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This 3 page Reader was uploaded by Kelsey O'Connell on Monday April 14, 2014. The Reader belongs to a course at University of California Santa Barbara taught by a professor in Fall. Since its upload, it has received 79 views.
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Date Created: 04/14/14
Lecture 3 48 The circular flow Expendituresincome 3 ways of calculating GDP Vaue added expenditure income GDP Expenditure Approach Everything produced gets consumed by someone Personal consumption C Investment I Government G Exports imports X M Important equation to know YCIGX M YGDP How to calculate GDP through expenditures GDP Income Approach Everything that is produced is income to someone Calculate GDP by adding up income 0 Compensation of employees wages salaries and benefits Proprietors income Rental income Corporate profits Net interest Indirect business taxes sales and excise Depreciation taken out when computing profits so have to add it back in GDP vs GNP Gross Domestic Product GDP 0 Produced within countries borders Gross National Product GNP o Produced by citizens of that country Productivity An important construct Bereau of Labor Statistics BLS o Often used measure of health of an economy 0 ProductivityGDPHours of work GDP tells us how much stuff is out there Whats an Index Index numbers are used to compare some base year Steps 0 Choose any base year 0 Divide output in each year by output in the base year then multiply by 100 0 base year is always 100 Creating Economic Aggregates OOOOO OOOOOO Important to distinguish between real and nominal values 0 Real measures output of physical goods and services 0 Nominal measure current dollar value How might we think of adding together the different goods we produce 0 We could weight each good by some value pounds dollars etc To calculate real GDP Calculate nominal GDP for each year 0 Just multiply prices x quantity in each year Choose some base year 0 Nominal and real GDP should be the same for the base year 0 Take base year prices and use with each year to find REAL GDP Price Level The distinction between REAL and NOMINAL suggests a notion of Price Level GDP Deflator Since we held prices fixed 0 Real GDP reflects only quantities produced 0 GDP Deflator 0 GDP DefatorNomina GDPReal GDP x 100 GDP Deflator and Inflation Inflation rate year 2 GDP Deflator year 2 GDP deflator year 1 GDP deflator year 1 x 100 PCE Deflator Personal consumption expenditures 0 Based on the C for expenditures PCE Deflator o PCE DefatorNomina PCEReal PCE x 100 Lecture 4 410 GDP deflator trying to measure some average level of price changes in the economy Chain weighting a new approach to measuring GDP Consumer Price Index Most often used measure of the aggregate price level A price index calculated as the current cost of a fixed basket of consumer goods divided by the costs of the basket in the base period Core CPI Same as above but takes out food and energy Calculating CPI Pick a base year Determine a basket of goods consumed by an average urban family Bls sends their minions to stores every month to survey prices on these items Compute the cost of the same basket each year Compute inflation CPItcost of base year basket in year tcost of base year basket in the base yearx100 Inflation percentage change in the price index Uses of CPI Converting current dollars in to real dollars In 1931 Babe Ruth earned about 80000 per year In 2001 Barry Bonds earned about 10000000 per year 0 Who was better off babe or barry o 1931 cpi 152 o 2001 cpi 1771 amount in todays doarsamt in year t dollars x cpi todaycpi in year t real price choose the initial year 1970 as the base year so cpi in 1970100 use the definition of inflation to get cpi in 2005504 price indices main idea see what is happening to aggregate prices 0 Cpi o pce 0 core cpi exclude food and energy 0 median cpi misconception the cpi is used to capture a change in average aggregate prices not relative prices price expectations the measures we have talked about are ex post measures for planning purposes what is important are you expectations of future price changes problems with inflation distorts price signals shoe eather costs income tax distortions 0 money may no longer provide its role 0 hyperinflation
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