Nominal and Real GDP.pptx for macroeconomics
- 1. Nominal and Real GDP •Nominal GDP:? •Real GDP:?
- 3. Real GDP and Price Index PRICE INDEX(PI) = 100*(Price in year t)/(price in base year) Real GDP = (Nominal GDP)/(Prce index; inhundreds) % Real GDP = % Nominal GDP- % Pirice Index Price Index = GDP Deflator
- 4. Real GDP and Price Index YEAR CUP OF LATTES PRICE PER CUP NOMINAL GDP PRICE INDEX REAL GDP 2012 1000 $2 2013 1200 $3 2014 1800 $4 2015 1600 $5
- 7. Measuring the Cost of Living • Inflation (π) • occurs when the economy’s overall price level is rising. • Inflation Rate (π%) • the percentage change in the price level from one time period to another.
- 8. THE CONSUMER PRICE INDEX • The consumer price index (CPI) is a measure of the overall cost of the goods and services bought by a typical consumer. • The Bureau of Labor Statistics reports the CPI each month. • It is used to monitor changes in the cost of living over time.
- 9. THE CONSUMER PRICE INDEX • When the CPI rises, the typical family has to spend more dollars to maintain the same standard of living.
- 10. How the Consumer Price Index Is Calculated • Fix the Basket: Determine what prices are most important to the typical consumer. • The Bureau of Labor Statistics (BLS) identifies a market basket of goods and services the typical consumer buys. • The BLS conducts monthly consumer surveys to set the weights for the prices of those goods and services.
- 11. • Find the Prices: Find the prices of each of the goods and services in the basket for each point in time. How the Consumer Price Index Is Calculated
- 12. • Compute the Basket’s Cost: Use the data on prices to calculate the cost of the basket of goods and services at different times. How the Consumer Price Index Is Calculated
- 13. • Choose a Base Year and Compute the Index: • Designate one year as the base year, making it the benchmark against which other years are compared. • Compute the index by dividing the price of the basket in one year by the price in the base year and multiplying by 100. How the Consumer Price Index Is Calculated Consumer Price Index(CPI)=100*(Spending current year)/(Spending base year)
- 14. How the Consumer Price Index Is Calculated
- 15. • Compute the inflation rate: (π%) The inflation rate is the percentage change in the price index from the preceding period. How the Consumer Price Index Is Calculated
- 16. • The Inflation Rate (π%) • The inflation rate is calculated as follows: Inflation Rate in Year 2 = CPI in Year 2 - CPI in Year 1 CPI in Year 1 100 How the Consumer Price Index Is Calculated
- 17. Calculating the Consumer Price Index and the Inflation Rate: An Example
- 19. How the Consumer Price Index Is Calculated • Calculating the Consumer Price Index and the Inflation Rate: Another Example • Base Year is 2002. • Basket of goods in 2002 costs $1,200. • The same basket in 2004 costs $1,236. • CPI = ($1,236/$1,200) 100 = 103. • Prices increased 3 percent between 2002 and 2004.
- 20. FYI: What’s in the CPI’s Basket? 16% Food and beverages 17% Transportation Medical care 6% Recreation 6% Apparel 4% Other goods and services 4% 41% Housing 6% Education and communication Copyright©2004 South-Western
- 21. Problems in Measuring the Cost of Living • The CPI is an accurate measure of the selected goods that make up the typical bundle, but it is not a perfect measure of the cost of living.
- 22. Problems in Measuring the Cost of Living • Substitution bias • Introduction of new goods • Unmeasured quality changes
- 23. • Substitution Bias • The basket does not change to reflect consumer reaction to changes in relative prices. • Consumers substitute toward goods that have become relatively less expensive. • The index overstates the increase in cost of living by not considering consumer substitution. Problems in Measuring the Cost of Living
- 24. • Introduction of New Goods • The basket does not reflect the change in purchasing power brought on by the introduction of new products. • New products result in greater variety, which in turn makes each dollar more valuable. • Consumers need fewer dollars to maintain any given standard of living. Problems in Measuring the Cost of Living
- 25. • Unmeasured Quality Changes • If the quality of a good rises from one year to the next, the value of a dollar rises, even if the price of the good stays the same. • If the quality of a good falls from one year to the next, the value of a dollar falls, even if the price of the good stays the same. • The BLS tries to adjust the price for constant quality, but such differences are hard to measure. Problems in Measuring the Cost of Living
- 26. • The substitution bias, introduction of new goods, and unmeasured quality changes cause the CPI to overstate the true cost of living. • The issue is important because many government programs use the CPI to adjust for changes in the overall level of prices. • The CPI overstates inflation by about 1 percentage point per year. Problems in Measuring the Cost of Living
- 27. The GDP Deflator versus the Consumer Price Index • The GDP deflator is calculated as follows: GDP deflator = Nom inal GD P Real GDP 100
- 28. The GDP Deflator versus the Consumer Price Index • The BLS calculates other prices indexes: • The index for different regions within the country. • The producer price index, which measures the cost of a basket of goods and services bought by firms rather than consumers.
- 29. The GDP Deflator versus the Consumer Price Index • Economists and policymakers monitor both the GDP deflator and the consumer price index to gauge how quickly prices are rising. • There are two important differences between the indexes that can cause them to diverge.
- 30. • The GDP deflator reflects the prices of all goods and services produced domestically, whereas... • …the consumer price index reflects the prices of all goods and services bought by consumers. The GDP Deflator versus the Consumer Price Index
- 31. • The consumer price index compares the price of a fixed basket of goods and services to the price of the basket in the base year (only occasionally does the BLS change the basket)... • …whereas the GDP deflator compares the price of currently produced goods and services to the price of the same goods and services in the base year. The GDP Deflator versus the Consumer Price Index
- 32. REAL and NOMINAL INCOME • Real Income this year = Nominal Income this year/CPI this year(in hundreds) • Example: Nominal income 2023=$40.000 Nominal income 2024=$41.000 CPI(2023)=234.8 Base Year:1984 CPI(2024)=236.5 Real income(2023) =? Real income(2024) =?
- 33. Is Inflation Bad? • Expected Inflation: • Unexpected Inflation:
- 34. Real (r%) and Nominal Interest (i%) Rates • Interest represents a payment in the future for a transfer of money in the past.
- 35. • The nominal interest (i%) rate is the interest rate usually reported and not corrected for inflation (π%). • It is the interest rate that a bank pays. • The real interest rate (r%) is the nominal interest rate that is corrected for the effects of inflation (π%). Real (r%) and Nominal Interest (i%) Rates
- 36. Nominal interest rate = Real interest rate + Expected Inflation “Fisher’s Hypothesis” Real (r%) and Nominal Interest (i%) Rates
- 37. The Costs of Inflation ■ Financial wealth is eroded ■ Savings are discouraged ■ Menu costs—resources are misallocated with rising prices ■ Inflation tax—wealth is redistributed from lenders to borrowers