Ch 2. National Accountability and macroeconomic aggregates

Question 1

What is GDP?

Answer 1

Gross Domestic Product (GDP) measures the market value (m.u.) of the output of all final goods and services produced by domestic and foreign factors of production within a country (within a country’s border at a given time (flow variable)
Its the main economic indicator for measuring the level of economic activity and aggregate production (total output) of an economy
It is measured by INE quarterly in Spain

Question 2

Point out activities not included in GDP

Answer 2

1. What is not sold (household production: housework, child and elderly care)
2. Underground economy (what is not declared)
3. Illegal economy:(prostitution, drug trafficking and smuggling)
4. Sale of second-hand goods

Question 3

According to the total spending method to calculate GDP, Explain the components

Answer 3

• Consumption (C)= Expenditure on consumer goods and services
• Invesment (I)= Expenditure on newly produced capitak goods (incl. equipment, buildings, and inventories = unsold output
• Goverment spending (G)= Goverment expenditure on goods and services (excluding transfers to avoid double-counting)
• Net exports (trade balance)= Exports (X) minus imports (M)

GDP =C + I + G +X - I (also known as Y or aggregate demand)

Question 4

How do we account for international transaction? And goverment?

Calculation of GDP (t.spending.meth)

Answer 4

1. We include exports and exclude imports, so that GDP includes value added, income from, or consumption of, domestic production.
2. Treat goverment as another producer - public services are “bought” via taxes. Also asume that cost of production captures the value added.

Question 5

Commonly, what component of agreggate demand makes up the mayority of it?

Answer 5

In most countries private consumption makes up the largest share of GDP.

Question 6

What is the nominal GDP? What is real GDP? How do you calculate them?

Answer 6

◈GDP nominal: Its the sum of the quantities of final goods produced and multiplied by their current price. This indicates nominal GDP increases over time for 2 reasons:
* The production of most goods rises over time
* The price of most goods also rises over time

GDP nominal (current prices)= Q_t x P_t

◈Real GDP is the sum of the production of final goods multiplied by constant (rather than current) prices.
If our objective is to measure production and its evolution over time, it is convenient to eliminate the effect of inflation when measuring GDP.

GDP real (constant prices)= Q_t x P_{base year}

Qt= quantities

Question 7

Differences between nominal GDP growth and real GDP growth?

Answer 7

Nominal GDP growth reflects changes in production (quantities) and the change in prices (inflation). In contrast the real GDP growth reflects only the change in output (quantities).
In addition:
* Nominal GDP Growth ≅ Production Growth + Price Growth.
* Real GDP growth = Production growth
* Nominal GDP growth - Real GDP growth ≅ Price growth.
* As long as there is inflation (positive price growth), nominal GDP growth will be greater than real GDP growth

Question 8

Chained volume indexes

Answer 8

The methodology is based on valuing each year’s production using the previous year’s prices (“chained”).
This method improves on the calculation of GDP at “fixed” base year prices, since it was losing realism as we moved away from the base year.
A volume index does not provide information on the monetary value of GDP (in euros), it is merely an indicator of the evolution of production. It is therefore advisable to calculate the growth rate of chained volume indexes.

Question 9

About deflators

Answer 9

A deflator is a price index. A price index collects the prices of a “basket of goods and services” produced in an economy (not imported) over a period of time.
Price index= P₂₀₁₆/P₂₀₁₀
In the base year the deflator by definition takes a value of 100.
* If the deflator is greater than 100 it means that prices have increased with respect to the base year (inflation).
* If the deflator is less than 100 it means that prices have decreased
compared to the base year

Question 10

GDP deflator and its rate of change

Answer 10

• How it is calculated: it is the quotient between nominal GDP and
  real GDP (in percent).
  GDP deflator= Nominal GDP/Real GDP = (SumQ x P_t) / (SumQ x P_base) → If we take out SumQ/SumQ= 1 →

GDP Deflator = P_t / P_base

• Rate of change of the GDP deflator ≅ Rate of change nominal
  GDP - Rate of change real GDP.

Question 11

Personal income vs Personal disposable income

Answer 11

Personal income: Total earnings generated by individual.
Personal disposable income: Personal income after taxes have been payed.

Question 12

Relation between savings and invesments

Mathematically

Answer 12

GDP = Y
Yd = C + Sp
Yd = Y – T + TR
Y = C + I + G + X – M
Replacing:
[C+I+G+(X–IM)] – T + TR= C + Sp
Sp = I + G + X – IM – T + TR
Sp + (T – G – TR) = I + XN
Sp + Sg = I + XN
Sp: private savings
Sg: public savings
(Sp – I) = Surplus (>0) or deficit (<0) of private sector
XN: X-M

Question 13

What is inflation? How to calculate it?

Answer 13

• Inflation is the increase in the general price level. Inflation tends to be lower during recessions (high unemployment).
• To calculate a country’s inflation rate, we calculate the growth rate of a price index. There are many price indexes. The most common ones for measuring inflation are the GDP Deflator, the Private Consumption Deflator and the Consumer Price Index (CPI), the latter being the most commonly
  used.
• The private consumption deflator is calculated as the ratio of private
  consumption (current prices) to private consumption (constant prices).
• In Spain, the Consumer Price Index (CPI) is used to measure inflation. The CPI represents the cost of a basket of goods and services representative of a domestic economy (weights).

Question 14

Measuring inflation

Answer 14

◈The Consumer Price Index (CPI) measures the general level of prices that consumers have to pay for goods and services, including consumption taxes.
* Based on a representative bundle of consumer goods – “cost of living”
* Common measure of inflation = change in CPI

◈GDP deflator = A measure of the level of prices for domestically produced output (ratio of nominal to real GDP)
* Tracks prices of components of GDP (C, I, G, NX)
* Allows GDP to be compared across countries and over time

Question 15

Labour market indicators

Answer 15

Unemployment rate = Unemployed / Labour force
Activity rate = Labour force / active age population
Employment rate= Employed / active age population