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Lecture 28

Lecture 28-GDP

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University of Toronto St. George
Jack Carr

Thursday, January 28th, 2010. GDP (Gross Domestic Product) Definition: :0HDVXUHRIRXWSXWDQGRILQFRPHVHDUQHGWRSURGXFHRXWSXW Insight 1. Total expenditures on output = Total incomes earned to produce output 2. Measure using: Expenditure Approach or Factor Income Approach Real Vs. Nominal GDP Nominal GDP: current prices Real GDP: constant base-year prices GDP deflator = Nominal GDP * 100 Real GDP Determining Real GDP (Using GDP Deflator) GDP deflator = Nominal GDP*100 Real GDP Ù Real GDP = Nominal GDP*100 GDP Deflator Example: Nominal GDP = 600 GDP Deflator = 171 Real GDP = 600*100 = 350 171 Implication % ¨1RPLQDO*'3§ [market value of output in current prices] % ¨Read GDP [Real output] + % ¨GDP Deflator [Prices] ¨1RPLQDO*'3 ¨*'3'HIODWRU ¨5HDO*'3 10 8 2 6 -2 8 8 7 1 Contribution of a Firm to GDP 1. Value added: YDOXHRIILUP¶VSURGXFWLRQPLQXVWKHYDOXHRIintermediate goods purchased from other firms 2. Example: Price of suit: $200 Cost of wool: ($50) Cost of buttons: ($ 5) Value added of tailor: $145 3. Results: (1) (DFKILUP¶VFRntribution of GDP is its value added (2) GDP = sum of value added by each firm (3) GDP VXPRIRXWSXWRIHDFKILUPVLQFHZRXOG³GRXEOHFRXQW´LQWHUPHGLDWHgood) Real GDP and Economics Well-Being Real per capita GDP indicates income (and expenditure) of average person in economy Country with high per capita GDP can afford better education, health care, environmental protection, etc. Limitations (Examples) 1. Ignores distribution of income 2. Ignores household production (only market activities are included) 3. Ignores quality of the environment Consumer Price Index (CPI) : measures the cost of a basket of goods and services relative to the cost of the same basket in the base year Note: CPI measures prices of consumed goods and services (includes imports) GDP deflator measures prices of goods and services produced Consumer Price Index (CPI) STEP 1: Survey consumers to determine a fixed basket of goods 4 hot dogs, 2 hamburgers STEP 2: Find the price of each good in each year Year Price of Hot Dogs Price of Hamburgers Year Price of Hot Dog Price of Hamburger 1 $1 $2 2 $2 $3 STEP 3:Compute cost of basket of goods in each year Year Cost of Basket 1 ($1 per hot dog × 4) + ($2 per hamburger × 2) = $8 2 ($2 per hot dog × 4) + ($3 per hamburger × 2) = $14 STEP 4: Choose one year as a base year (Year 1) and compute CPI in each year. Year Consumer Price Index 1 ($8/$8) × 100 = 100 2 ($14/$8) × 100 = 175 STEP 5: Use CPI to compute inflation rate from previous year Year Inflation Rate 2 (175 - 100)/100 × 100 = 75% Observations 1. CPI = &XUUHQW
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