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ECO 121 MACROECONOMICS
Lecture Five
Aisha KhanSection L & M
Spring 2010
Recap
GDP (primary monetary measure)
Chapter 6 continued
Personal Income
All income received whether earned or unearned
Different from NI because some income earned paid out as social security taxes (payroll taxes), corporate income taxes and undistributed taxes, corporate profits (not received by households)
Transfer payments not earned
PI = NI – income earned but not received + income received but not earned
Disposable income
Disposable income = PI – personal taxes
DI = consumption + saving
Nominal GDP vs. Real GDP
GDP Total market value of all final goods and services produced in a given year
Measured in money value Money values may change from year to
year then how do we compare GDP values from year to year?
Must correct for changes due to inflation/deflation
Nominal GDP is calculated at current prices prevailing when output was produced
Real GDP is a figure which is adjusted for price changes
Adjusting Nominal GDP
Two methods
1. Determine a price index adjust Nominal GDP by dividing by the price index
Price index = (price of mkt basket /price of mkt basket in base year) * 100
Real GDP = nominal GDP / price index (hundreths)
2. Gather separate data on physical output determine what it would sell for in base year
Next we can identify the price index
Price index = Nominal GDP/ Real GDP
Real GDP
Allows a better and direct comparison of physical output from year to year
Constant “dollar” measuring device
Purchasing power has been standardized
Consumer Price Index
Designed to measure the changes in the cost of a constant standard of living for a typical consumer
Fixed weight approach Items in the basket remain the same
Less broad and doesn’t change its basket each year
GDP shortfalls
Doesn’t measure some useful output such as Homemakers’ services Parental child care Volunteer efforts
Doesn’t measure improvements in quality or increased leisure time
Doesn’t measure improved living conditions
No value adjustments in the composition of output or income distribution
Underground economy Illegal activities aren’t counted Legal activities may also be part of underground
activities such as to avoid taxation
Harmful effects of production on the environment aren’t adjusted in GDP
GDP per capita Better measure of standard of living
Non economic sources of well being (courtesy, crime reduction) not covered in GDP
Reminders
Quiz 1 Chapters 7, 4, 5, (chapter 6 till Income
approach)
Use the following to calculate a) GDP, b) NDP, c) NI d) PI e) DI
Compensation of employees
$ 194.2 billion
US imports of goods and services
16.5
US exports of g&s 17.8 Personal taxes 40.5
Depreciation 11.8 Net foreign factor income
2.2
Government purchases
59.4 Personal consumption expenditures
219.1
Taxes on production and imports
14.4 Statistical discrepancy 0
Net private domestic investment
52.1
Transfer payments 13.9