasing. We compute the percentage change in a Price Index to find the inflation rate. Inflation rate is defined as Inflationrate = CPI t CPI t 1 CPI t If the inflation rate is negative, this shows that the prices are decreasing, and this is known as the deflation.

14 Markets in an economy There are mainly the following markets in a typical economy. 1. Goods and services market 2. Factors of production market 3. Asset markets Next we will be looking at the Factors of Production Markets, concentrating on Labor market and definition of Unemployment rate.