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ECON 1BB3 (535)
Lecture 7

# Economics – Lecture 7-11 Notes.docx

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School
Department
Economics
Course
ECON 1BB3
Professor
Bridget O' Shaughnessy
Semester
Winter

Description
Economics – January 22 , 2013 – Lecture 7 Does doing the dishes have economic value?  Yes  According to Statistics Canada o YES if you are in a restaurant o NO if you are at home Gross Domestic Product (GDP)  Gross Domestic Product (GDP): market value of all final good and services produced in a country in a given period of time  Stock: measured at a given point in time  Flow: happens over a time interval  GDP is flow  GDP is a measure of how much stuff we make Components of GDP  Market value (gone up in last 50 years): o Produce more than we did 50 years ago o Using market prices to calculate and market prices have gone up o Paying for things now that we would have been doing for ourselves 50 years ago (ex. childcare, lawn mowing, etc.)  All (legal)  Final o Only include final goods and services o Only count when we sell product not the things used to make product (to avoid double counting)  Goods and services  Produced in a country  In a given period of time o Count all the NEW final goods and services produced in that year o Ex. Do not count if bought a used car (produced in an earlier year) Three Ways to Calculate GDP 1. Output (basic prices) 2. Expenditure (market prices) 3. Income (market prices)  The difference between GDP at market prices and GDP at basic price is basic prices do not include sales tax whereas market prices do  Output and expenditures are the same concept but using different prices Canada’s 2011 GDP  Equation: Y = C + I + G + NX o Consumption (C): durable goods, semi-durable goods, non-durable goods, services o Investment (I): purchase of new capital goods; machinery and equipment; also new housing; inventory o Government Spending (G): all levels of government spending on goods and services (not transfer payments) o Net Exports (NX): purchases of domestically produced goods by foreigners (exports) MINUS domestic purchases of foreign goods (imports) Gross National Product (GNP)  Gross National Product (GNP): market value of all final goods and services produced by a country’s factors in a given period of time Economics – January 24 , 2013 – Lecture 8  GDP increases if price increases or if output increases  Real GDP vs. nominal GDP (base year prices vs. current year prices)  Current prices: prices from that year used to calculated nominal GDP of that year  Base year prices: choose base year and use the prices from that year not the current year  What would GDP be in 2012 if the prices were the same as they were in 2008?  Nominal GDP goes up when prices OR output go up  Real GDP goes up only if output goes up  Can use numbers to figure out what is happening to price level over time  GDP deflator: a measure of the price level  Not same as GDP (a measure of output) GDP deflator = (nominal GDP/real GDP) x 100 Ex. Canada’s GDP is based on only two goods: skates and hockey pucks. Calculate the GDP with the data below. Skates Hockey Pucks Year Price Quantity Price Quantity 2010 \$50 100 \$3 500 2011 \$60 200 \$4 1000 2012 \$70 300 \$5 1200 *base year = 2010 Year Nominal GDP Real GDP GDP Deflator Inflation Rate (percent change in price from one year to the next) 2010 (50 x 100) + \$6,500 100 (3 x 500) = \$6,500 2011 (60 x 200) + (50 x 200) + (16000/13000) x (123.1 – 100) = (4 x 1000) = (3 x 1000) = 100 = 123.1 23.1% \$!6,000 \$13,000 2012 (70 x 300) + (50 x 300) + (27,000/18600) x ((145.2 – (5 x 1200) = (3 x 1200) = 100 = 145.2 124.1)/(123.1)) x \$27,000 \$18,600 100 = 18.0% How do we calculate inflation using CPI?  Consumer price index (CPI): measures overall cost of goods for a typical urban household  It is a measure of the price level  Steps to calculating inflation using CPI: 1. Fix the basket of goods 2. Calculate CPI: CPI = (cost in current year/cost in base year) x 100 3. Calculate inflation rate = (P – P P ) x 100 t t-1)/( t-1 P: price level t: time Ex. Basket = 10 skates and 20 hockey pucks Year Price of skates Price of hockey pucks 2010 \$50 \$3 2011 \$60 \$4 2012 \$70 \$5 *base year = 2010 Year Cost in current year CPI Inflation Rate 2010 (10 x 50) + (20 x 3) = 100 560 2011 (10 x 60) + (20 x 4) = (680/560) x 100 = 21.4% 680 1214 2012 (10 x 70) + (20 x 5) = (800/560) x 100 = ((142.9 – 121.4)/ 121.4) x 800 142.9 10 Economics – January 28 , 2013 – Lecture 9 Using CPI Ex. Your father earned \$40,000 in 1982. What is this salary worth in 2012 dollars? CPI1982= 61.8 CPI = 116.3 2012 Answer: 116.3/61.8 = x/\$40,000 x = (116.3 x 40000)/(61.8) = \$75,275 Problems with CPI  Three problems with CPI: 1. Substitution bias: ignores consumer substitution; overstates inflation (would end up with a lower number than stats Canada calculates because does not take into account substitution when prices of one good rises) 2. Introduction of new goods: CPI is based on a fixed basket of goods and services; overstates inflation 3. Unmeasured quality change: some price changes reflect quality improvements; overstates inflation CPI vs. GDP Deflator 1. CIP – goods and services bought by typical consumers
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