ECO 121 MACROECONOMICS

Lecture Five

Aisha KhanSection L & M

Spring 2010

Recap

GDP (primary monetary measure)

Chapter 6 continued

Personal Income

All income received whether earned or unearned

Different from NI because some income earned paid out as social security taxes (payroll taxes), corporate income taxes and undistributed taxes, corporate profits (not received by households)

Transfer payments not earned

PI = NI – income earned but not received + income received but not earned

Disposable income

Disposable income = PI – personal taxes

DI = consumption + saving

Nominal GDP vs. Real GDP

GDP Total market value of all final goods and services produced in a given year

Measured in money value Money values may change from year to

year then how do we compare GDP values from year to year?

Must correct for changes due to inflation/deflation

Nominal GDP is calculated at current prices prevailing when output was produced

Real GDP is a figure which is adjusted for price changes

Adjusting Nominal GDP

Two methods

1. Determine a price index adjust Nominal GDP by dividing by the price index

Price index = (price of mkt basket /price of mkt basket in base year) * 100

Real GDP = nominal GDP / price index (hundreths)

2. Gather separate data on physical output determine what it would sell for in base year

Next we can identify the price index

Price index = Nominal GDP/ Real GDP

Real GDP

Allows a better and direct comparison of physical output from year to year

Constant “dollar” measuring device

Purchasing power has been standardized

Consumer Price Index

Designed to measure the changes in the cost of a constant standard of living for a typical consumer

Fixed weight approach Items in the basket remain the same

Less broad and doesn’t change its basket each year

GDP shortfalls

Doesn’t measure some useful output such as Homemakers’ services Parental child care Volunteer efforts

Doesn’t measure improvements in quality or increased leisure time

Doesn’t measure improved living conditions

No value adjustments in the composition of output or income distribution

Underground economy Illegal activities aren’t counted Legal activities may also be part of underground

activities such as to avoid taxation

Harmful effects of production on the environment aren’t adjusted in GDP

GDP per capita Better measure of standard of living

Non economic sources of well being (courtesy, crime reduction) not covered in GDP

Reminders

Quiz 1 Chapters 7, 4, 5, (chapter 6 till Income

approach)

Use the following to calculate a) GDP, b) NDP, c) NI d) PI e) DI

Compensation of employees

$ 194.2 billion

US imports of goods and services

16.5

US exports of g&s 17.8 Personal taxes 40.5

Depreciation 11.8 Net foreign factor income

2.2

Government purchases

59.4 Personal consumption expenditures

219.1

Taxes on production and imports

14.4 Statistical discrepancy 0

Net private domestic investment

52.1

Transfer payments 13.9