![Nominal and Real GDP
Apples Oranges
Price ($) Quantity Price ($) Quantity
2015 50 10 20 50
2016 100 20 30 100
2017 150 20 50 200
Nominal GDP $ Growth Rate (%)
2015 ($50 ✕ 10) + ($20 ✕ 50) = 1500
2016 ($100 ✕ 20) + ($30 ✕ 100) = 5000 100 ✕ [(5000 – 1500)/ 1500] = 233
2017 ($150 ✕ 20) + ($50 ✕ 200) = 13000 100 ✕ [(13000 – 5000)/ 5000] = 160
Real GDP (Base year 2015) 2015 $
2015 ($50 ✕ 10) + ($20 ✕ 50) = 1500
2016 ($50 ✕ 20) + ($20 ✕ 100) = 3000 100 ✕ [(3000 – 1500)/ 1500] = 100
2017 ($50 ✕ 20) + ($20 ✕ 200) = 5000 100 ✕ [(5000 – 3000)/ 3000] = 67
100
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Lesson 1 Introduction (1).pdf...........
- 2. What is Economics? Economics is the branch of knowledge concerned with the production, consumption and transfer of wealth. It is the study of how scarce resources are allocated to fulfill the infinite wants of consumers.
- 3. NEEDS: are the basic necessities that a person must have in order to survive e.g. food, water, warmth, shelter and clothing WANTS: are the desire that people have e.g. things that people would like to have, such as bigger homes, iphones, etc.
- 4. Micro and Macro Economics Economics is divided into two categories: microeconomics and macroeconomics. Microeconomics is the study of individuals and business decisions, while macroeconomics looks at the decisions of countries and governments. It analyzes entire industries and economies, rather than individuals or specific companies.
- 5. 5 Macroeconomics is ... ▪the study of the economy as a whole ▪it deals with broad aggregates ▪but uses the same style of thinking about economic issues as in microeconomics.
- 6. 6 Some key issues in macroeconomics ▪Inflation: the rate of change of the general price level ▪Unemployment: a measure of the number of people looking for work, but who are without jobs ▪Output ◦real gross national product (GNP) measures total income of an economy ◦it is closely related to the economy's total output
- 7. 7 More key issues in macroeconomics Economic growth ◦increases in real GNP, an indication of the expansion of the economy’s total output Macroeconomic policy ◦a variety of policy measures used by the government to affect the overall performance of the economy
- 8. The Circular Flow and National Income Accounting National Income Accounting refers to the measurement of aggregate economic activity, particularly national income and its components. the terms circular flow of income or circular flow refer to a simple economic model which describes the reciprocal circulation of income between producers and consumers. More complete and realistic circular flow models are more complex.
- 9. 9 The Simple Economy – 2 sector model
- 10. The Circular Flow Model– 5 sector model
- 11. In terms of the five- sector circular flow of income model the state of equilibrium occurs when the total leakages are equal to the total injections that occur in the economy. This can be shown as: Savings + Taxes + Imports = Investment + Government Spending + Exports OR S + T + M = I + G + X.
- 12. Three measures of national output Expenditure ◦the sum of expenditures in the economy ◦Y = C + I + G + X - Z Income ◦the sum of incomes paid for factor services ◦wages, profits, etc. Output ◦the sum of output (value added) produced in the economy
- 13. Final Output To avoid the problem of double counting, only the value of the final stage, the retail price, is included, and not the value added in all the intermediate stages. For example, consider the production of a motor car which has a retail price of US$2,500. This price includes US$ 2,100 for all the costs of production (US$ 600 for components, US$ 1,000 for assembly and US$ 500 for marketing) plus US$400 for profit. To avoid double-counting, the national income accounts only record the value of the final stage, which in this case is the selling price of US$ 2,500.
- 14. 14 GDP and GNP Gross domestic product (GDP) ◦ measures the output produced by factors of production located in the domestic economy Gross national product (GNP) ◦ measures the total income earned by domestic citizens
- 15. Inadequacies of GDP as a measure of economic activity ▪Measures of GDP typically exclude unpaid economic activity, most importantly domestic work such as childcare. ▪GDP takes no account of the inputs used to produce the output. For example, if everyone worked for twice the number of hours, then GDP might roughly double, but this does not necessarily mean that workers are better off as they would have less leisure time. ▪Similarly, the impact of economic activity on the environment is not measured in calculating GDP. ▪Comparison of GDP from one country to another may be distorted by movements in exchange rates.
- 16. GDP: nominal and real GDP comes in two flavors: ◦Nominal GDP (also called GDP at current prices), and ◦Real GDP (also called GDP at constant prices)
- 17. Gross Domestic Product, Nominal Nominal GDP is the total market value of all final goods and services produced within a country in a given period of time. ◦The market value is calculated using current prices, the prices that prevailed when the production took place. Real GDP is the total market value of all final goods and services produced within a country in a given period of time. ◦The market value is calculated using constant prices, which are the prices that prevailed in a benchmark year called the base year.
- 18. Nominal and Real GDP Apples Oranges Price ($) Quantity Price ($) Quantity 2015 50 10 20 50 2016 100 20 30 100 2017 150 20 50 200 Nominal GDP $ 2015 ($50 ✕ 10) + ($20 ✕ 50) = 1500 2016 ($100 ✕ 20) + ($30 ✕ 100) = 5000 2017 ($150 ✕ 20) + ($50 ✕ 200) = 13000 Real GDP (Base year 2015) 2015 $ 2015 ($50 ✕ 10) + ($20 ✕ 50) = 1500 2016 ($50 ✕ 20) + ($20 ✕ 100) = 3000 2017 ($50 ✕ 20) + ($20 ✕ 200) = 5000 Note that the base year’s nominal and real GDP must be the same.
- 19. Nominal and Real GDP Apples Oranges Price ($) Quantity Price ($) Quantity 2015 50 10 20 50 2016 100 20 30 100 2017 150 20 50 200 Nominal GDP $ Growth Rate (%) 2015 ($50 ✕ 10) + ($20 ✕ 50) = 1500 2016 ($100 ✕ 20) + ($30 ✕ 100) = 5000 100 ✕ [(5000 – 1500)/ 1500] = 233 2017 ($150 ✕ 20) + ($50 ✕ 200) = 13000 100 ✕ [(13000 – 5000)/ 5000] = 160 Real GDP (Base year 2015) 2015 $ 2015 ($50 ✕ 10) + ($20 ✕ 50) = 1500 2016 ($50 ✕ 20) + ($20 ✕ 100) = 3000 100 ✕ [(3000 – 1500)/ 1500] = 100 2017 ($50 ✕ 20) + ($20 ✕ 200) = 5000 100 ✕ [(5000 – 3000)/ 3000] = 67 100 value Old value Old value New Rate Growth − =
- 20. Zambia's Real GDP Growth from Mar 2015 to Sep 2017
- 21. Components of GDP We need to pay attention not only to the total expenditure on all final goods and services made in a country (that is, GDP), we also need to watch where the expenditure is coming from GDP = Consumption Spending + Investment Spending + Government Spending + Exports – Imports
- 22. The Components Of GDP Consumption (C): ◦The spending by households on goods and services, with the exception of purchases of new housing. Investment (I): ◦The spending on capital equipment, inventories, and structures, including new housing.
- 23. The Components Of GDP Government Purchases (G): ◦The spending on goods and services by local, state, and federal governments. ◦Does not include transfer payments because they are not made in exchange for currently produced goods or services. Net Exports (NX): ◦Exports minus imports.
- 24. Components of GDP - Zambia Time Scale Household & NPISH final consumption Government consumption Gross Fixed Capital Formation Changes in inventories Exports of goods and services Import of goods and services Units Kwacha Kwacha Kwacha Kwacha Kwacha Kwacha 2013 billions 78.997 18.439 39.400 12.110 61.263 66.759 2014 billions 87.146 24.263 51.805 5.064 64.854 68.894 2015 billions 92.920 27.105 70.491 7.981 68.105 86.512 2016 billions 102.207 34.731 78.704 3.859 76.336 83.487 2017 billions 115.692 33.788 95.567 5.404 86.171 90.111 2018 billions 123.741 34.971 96.614 9.716 104.449 101.625 2019 billions 126.937 53.132 107.430 10.532 104.064 102.618 2020 billions 127.845 48.876 99.227 8.059 155.448 108.090 2021 billions 145.316 75.800 128.192 12.635 230.896 150.361 2022 billions 175.872 70.752 124.006 9.268 198.544 143.760 Components of GDP
- 25. Calculating GDP Practically The Output Method measures GDP as the value of •Output (what is produced) •minus the value of goods and services used up in producing these outputs (the inputs) •plus all taxes on products like VAT •minus all subsidies on products like renewable energy subsidies
- 26. Calculating GDP Practically ▪The income method measures GDP by adding together: ▪The Gross Profit of companies and the Self-Employed, ▪plus the wages of employees (Compensation of Employees). ▪plus all Taxes on Products like VAT ▪minus all subsidies on products.
- 27. Calculating GDP Practically ▪The expenditure method measures GDP by adding together: ▪Consumer spending by individuals (Personal Consumption Expenditure) ▪plus Net Expenditure by Central and Local Government ▪plus all Capital Spending (such as buildings and machines) ▪plus Exports, ▪minus Imports
- 28. Calculating GDP Practically Transfer Payments $54 Interest Income $150 Depreciation $36 Wages $67 Gross Private Investment (I) $124 Business Profits $200 Indirect Business Taxes $74 Rental Income $75 Net Exports (X-M) $18 Net Foreign Factor Income $12 Government Purchases (G) $156 Household Consumption (C) $304 Calculate the GDP using the expenditures approach GDP = C + G + I + (X - M) ▪In this case the C is represented by Household Consumption which is $304. ▪The G refers to Government Spending which is $156. ▪ I is gross private investment and is $124. ▪ (X - M) is the net exports and in the table is shown to be $18. Therefore: GDP = $304 + $156 + $124 + $18 GDP = $602