ECON 1110 Lecture Notes - Lecture 5: Gdp Deflator, Disposable And Discretionary Income, Autonomous Consumption

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jadekangaroo201

2 Feb 2016

School

University of Windsor

Department

Economics

Course

ECON 1110

Professor

Peter Miller

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Document Summary

Index number derived by dividing nominal gdp by real gdp. Gdp deflator = (gdp at current price / gdp at base-period prices) x 100. Real gdp per capita = real gdp / population. Changes in per capita gdp are a good measure of average material living standards. Ae = c + i + g + (x-m) Two types of aggregate expenditures: autonomous expenditures. Do not change systematically with national income: induced expenditures. Closed economy: g = 0 and taxes are zero, exports = 0 and imports = 0. Relationship between desired consumption expenditures of all households to the several factors that determine it: disposable income. Increase in disposable income = increase in consumption: wealth. Increase in wealth = increase in consumption: cost of borrowing. Increase in cost of borrowing = decrease in consumption: expectations about the future. Consumption that is independent of the level of income: wealth, expectations, changes in interest rates (cost of borrowing)

Related Questions

1. What component of GDP (if any) will each of the following transactions affect? Explain.
a) A family buys a new refrigerator.
b) Aunty Jane buys a new house.
c) Kina Pharma sells drugs from its inventory.
d) Emmanuel buys a pizza.
e) The government builds a new Motorway from Accrato Kumasi
f) You buy a bottle of California wine.
g) Samsung build an assembly plant in Ghana.

2. Consider an economy that produces only four types of fruit: apples, oranges, pineapples, and bananas. In the base year (2017), the production and price data were as follows:

Fruit	Quantity	Price
Apple	3,000	$2
Banana	6,000	$3
Pineapple	4,000	$1.5
Oranges	8,000	$4

In the current year (2020), the production and price data are as follows:

Fruit	Quantity	Price
Apples	4,000	$3
Banana	14,000	$2
Pineapple	7,500	$2
Orange	32,000	$5

(a) Calculate the nominal GDP in the current year and in the base year. What is the percentage increase since the base year?
(b) Calculate the real GDP in the current year and in the base year. By what percentage does real GDP increase from the base year to the current year?
(c) Find the GDP deflator for the current year and the base year. By what percentage does the price level change from the base year to the current year?
(d) Would you say that the percentage increase in nominal GDP in this economy since the base year is due more to increases in prices or increases in the physical volume of output?

3. The following information is obtained from the World Bank’s World Development Indicators on the Economy of Ghana for the year 2015:
i) GDP per capita (constant 2000 US$) - $1696.08
ii) GDP per capita (current US$) - $1381.41
ii) GDP per capita, PPP (constant 2005 International $) - $3953.21

a) What factors could account for the difference between the figures in i) and ii)

b) What factors could account for the difference between the figures in i) and iii)?

c) What factors could account for difference between the figures in ii) and iii)?

4. The following relationships hold in the economy of Matata Island:
𝐶 = 320 + 0.4(𝑌 − 𝑇)

𝐼 = 150
𝐺 = 275
𝑇 = 200
a) Explain the concepts of marginal propensity to consume (MPC) and marginal propensity to save (MPS).

b) What is the MPC for this economy?
c) Explain the concepts of the autonomous spending and tax multipliers.
d) What is the autonomous spending multiplier for this economy?
e) What is the equilibrium level of income for this economy?
f) Suppose that the full employment level of output for this economy is 4000. What sort of output gap is Matata island facing?
g) What kind of policy can the government use to close this kind of gap? Explain with the aid of a diagram.

5. a) For the purposes of assessing an economy's growth performance, which is the more important statistic: real GDP or nominal GDP? Why?
b) Why are goods and services counted in GDP at market value? Explain.
c) What is the difference between intermediate good and final good? Why is the distinction important for measuring GDP?

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ECON 1110 Lecture Notes - Lecture 5: Gdp Deflator, Disposable And Discretionary Income, Autonomous Consumption

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