ECON1101 Lecture Notes - Lecture 1: Gdp Deflator, Discouraged Worker, Price Level

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17 May 2018
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ECON notes
- GDP: monetary value of (aggregate) final g&s produced in a country during a given period
o Not intermediate goods (and second-hand produced in previous period+ resold)
o Value added: market value of production less cost of inputs purchased from other
firms
o Flow variable: measured over period of time
- Measurement: production (value added), expenditure, income
o Expenditure method (purchases): accounting identity expenditure on g&s by final
users = value of production
o Y == C + I + G+ (X-M)
o Income method: aggregate incomes paid to Labour + K(capital) (ie factor costs) +
(indirect taxes subsidies) to get market prices
GDP = Labour income + capital income + net indirect taxes
GDP = (W*L) + (r*K) + (indirect T sub)
- GNI: GDP + net primary (or factor) income from non-residents
- Nominal: values Q of g&s produced at their current year prices
- Real: values Q of g&s produced at base year prices (physical volume)
o Using initial prices (Laspeyres index) v. using final prices (Paasche index)
o Real= Number of goods produced * price of the good in the base year
o Chain weighted measure of real GDP: average of the growth rates of each base year
real chain-weighted growth rate
o Price level = nominal/real
- Standard of living GDP vs. economic wellbeing (happiness, HDI)
- GDP deflator (price index): [all g&s produced] measure of price level= nominal GDP/real
GDP * 100
- CPI: cost in that period of a [representative basket] of g&s relative to their cost in a fixed
year (base) cost of basket in current/cost of basket in base year
o Inflation/deflation= [CPI(t) CPI(t-1)]/CPI(t-1)
o Limitations: quality adjustment and new goods bias- higher prices for improvements
+ new g not incl until CPI is re-based
substitution bias: fixed means no allowance for consumer substitution
tends to overstate inflation rate
- Costs of inflation: relative price change v. change in general price level
o Unexpected inflation: unexpected re-distributions of wealth- borrowers/lenders
(fixed nominal incomes), distorts tax systems (if not indexed to inflation), fks up price
mechanism
o Shoe leather costs: inflation reduces real PP
o Menu costs: any real costs associated w changing prices
- Business cycles: contraction (GDP falls) trough, expansion (GDP rises) peak, economic
activity
- Recession: -ve GDP growth in 2+ consecutive quarters
- Optimal inflation (1-3%pa)- avoid high and variable inflation + deflation
Unemployment and the Labour Market
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- Employed: person worked for at least 1 hr in past week for some form of
compensation/leave
- Unemployed: did not work during past week: looked for work in previous month + available
to being work + waiting to start a new job
- Working age pop (15+), LF = E + U
- Underemployment: willing ot work more than current hours/has skills not required in
current job
- Discouraged worker: person given up active job search, despite being willing to work
- Frictional/search u/e: associated w ppl searching for suitable job (dynamic eco- beneficial-
leads to more efficient matching between workers + jobs)
- Long run frictional u/e (people between)
(s- moving from E U, f- move from U E)
LR rate of frictional u/e depends on separation and job finding rate
- Strutural u/e: LT u/e he distriutios of skills of soe orkers does’t ath aailale
jobs) esp specialised workers
- Cyclical u/e
o Associated w fluctuations in eco activity- rises in recessions + falls in booms
- Natural rate of unemployment (frictional+struc not cyclical) u*
- Oku’s La: Cylial u/e + ∆i eo atiity (ouput gap)
- Potential output: level of GDP eco can produce when resources/factors of production are
utilised at NORMAL rates, potential output = Y* (max output)
o Increase o/t w eco growth- LF, capital stocks, tech
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Document Summary

Measurement: production (value added), expenditure, income: expenditure method (purchases): accounting identity expenditure on g&s by final users = value of production, y == c + i + g+ (x-m) Gni: gdp + net primary (or factor) income from non-residents. Nominal: values q of g&s produced at their current year prices. Real chain-weighted growth rate: price level = nominal/real. Standard of living gdp vs. economic wellbeing (happiness, hdi) Gdp deflator (price index): [all g&s produced] measure of price level= nominal gdp/real. Cpi: cost in that period of a [representative basket] of g&s relative to their cost in a fixed year (base) cost of basket in current/cost of basket in base year. Inflation/deflation= [cpi(t) cpi(t-1)]/cpi(t-1: limitations: quality adjustment and new goods bias- higher prices for improvements. + new g not incl until cpi is re-based: substitution bias: fixed means no allowance for consumer substitution tends to overstate inflation rate. Business cycles: contraction (gdp falls) trough, expansion (gdp rises) peak, economic activity.

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