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Lecture 1

MGEB06H3 Lecture Notes - Lecture 1: Gdp Deflator, Market Basket

Economics for Management Studies
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Iris Au

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Macroeconomics Notes: Lecture One (Chapter Seven): PART 2
The Real GDP:
o This is the total value of all final goods and services produced in the economy during a
given year calculated using the price of a selected base year. (using the price of a
selected base year)
o We use the real GDP to get an accurate measure of the economic growth. Since the
increase in the GDP over time may cause an increase in prices of goods/services and in
Real GDP per capital:
o The real GDP takes out the effect of price changed on the production to eliminate that
problem you look at the real GDP per capital.
o a country with a large population has a high GDP because there are more people
o Real GDP per Capital = Real GDP/Population
o The real GDP per capital is used to measure and compare labor productivity across the
country and sometimes used to compare living standards in the countries. Countries with
a high real GDP tend to have high living standards (education, healthcare). However, we
use it with caution because it only gives the measurement of the economy’s average
output/person and ignores the output. Also it does not tell us how that output affects the
living standards.
Nominal GDP:
o This is the value of all final goods and services produced in the economy during a given
year calculated using the prices in the current year in which the output is produced.
(using the prices in the year in which the output is produced (i.e., the current year prices)
o This measures the true changes of output from year 1 to year 2
Price Indexes:
o This measure the cost of purchasing a given market basket in a given year where the cost
is normalized so that it is equal to 100 in the base year.
o There are many price index such as.. consumer price index (CPI), the producer price
index, and the GDP deflator.
o The change of a price index is called the inflation rate.
Consumer price index (CPI):
o It measures how fast the cost of a goods and services bought by a typical Canadian
household has changed over time, which is the most commonly used measure to compute
inflation rate. Uses fixed cast due to base year
o CPI = (cost of (fixed)market basket in year t/ cost of (fixed market basket in base year) x
o This is the most used measure of price in Canada.
o This shows how the cost of all purchases by a typical Canadian family has changed over
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