chapter 2: macroeconomics indicators Flashcards
the uses of CPI
- to harmonize countries
- health index
- Smoothed index
- Central index
GDP
Gross Domestic Product equals the market value of all final goods & services produced within a given geographic area in a given period of time
or
equals the total expenditure on final goods & services produced within a given geographic area in a given period of time.
Macroeconomic Indicators
- Measuring Unemployment
- Measuring Economic Activity
- Measuring The Cost of Living
- Appendix: Measuring Growth
Microeconomics is concerned with
- Individual decisions, such as
- households
- corporations - Interactions between economic agents on one specific market
- Incidence of public interventions
Macroeconomics is concerned with all questions related to the global workings of an economy among which:
1 Evolution (growth) of economic activity and income long-run trend & short-run fluctuations causes of income inequalities between countries
2 Global (un)employment
3 Inflation (growth of the general level of prices)
4 Influence of public authorities on the above-mentionned variables
5 Consequences of public debt
The activity rate depends on
- The activity rate depends on the average schooling length (beyond compulsory education)
- cultural determinants (e.g. attitude w.r.t. workplace gender equality)
- the importance of early retirement
Aggregate
Synthetic indicator of a set of elementary variables
Ockham’s razor
Macroeconomists drastically simplify reality
and consider only a very restricted number of agents (Households, Enterprises, Government, Rest of the world) and markets (Goods & Services, Factors of production, Money).
How is unemployment defined?
1 Claimant count ➥ Number of claimants
PRO: Easy and cheap to establish
How is unemployment defined?
2 Labour-force survey ➥ No work during the reference week, willing to work in the coming 2 weeks and actively looking for employment for at least 4 weeks, or waiting to start working within 3 months
PRO: Uniform definition (ILO)
CON: Costly to establish
Natural Rate of Unemployment
The natural rate of unemployment is the normal rate of unemployment around which the unemployment rate fluctuates.
Cyclical Unemployment
The cyclical unemployment is the deviation of unemployment from its natural rate.
Economic activity
= Value of “what is traded” in an economy
(Why “value” and not “quantity”?= Compare an economy producing only carrots with an
economy producing computers)
Value Added
The value added of a production i = 1, . . . , n during period t is the difference between:
- the market value of that production Pit Qit
and the market value of the intermediate goods & services consumed for its production (:CIit)
GNP
Gross National Product:
➥ . . . produced by resident factors of production in a given period . . .
NDP
Net Domestic Product:
➥ . . . the market value, taking depreciation into account, of all final goods & services . . .
GDP is a measure of
1 total production of final G&S on the territory
➥ Sum of all values added
2 total income generated on the territory
➥ Sum of all primary incomes
3 total expenditure on the territory’s final production
➥ Sum of all spendings
Primary Income
Primary incomes describe the earnings received in compensation for the creation of value added.
- the sum of all values added is necessarily
equal to the sum of all primary incomes
Secondary incomes
such as allowances, unemployment or
retirement benefits, etc.
are transfers of money, i.e., not compensations for creating value added
The earnings from creating value added are distributed to
- public authorities (production taxes, incl. VAT)
- factors of production (labour, capital. . . )
gross mixed income
The earnings distributed to the self-employed (worker + shareholder)
GDI
Gross Domestic Income, (GDP as total income) equals the sum of all primary incomes created within a given geographic area in a given period of time.
- does NOT include secondary income
Disposable Income
Household Disposable Income
= Primary Income + Received Transfers - Paid Transfers
Suppose we find different values for GDP in two different periods of time.
- What could cause this difference?
The two values might be different because:
☞ the volume of final production has changed
☞ the prices at which production is valued have changed!
Nominal Variable
Variable measured in current monetary units, i.e., based on the prices that prevail when measured
Examples:
- Total purchases at a store checkout
- Balance of a bank account
Real GDP or GDP in Volume
Value of all final goods & services based on the prices of a reference year rather than on the current prices.
Two methods for computing real GDP: (what you need)
1 GDP at constant prices
2 GDP at chained volumes
Using constant prices leads to issues such as:
1) How to value new goods that didn’t exist in the base period?
2) Should we keep the same price if the quality of a good has significantly increased/decreased since the base period?
3) Shouldn’t changes in relative prices be reflected?
Per-Capita GDP & GNP
- The ratio GDPt/Nt, is the primary income created by a resident on average.
- The ratio GNPt/Nt, is the primary income received by a resident on average
International Comparisons
Difficulties:
1 Exchange rate fluctuations
2 Disparities in purchasing power r (i.e., quantity of G&S onemonetary unit can buy) within a monetary zone
Purchasing-Power Parity Index
A PPP index is a conversion rate between two currencies that is calculated by comparing the domestic purchasing power of each currency
is GDP/cap.
A Good Measure of Well-Being?
Indicator of material living conditions in a country
Does not account for income inequalities
Does not account for these (correlated) aspects:
- Health, life expectancy
- Leisure, out-of-market activities
- Environment
- Crime rate, etc
Consumer Prices Index:
The CPI measures the overall cost of goods and services bought by a typical consumer.
Inaccuracies / Remarks of Measuring The Cost of Living
1 Substitution bias
2 Introduction of new goods
3 Unmeasured changes in quality
Substitution bias
☞ Consumer adjust their consumption in reaction to changes in relative prices (they consume less of the goods whose price has risen comparatively more)
➥ CPI overstates inflation
Introduction of new goods
☞ Greater choice for consumers
➥ CPI loses representativeness
Unmeasured changes in quality
☞ The quality of the G&S contained in the basket can change and this would justify a change in prices
➥ If quality rises, CPI overstates inflation
CPI vs. GDP Deflator Comparison:
- Similarities
Both measure the overall level of prices
➥ Both can be used to compute inflation
Both depend on the chosen base period
➥ The value in any period only makes sense
when compared to the value in another
period
CPI vs. GDP Deflator Comparison:
- Differences
- Price level of what is consumed [CPI]
vs.
Price level of what is produced [Deflator] - Fixed basket [CPI]
vs.
Quantities change [Deflator]
Real Variable
Ratio of a nominal variable to a price index
Indexation,
Existing Indices In Belgium
1 CPI 2 Harmonized CPI 3 Health index (“indice santé”) 4 Smoothed index (“indice lissé”) 5 Central index (“indice pivot”)
Harmonized CPI
☞ Common European methodology to enable comparisons between EU countries
Health index (“indice santé”)
☞ Based on the CPI product basket without
- alcoholic beverages
- tobacco products
- motor fuels (except for LPG)
Smoothed index (“indice lissé”)
☞ Arithmetic (= rekenkundig) average of the 4 latest monthly health indices
Central index (“indice pivot”)
☞ Theoretical threshold that triggers an indexation wheneverthe smoothed index exceeds it
☞ Each threshold is 2% higher than the previous one
