Chapter 2 Data of Macroeconomics

Mentor Pham Xuan Truong

[email protected]
 Content
I National income - Gross domestic products (GDP)
1 Definition
2 Methods of computing GDP
3 Other measurements of national income
4 Nominal GDP, real GDP and GDP deflator
5 GDP and net economic welfare
II Cost of living - Consumer price index (CPI)
1 Definition
2 Method of computing CPI
3 Problems in measuring CPI
4 CPI versus GDP deflator
5 Apply CPI in practice
 I Gross domestic products (GDP)
1 Definition
Gross Domestic Product (GDP) is the market value of all final
goods and services produced within an economy in a given period
of time.
Concepts must be noticed
- Market value: reflect the value of the goods
- of all: all items produced in the economy and sold legally in
markets excluding most items produced and sold illicitly or
produced and consumed at home
- Final goods and services: Value of intermediate goods is already
included in the prices of the final goods
- Produced within an economy: Goods and services produced
domestically, regardless of the nationality of the producer
- a given period of time: A year or a quarter
All transaction implemented in 2021
1. Water bill paid by car washing house hold
2. Sell old villa of your family
3. Buy drug to celebrate 20.11
4. Buy imported car produced in Japan
5. Water bill paid by non-business household
 I Gross domestic products (GDP)
2 Methods of computing GDP
Let’s examine Circular-flow diagram with two assumptions:
+ All goods and services – bought by households (economy
includes only firms and households
+ Households - spend all of their income (no saving)

Households buy goods and

services from firms, and firms
use their revenue from sales to
pay wages to workers, rent to
landowners, and profit to firm
owners. GDP equals the total
amount spent by households in
the market for goods and
services. It also equals the
total wages, rent, and profit
paid by firms in the markets for
the factors of production.
 I Gross domestic products (GDP)
2 Methods of computing GDP

There are 2 ways Total income of everyone in the economy

of viewing GDP Total expenditure on the economy’s
output of goods and services

For the economy as a whole, income must equal

expenditure.
 I Gross domestic products (GDP)
2 Method of computing GDP
+ Expenditure approach – GDP as aggregate expenditure

GDP = C + I + G + (X-M)
= C + I + G + NX
Component of aggregate expenditure
C: consumption spending by households except purchases of new
houses
I: investment spending by business (capitals, inventories) and
households (houses)
G: government purchases of goods and services except transfer payment
NX (X –M): net export or net foreign demand for domestic goods. X is
spending on domestically produced goods by foreigners (export), M is
spending on foreign goods by domestic residents (import)
 I Gross domestic products (GDP)
2 Method of computing GDP
+ Income approach - GDP as aggregate income

GDP = w + R + i + ∏ + D + Te
Component of aggregate expenditure
w: wage paying for workers who contribute labor for production
R: rent paying for capital owners who contribute capital
including land for production
i: interest paying for lender who contribute finance for production
∏: profit paying for stockholder who contribute finance for
production
D: depreciation of old machines
Te: net indirect tax paying for government who contribute
business environment for production
I Gross domestic products (GDP)
2 Method of computing GDP
+ Production approach - GDP as aggregate/total
output
Total value added = total revenue – total cost
GDP =  Value added in all industries
Example
Steel mill– steel 100
products
Car producer - cars 100 600

Total output (GDP)= 700 = value added by steel mill

+ value added by car producer = 100 + 600
I Gross domestic products (GDP)
3 Other measurements of national income
GNP (gross national products) is the market value of all the
products and services produced in one year by labour and
property supplied by the citizens of a country.
or the equivalent measurement
GNP (gross national products) or GNI (gross national income)
is the total factor income owned by domestic residents from
selling final goods and services
GNP (GNI) = GDP + NFA
NFA: net factor income from abroad
NNP (net national product): GNP excludes Depreciation
NI (national income): NNP excludes tax
DPI (disposable personal income): NI excludes income tax and
adds transfer payment and other payment items from
government.
I Gross domestic products (GDP)
3 Other measurements of national income
I Gross domestic products (GDP)
4 Nominal GDP, real GDP and GDP deflator
Total spending rises from one year to the next
+ Economy - producing a larger output of goods and
services
+ And/or goods and services are being sold at higher
prices
Nominal GDP reflects both changes of output and price,
whereas real GDP only reflect change of output
I Gross domestic products (GDP)
4 Nominal GDP, real GDP and GDP deflator
Nominal GDP
Production of goods and services
Valued at current prices

Real GDP
Production of goods and services
Valued at constant prices
Designate one year as base year
Not affected by changes in prices

Notice: For the base year Nominal GDP = Real GDP

 I Gross domestic products (GDP)
4 Nominal GDP, real GDP and GDP deflator
The GDP deflator
Measure of the price level
Ratio of nominal GDP to real GDP times 100
=100 for the base year
Measures the current level of prices relative to the level
of prices in the base year
Inflation
Economy’s overall price level is rising
Inflation rate: Percentage change in some measure of the
price level from one period
GDP deflator to the
in year next deflator in year 1
2 - GDP
Inflation in year 2   100
GDP deflator in year 1
Example: Real and Nominal GDP
Prices and Quantities

Price of Quantity of Price of Quantity of

Year hot dogs hot dogs hamburgers hamburgers

2008 $1 100 $2 50
2009 $2 150 $3 100
2010 $3 200 $4 150

Calculating Nominal GDP

2008 ($1 per hot dog × 100 hot dogs) + ($2 per hamburger × 50 hamburgers) = $200
2009 ($2 per hot dog × 150 hot dogs) + ($3 per hamburger × 100 hamburgers) = $600
2010 ($3 per hot dog × 200 hot dogs) + ($4 per hamburger × 150 hamburgers) = $1,200

Calculating Real GDP (base year 2008)

2008 ($1 per hot dog × 100 hot dogs) + ($2 per hamburger × 50 hamburgers) = $200
2009 ($1 per hot dog × 150 hot dogs) + ($2 per hamburger × 100 hamburgers) = $350
2010 ($1 per hot dog × 200 hot dogs) + ($2 per hamburger × 150 hamburgers) = $500

Calculating the GDP Deflator

2008 ($200 / $200) × 100 = 100 This table shows how to calculate real GDP, nominal GDP,
2009 ($600 / $350) × 100 = 171 and the GDP deflator for a hypothetical economy that
2010 ($1,200 / $500) × 100 = 240 produces only hot dogs and hamburgers.
 I Gross domestic products (GDP)
5 GDP and net economic welfare
GDP – good measure of economic well - being
GDP – “single measure of the economic well-being of a society”
Economy’s total income
Economy’s total expenditure
Larger GDP
Good life
Better healthcare
Better educational systems
Measure - ability to obtain many of the inputs into a
worthwhile life
 I Gross domestic products (GDP)
5 GDP and net economic welfare
But GDP – not a perfect measure of well-being
Doesn’t include
Leisure
Value of almost all activity that takes place outside markets
Quality of the environment
No distribution of income
Net economic welfare (NEW)
NEW = GDP(or GNP) + V1 – V2
V1: value of rest, value of goods and services which are not sold, revenue
from transactions in black market…
V2: negative externality for natural resource, environment such as noise,
traffic jam, air pollution…
NEW reflects welfare better than GNP but it is very difficult to have
enough data to compute NEW. Therefore, economists still use GDP and
GDP and the quality of life
Real GDP per Life Adult literacy Internet usage
Country person (2005) expectancy (% of population) (% of population)
United States $41,890 78 years 99% 63 %
Japan 31,267 82 99 67
Germany 29,461 79 99 45
Russia 10,845 65 99 15
Mexico 10,751 76 92 18
Brazil 8,402 72 89 19
China 6,757 72 91 9
Indonesia 3,843 70 90 7
India 3,452 64 61 3
Pakistan 2,370 65 50 7
Bangladesh 2,053 63 47 0.3
Nigeria 1,128 47 69 4

The table shows GDP per person and three other measures of the quality of life for twelve
major countries.
II Consumer price index
1 Definition
The consumer price index (CPI) is a measure of the
overall cost of the goods and services bought by a typical
consumer. Each month, the General Statistic Office
(GSO), which is part of the Ministry of Finance,
computes and reports the consumer price index.
Concepts must be noticed
- Overall cost
- Typical consumer
 II Consumer price index
2 Method of computing of CPI
How the consumer price index is calculated
1. Fix the basket
2. Find the prices
3. Compute the basket’s cost
4. Chose a base year and compute the CPI
Price of basket of goods & services in current year
Divided by price of basket in base year
Times 100
5. Compute the inflation rate
Percentage change in the price index from the preceding period
CPI in year 2 - CPI in year 1
Inflation rate in year 2   100
CPI in year 1
 Calculating the CPI and the inflation rate: an example
Step 1: Survey consumers to determine a fixed basket of goods
Basket = 4 hot dogs, 2 hamburgers
Step 2: Find the price of each good in each year
Year Price of hot dogs Price of hamburgers
2008 $1 $2
2009 2 3
2010 3 4
Step 3: Compute the cost of the basket of goods in each year
2008 ($1 per hot dog × 4 hot dogs) + ($2 per hamburger × 2 hamburgers) = $8 per
2009 basket
2010 ($2 per hot dog × 4 hot dogs) + ($3 per hamburger × 2 hamburgers) = $14 per
basket
($3 per hot dog × 4 hot dogs) + ($4 per hamburger × 2 hamburgers) = $20 per
basket
Step 4: Choose one year as a base year (2008) and compute the CPI in each year
2008 ($8 / $8) × 100 = 100
2009 ($14 / $8) × 100 = 175
2010 ($20 / $8) × 100 = 250
Step 5: Use the consumer price index to compute the inflation rate from previous year
Typical basket of goods and services
II Consumer price index
3 Problems in measuring CPI
- Substitution bias: overstate cost of living by fixing
goods baskets as consumers change consumption
behavior from buying high price goods to low price
substitute goods
- Introduction of new goods: overstate cost of living by
ignoring new introduced goods with lower price
- Unmeasured quality change: increase cost of living
does not mean we are more miserable
 II Consumer price index
4 CPI versus GDP deflator
GDP deflator
Ratio of nominal GDP to real GDP
Reflects prices of all goods & services produced domestically
CPI
Reflects prices of goods & services bought by consumers
GDP deflator
Compares the price of currently produced goods and services
To the price of the same goods and services in the base year
CPI
Compares price of a fixed basket of goods and services
To the price of the basket in the base year
 II Consumer price index
5 Apply CPI in practice
Correcting Economic Variable for the effects of Inflation
Money value figures from different times
Price level today
Amount in today' s dollars  Amount in year T dollars 
Price level in year T
Unadjusted
Rank Title Studio Adjusted Gross Year^
Gross
1 Gone with the Wind MGM $1,594,132,100 $198,676,459 1939^
2 Star Wars Fox $1,405,363,600 $460,998,007 1977^
3 The Sound of Music Fox $1,123,657,300 $158,671,368 1965
4 E.T.: The Extra-Terrestrial Uni. $1,119,230,700 $435,110,554 1982^
5 The Ten Commandments Par. $1,033,590,000 $65,500,000 1956
6 Titanic Par. $1,012,649,000 $600,788,188 1997
7 Jaws Uni. $1,010,541,900 $260,000,000 1975
8 Doctor Zhivago MGM $979,428,700 $111,721,910 1965
9 The Exorcist WB $872,386,800 $232,671,011 1973^

10 Snow White and the Seven Dwarfs Dis. $860,010,000 $184,925,486 1937^
 II Consumer price index
5 Apply CPI in practice
Nominal and real interest rate
Nominal interest rate
Interest rate as usually reported
Without a correction for the effects of inflation
Implies the growth of money value of an amount of money over
time
Real interest rate
Interest rate corrected for the effects of inflation
= Nominal interest rate – Inflation rate
Implies the growing of purchasing power of an amount of money
over time
Nominal and real interest rate of the US
from 1965 to 2005
Key concepts
- Gross domestic products (GDP)
- Gross national products (GNP)
- Nominal GDP, real GDP, GDP deflator
- Consumer price index (CPI)
- Inflation rate
- Nominal interest rate, real interest rate