Lecture 5: GDP and economic growth

Question 1

What is macroeconomics?

Answer 1

The focus lies on the economy as a whole. For example:
• How many people are employed in the economy as a whole this year?
• How much richer are we (on average) compared to fifty years ago?
• Why are there income differences across countries?
• Has the aggregate price level gone up or down?
• What is the mechanism that explains aggregate output going up or
down?

Question 2

Gross Domestic Product (GDP)

Answer 2

Definition: GDP is the total value of all final goods and services produced
in an economy during a given period

• measures how much output the economy produces

• A final good is a good that is sold to the final user: buying a car
• If a car manufacturer buys steel to produce a car, this is not considered
to be a final good. But it is an intermediate input in production
• When calculating GDP we do not include (explicitly) these intermediate
inputs

Question 3

Consumer Price Index

Answer 3

measures price level and can be used to evaluate whether prices 
have increased (inflation) or decreased (deflation)

Question 4

Two other ways to measuring GDP

Answer 4

1. Products and services that are produced are also bought by someone.
   Thus GDP is equal to total spending on domestically produced final
   goods and services in the economy
2. Each sale in the economy must accrue to someone as income—either
   as wages, profit, interest, or rent. So a third way of calculating GDP is
   to sum over all income earned

• All three ways of measuring GDP should give the same result

Question 5

nominal GDP

Answer 5

how much the economy

produces in euros

Question 6

Real GDP

Answer 6

Real GDP is nominal GDP divided by the price level

Question 7

How to calculate the price level?

Answer 7

= CPI

• The most commonly used price level is the Consumer Price Index (CPI)
• It first determines which products households often use (a basket of products)
• Then it looks at how prices change over time
• It aggregates assuming that consumption of each product remained constant

Question 8

What with new products?

Answer 8

The CPI only calculates changes based on products that existed in 2021
(the basket of good refers to 2021)

= CPI overestimates price change

Question 9

inflation

Answer 9

CPI goes up

Question 10

deflation

Answer 10

CPI goes down

Question 11

Is GDP a good measure of well-being?

Answer 11

correlation does not necessarily mean there is causality