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Topic 7 (GDP & Economic Growth) :: The Consumer Price Index

GDP is the total value of goods and services produced in an economy annually. It can be calculated through the income, expenditure, or output approach. Nominal GDP uses current prices while real GDP is adjusted for inflation using a price index. Unemployment refers to those actively seeking work but unable to find a job. It is calculated as a percentage of the labor force and excludes discouraged workers. Inflation is a sustained increase in the overall price level in an economy, measured by changes in a consumer price index.

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Nguyen Trung Kien ( Swinburne HN)
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24 views

Topic 7 (GDP & Economic Growth) :: The Consumer Price Index

GDP is the total value of goods and services produced in an economy annually. It can be calculated through the income, expenditure, or output approach. Nominal GDP uses current prices while real GDP is adjusted for inflation using a price index. Unemployment refers to those actively seeking work but unable to find a job. It is calculated as a percentage of the labor force and excludes discouraged workers. Inflation is a sustained increase in the overall price level in an economy, measured by changes in a consumer price index.

Uploaded by

Nguyen Trung Kien ( Swinburne HN)
Copyright
© © All Rights Reserved
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Download as DOCX, PDF, TXT or read online on Scribd
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Topic 7 (GDP & Economic Growth):

Definition of GDP
GDP is the total market value of all final goods and services produced in an economy during a period
of time( Annually).

Components of GDP
GDP ( Y) = Consumption + Investment +Government’s spending + ( Export – Import )
Calculating GDP
Income Measure
GDPY=Adding up the total amount of incomes received by household for supplying factor inputs
GDPO = Adding up the total value of output of g&s produced by firms in the economy
GDPE= Adding up the total amount of spending on domestic outputs.
Inflating GDP
The Consumer Price Index
This measures the price level of a ‘market basket’ of goods and services for a typical family in the
capital cities (it is published quarterly by the ABS)
The Implicit Price Deflator
This measures the average level of price changes of C, I, G and Net export expenditure and is derived
from the quarterly National Accounts data.

Calculations of nominal GDP, real GDP, nominal GDP per capita, real GDP per capita, nominal wage,
real wage
Nominal GDP is calculated on the basis of current prices:
For example
Nominal GDP2005 = Quantity2005 x Price2005

Real GDP is based on prices which applied in the "base" year:


Real GDP2005 = Quantity2005 x PriceBaseYear
Real GDP = Nominal / Price Index *100

GDP Deflator = Nominal GDP x 100


Real GDP

Real GDP( Actual GDP compared to the base year ) vs. nominal GDP( Current GDP),
real variables ( Dollars )vs. nominal variables( Outputs)
Long-term growth
GDP per hour worked is proportional with Capital per hour worked ( Move along)
Technological advances enable to boost GDP per hour worked while remaining the capital per hour
worked

Topic 8 (Unemployment & Inflation):


Definition of unemployment
To be classified as employed, a person must have worked in paid employment only 1 hour or more in
the week before the survey.
To be classified as unemployed, a person must have been actively looking for work in the past 4
weeks, and must be ready to start work immediately.

 Unemployment rate: The percentage of the labour force that is unemployed.


 Labour force: The sum of employed and unemployed workers in the economy.
 Discouraged workers: People who are available for work but have not looked for a job during
the previous four weeks because they believe no jobs are available for them.
Shortcomings:
1. The number of discouraged workers increases during a recession, therefore the official
unemployment rate appears lower than it would otherwise be.
2. Under-employed workers – people who work part-time but would like to work more hours.
3. People who claim to be unemployed but are not, can lead to the unemployment rate being
overstated.

Types of unemployment
 Frictional unemployment arises when people are between jobs for normal reasons.
 Structural unemployment is caused by shifts in the pattern of demand, or technological changes,
such that some industries become smaller, and some skills become obsolete.
 Natural unemployment is essentially steady over the course of the business cycle.
 Cyclical unemployment varies with the business cycle, that is, it depends on the state of the
economy: it rises when the economy is weak and falls when the economy is strong
 Actual unemployment = natural + cyclical unemployment

Inflation
Inflation: The sustained increase in the general level of prices in the economy.
Price level: A measure of the average prices of goods and services in the economy.
Inflation rate: The percentage increase in the general price level in the economy from one year to the
next.

CPI and Inflation calculation .

Base Year (2012) 2015 2016


Product Quant Pric Expendit Price Expenditures (on base year q Pric E
ity e ures uantities) e u

Eye exa 1 $50.  $50.00 $100. $100.00 $85.  $


ms 00 00 00
Pizzas 20 200.00 300.00 2
10.0 15.00 14.0
0 0
Books 20 500.00 500.00 5
25.0 25.00 27.5
0 0
Total $750.00 $900.00 $

CPI =( Expenditure in the current year / Expenditure in the base year ) * 100
Inflation rate( CPI n -CPI n-1)/ CPI n-1
Value of currency in the base year = Value in the compared year* (CPI in the compared year / CPI in
the base year)
Causes of inflation
Sources of a supply shock can include:
 Increases in import prices
 Increases in wages
 Increases in indirect taxation
 Increases in monopoly power in product markets
 Natural disasters, such as droughts, floods, earthquakes

Effects of inflation (both anticipated and unanticipated inflation)

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