Chapter 2 Data of Macroeconomics

Reading Textbook: Chapter 10

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 2023
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)
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 income
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
ExampleSteel mill– 100
steel products-
Car producer 100 600
cars
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 to the next
a.Compute nominal GDP, real GDP, and the GDP
deflator for each year, using 2016 as the base
year.
b.Compute the percentage change in nominal GDP,
real GDP, and the GDP deflator in 2017 and 2018
from the preceding year. For each year, identify
the variable that does not change. Explain why
your answer makes sense.
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
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)- Tổng cục thống kê, which is part of the
Ministry of Planning and Investment, 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

5. Compute the inflation rate

Percentage change in the price index from the preceding
period
Typical basket of goods and services
II Consumer price index
3 Problems in measuring CPI
- Substitution bias( xu hướng sai lệch của hàng
hóa có thay thế): 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(lãi suất danh nghĩa)
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(lãi suất thực tế)
Interest rate corrected for the effects of inflation
= Nominal interest rate – Inflation rate
Implies the growing of purchasing power( chỉ số của sức
mua) of an amount of money over time
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