theme2+4 Flashcards
Aspects of GDP
- It’s about production of concrete (final) goods and services
- Measured production in a geographical area
- There’s a time dimension
GDP doesn’t take into account
- Home production
- Second-hand goods
- Production of illegal goods and services
- Value of financial or real assets
- Indirect costs on society: pollution, well-being, etc.
Real GDP (RGDP)
is calculated at constant prices, if the value change, we know that it will be caused by fluctuations in real output and not by fluctuations in prices
Nominal GDP (NGDP)
Nominal GDP (NGDP) is calculated at current prices
Can fluctuate due to changes in output or prices
Total GDP derived from
- Number of workers
- Production per worker
GDP per capita
Don’t represent the “true distribution” of income.
- Inequalities aren’t captured: Higher inequalities = less representative
- But good measure to get a general idea: Adequate approximation for the average material standard of living in an economy
- Generally, high-income economies (high GDP per capita) share several characteristics: easy access to drinking water and electricity, …
To compare GDP
Express everything in same currency
Problems:
1. Exchange rate fluctuates: Can fluctuate while production activity in both countries barely moves
2. 1 USD doesn’t correspond to the same quantity of goods/serv between economies (in terms of baskets of goods and services)
GDP Deflator
100 * (NGDP/RGDP)
I= Capital expenditures
- Residential construction
- Commercial construction
- Addition of machines and equipment
- Investment/ disinvestments in inventories
- Private and public infrastructures
CPI
Constant quantities
Change in CPI = Change in basket price
=Cost basket year/Cost basket base year
Cause of inflation
Inflation in the economy as a whole is caused by demand > production capacity.
- Too much demand relative to production capacity usually comes from too big of a growth in money creation relative to the growth of the economy’s production capacity.
- Money creation becomes ability and willingness to pay in the ST
High and/or volatile inflation has costs
- Decline in value of wealth: inflation reduces the value (in number of consumption baskets) of wealth
- Decline in purchasing power of people on fixed income: inflation increases the price of goods while their income remains the same
- Disproportionate impact on the poorest: Low-income people spend almost all of their income on consumption expenditures (have a high marginal propensity to consume) which becomes more expensive through inflation, thus lowering their standard of living
- Rising interest rates: when inflation rises, savers lose purchasing power on savings, to preserve purchasing power, there will be a quest for higher returns to compensate the anticipated loss caused by inflation
- Arbitrary reallocation of purchasing power between lenders and borrowers
- Potential changes in relative prices and resource allocation
- Price adjustment costs
- Tax distortions
Effect of inflation on returns
In LR, real returns will not be impacted by changes in inflation, so nominal interest rate will adjust
in LR, a permanent increase in inflation will cause a proportional increase in nominal interest rates. (Fisher equation)
Tax distortions:
If the taxation of income earned from savings is not adjusted for inflation, this taxation discourages saving.
The higher the inflation, the lower the net real return, which discourages saving:
return on savings ↓ when inflation↑
Labour market indicators
- Participation rate
- Unemployment rate:
High unemployment rate: significant distress in the population - Employment rate:
Low employment rate: standard of living lower than it could be
