ECON204 Lecture Notes - Lecture 2: Gdp Deflator, Labour Force Survey, Final Good
17 May 2018
School
Department
Course
Professor
Topic 2
The key macroeconomic variables
ā¢ GDP:
ā¢ Unemployment
ā¢ Inflation
GDP: measure of aggregate output in the national income accounts.
Three definitions:
ā¢ Production side:
o GDP is the value of the final goods and service produced in the economy during a
given period.
o GDP is the sum of value added in the economy during a given period.
ā¢ Income side:
o GDP is the sum of incomes in the economy during a given period.
Nominal and Real GDP
ā¢ Nominal GDP is the sum of the quantities of final goods produced times their current price.
ā¢ Nominal GDP increases over time because:
o The production of most goods increases over time.
o The prices of most goods also increase over time.
ā¢ Real GDP is constructed as the sum of the quantities of final goods times constant (rather
than current) prices.
ā¢ The problem in constructing real GDP is that there is more than one final good. Real GDP
must be defined as a weighted average of the output of all final goods, and this brings us to
what the weights should be. The relative prices of the goods would appear to be the natural
weights. But relative prices change over time. The measure that accounts for this is called
real GDP in chained dollars. (in appendix)
Australian Nominal and Real GDP
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ā¢ Real GDP per capita ā average standard of living in a country
ā¢ Economic performance is assessed by GDP growth
1
1)(
ā
ā
ā
t
tt
Y
YY
o Expansions and recessions are defined as such if they occur over a period greater
than or equal to 2 quarters.
Unemployment
Use Labour Force Survey to calculate.
Unemployment (no job, but has searched in last 4 weeks) rate:
ī·īīīīīīīīī
ī®ī½ī¾īīīīīØīīīæī
Participation rate (measure discouraged workers)
ī®ī½ī¾īīīīīØīīīæī
ī¹īīīī
īīīī£īīīī²īīīīī½īī
īī
Economists care about unemployment for two reasons:
ā¢ Unemployment has important social consequences.
o Welfare of the unemployed
ā¢ The unemployment rate gives them an indication of whether an economy is operating above
or below its normal level of activity.
o Inefficient use of human resources
Inflation
ā¢ Inflation rate:
o The GDP deflator is what is called an index numberāset equal to 100 in the base
year.
P
Y
Y
t
t
t
= =
nominal GDP
real GDP
t
t
$
o The rate of change in the GDP deflator equals the rate of inflation:
( )P P
P
t t
t
ā
ā
ā
1
1
ā¢ The Consumer Price Index
o The CPI and the GDP deflator move together most of the time.
o Inflation of the Consumer Price Index and the GDP Deflator in Australia
āŖ They differ in 2000s because of commodity prices.
āŖ They can also differ when the products consumed (CPI) are not goods
produced in Australia (GDP)
ā¢ Economists care about inflation for at least two reasons:
o Wages and prices do not move proportionately. So, it affects relative prices (e.g. the
real wage) and thus income distribution.
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āŖ E.g. paīī
µeī
¶ts that areī
¶īt iī
¶deīed, e.g. peī
¶sioī
¶s iī
¶ ī
µaī
¶ī īouī
¶tries
o It creates other distortions
āŖ changes in relative prices create uncertainty and affect decision making
āŖ inflation can affect taxes through tax bracket creep
ā¢ people move into higher tax brackets, even if their real income
doesī
¶īt īhaī
¶ge.
Output, Unemployment and the Inflation Rate
ā¢ OKUNīā LAW
o Output growth is negatively related to the change in the unemployment rate
ā¢ PHILLIPS CURVE
o The change in the inflation rate is negatively related to the unemployment rate
o Relation is not as strong as for Okuī
¶īs laī
ā¢ A Successful Economy
o A successful economy combines high output growth, low unemployment and low
inflation.
o Can all these objectives be achieved simultaneously?
o Is low unemployment compatible with low and stable inflation?
o Do policy makers have the tools to sustain growth, to achieve low unemployment
while maintaining low inflation?
The Short Run, the Medium Run, the Long Run
ā¢ Output is determined in the:
o short run by demand in the short run, say, up to a few years,
o medium run by the level of technology, the capital stock, and the labour force
o long run by e.g. education, research, saving, and the quality of government.
The Composition of Australian GDP, 2011
ā¢ Consumption (C) refers to the goods and services purchased by consumers.
ā¢ Investment (I), sometimes called fixed investment, is the purchase of capital goods. It is the
sum of non-residential investment and residential investment.
ā¢ Government Spending (G) refers to the purchases of goods and services by the federal,
state, and local governments. It does not include government transfers, nor interest
payments on the government debt.
ā¢ Imports (IM) are the purchases of foreign goods and services by consumers, business firms,
and the Australian government.
ā¢ Exports (X) are the purchases of Australian goods and services by foreigners.
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find more resources at oneclass.com
Document Summary
Gdp: measure of aggregate output in the national income accounts. Three definitions: production side, gdp is the value of the final goods and service produced in the economy during a given period, gdp is the sum of value added in the economy during a given period. Income side: gdp is the sum of incomes in the economy during a given period. Real gdp must be defined as a weighted average of the output of all final goods, and this brings us to what the weights should be. The relative prices of the goods would appear to be the natural weights. The measure that accounts for this is called real gdp in chained dollars. (in appendix) Participation rate (measure discouraged workers) (cid:1866)(cid:1857)(cid:1865)(cid:1868)(cid:1864)(cid:1867)(cid:1857)(cid:1856) (cid:1838)(cid:1853)(cid:1854)(cid:1867)(cid:1873) (cid:1867)(cid:1855)(cid:1857) (cid:1838)(cid:1853)(cid:1854)(cid:1867)(cid:1873) (cid:1867)(cid:1855)(cid:1857) (cid:1867)(cid:1863)(cid:1866) (cid:1857) (cid:1867)(cid:1868)(cid:1873)(cid:1864)(cid:1853)(cid:1872)(cid:1867)(cid:1866: real gdp per capita average standard of living in a country, economic performance is assessed by gdp growth t.
