Data of Macroeconomics (Measuring a nation’s income (Gross Domestic…
Data of Macroeconomics
the difference between microeconomics and macroeconomics
Microeconomics is the study of how individual households and firms make decisions and how they interact with one another in markets.
Macroeconomics is the study of the economy as a whole.
Some questions that macroeconomics aims to answer are:
Why is average income high in some countries and low in others?
Why do prices rise rapidly in some periods while they are more stable in other periods?
Why do production and employment expand in some years and contract in others?
Measuring a nation’s income
Gross Domestic Product (GDP)
For an economy as a whole, income must equal expenditure
We use GDP to measure an economy’s income and expenditure
all items produced in the economy and sold legally in markets.
most items that are produced and consumed at home and that never enter the marketplace.
items produced and sold illicitly, such as illegal drugs.
Components of GDP
Y = C + I + G + NX
C (Consumption): The spending by households on goods and services, with the exception of purchases of new housing.
I (Investment): The spending on capital equipment, inventories, and structures, including new housing.
G (Government purchases ): The spending on goods and services by local, state, and federal governments, excluding transfer payments.
NX (net exports) = exports-imports
Real vs. nominal GDP
Nominal GDP values the production of goods and services at current prices.
Real GDP values the production of goods and services at constant prices.
The GDP deflator is a measure of the price level
It tells us the rise in nominal GDP that is attributable to a rise in prices rather than a rise in the quantities produced.
GDP Deflator=Nornimal GDP/Real GDP x 100
GDP and economic wellbeing
GDP is the best single measure of the economic wellbeing of a society.
GDP measures our ability to satisfy material needs which helps improve our wellbeing.
Nations with larger GDP can afford
More expenditure on things that we value, e.g., arts
GDP is strongly correlated with other measures of the quality of life.
GDP per person tells us the income and expenditure of the average person in the economy.
Higher GDP per person indicates a higher standard of living.
However, GDP is not a perfect measure of the happiness or quality of life.
Some things that contribute to wellbeing are not included in GDP.
the value of leisure
the value of a clean environment
the value of almost all activity that takes place outside of markets, such as the value of the time parents spend with their children and the value of volunteer work.
Measuring the cost of living
Consumer price index (CPI)
The consumer price index (CPI) is a measure of the overall cost of the goods and services bought by a typical consumer.
The CPI is used to monitor changes in the cost of living over time.
When the CPI rises, the typical family has to spend more dollars to maintain the same standard of living.
The Australian Bureau of Statistics (ABS) reports the CPI each month.
How is the CPI calculated?
Fix the basket: Determine which goods/services are most important to the typical consumer.
The Australian Bureau of Statistics (ABS) identifies a market basket of goods and services the typical consumer buys.
The ABS conducts regular consumer surveys to determine what they buy and how much they pay.
Find the prices of each of the goods and services in the basket for each point in time.
Calculate the basket’s cost: Calculate the costs of the basket of goods and services at different times.
Choose a base year and compute the index: Divide the price of the basket in one year by the price in the base year and multiplying by 100.
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.
Calculating the inflation rate
Inflation refers to a situation in which the economy’s overall price level is rising.
The inflation rate is the percentage change in the price level from the previous period.
inflation rate in year 2=[(CPI in year 2 - CPI in year 1)/CPI in year 1] x 100
inflation rate in year 2 =[(GDP deflator in year 2 - GDP deflator in year 1)/ GDP deflator in year 1] x 100
Problems in measuring of the cost of living
The basket does not change to reflect consumer reaction to changes in relative prices, thus overstates the increase in the cost of living.
Introduction of new goods
Greater variety of goods makes each dollar more valuable, which lowers the cost of living.
A fixed basket does not reflect the change in purchasing power brought on by the introduction of new products.
Unmeasured quality changes
Means that we may not be comparing the same basket over time.
The GDP deflator vs. the CPI
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 group of goods changes automatically over time.
The CPI reflects the prices of all goods and services bought by consumers.
The CPI compares the price of a fixed basket of goods and services to the price of the same basket in the base year.
The ABS change the basket once every 4-5 years.
Nominal and Real interest rates
The nominal interest rate is the interest rate usually reported and not corrected for inflation.
The real interest rate is the interest rate that is corrected for the effects of inflation.
Real interest rate = nominal interest rate – inflation rate