ECON2123 Tutorial 1: GDP, Unemployment and Inflation

Transcription

1 ECON2123 Tutorial 1: GDP, Unemployment and Inflation Department of Economics HKUST September 14, 2018 ECON2123 Tutorial 1: GDP, Unemployment and Inflation 1 / 21

2 An Introduction to Macroeconomics ECON2123 Tutorial 1: GDP, Unemployment and Inflation 2 / 21

3 An Introduction to Macroeconomics ECON2123 Tutorial 1: GDP, Unemployment and Inflation 3 / 21

4 An Introduction to Macroeconomics Reliable Sources for Macroeconomic Data: FRED Economic Data from St. Louis FED ( Bereau of Economic Analysis, BEA ( OECD ( World Bank ( IMF ( CQER from Atlanta FED ( Bloomberg etc. ECON2123 Tutorial 1: GDP, Unemployment and Inflation 4 / 21

5 Economic Variables: Stock Variables vs. Flow Variables Stock variables: are measured at one specific time, and represent quantities existing at that point in time (say, December 31, 2004), which may have accumulated in the past. Flow variables: are measured over an interval of time (say a year). How to distinguish b/w stock variables and flow variables: To ask for a value of flow variables, you have to specify some time period, say a year. To ask for stock variables, you have to specify a specific time point, say Sept 11th, ECON2123 Tutorial 1: GDP, Unemployment and Inflation 5 / 21

6 GDP: Gross Domestic Production GDP: GDP is the value of the final goods and services produced in the economy during a given period.(expenditure approach) GDP is the sum of value added 1 in the economy during a given period.(value-added approach) GDP is the sum of incomes in the economy during a given period.(income approach) Three methods must give you the same results. Is GDP a stock variable or flow variable? 1 : the value of its production minus the value of the intermediate goods used in production. ECON2123 Tutorial 1: GDP, Unemployment and Inflation 6 / 21

7 Is GDP a flow or a stock variable? Flow variable. Becauae the phrase, during a given period, is specified in three definitions. ECON2123 Tutorial 1: GDP, Unemployment and Inflation 7 / 21

8 GDP Accounting Approaches Economy A with one firm, called Tree, that produces apples from inputs air and water (at no cost); with three people, called Steven, Jobs and Cook respectively. The firm Tree is owned by Steven, is managed by Jobs and sells its product to Cook. So the firm gains revenue from Cook, pays wages to Jobs and keeps to profit (revenue-wage cost) to Steven. At year 2017, Cook spent 1,000 HKD on apples, Jobs got paid for 500 HKD, while Steven kept the profit of 500 HKD. What is the GDP of Economy A at year 2017? Using three approaches to show. ECON2123 Tutorial 1: GDP, Unemployment and Inflation 8 / 21

9 What is the GDP of Economy A at year 2017? 1000 HKD. 1. Expenditure Approach: (final) There is only one final good/service: Apple, and its total value at sale is 1000 HKD. 2. Income Approach: 500 HKD (of Jobs)+ 500 HKD (of Steven)=1000 HKD. 3. Value-Added Approach: (final goods-intermediate goods) There is no cost for intermediate good, so the Value-added Approach coincides with Expenditure Approach in this case. ECON2123 Tutorial 1: GDP, Unemployment and Inflation 9 / 21

10 GDP Accounting Approaches (continued) At year 2017, Cook spent 1,000 HKD on apples, Jobs got paid for 500 HKD, while Steven kept the profit of 500 HKD. It turns out that Jobs is the son of Steven, and Cook is the housekeeper for their family. At the end of year 2017, Steven pays Cook 500 HKD for cooking for their family and Jobs pays Cook 500 HKD for his used bicycle. What is the GDP of Economy A at year 2017? Use three approaches to show. ECON2123 Tutorial 1: GDP, Unemployment and Inflation 10 / 21

11 What is the GDP of Economy A at year 2017? 1500 HKD. 1. Expenditure Approach: (goods and service) There are two final good and service now: Apple and Cooking. There total value is 1500 HKD. 2. Income Approach: 500 HKD (of Jobs)+ 500 HKD (of Steven) HKD (of Cook) =1500 HKD. 3. Value-Added Approach: (final goods-intermediate goods) Again, there is no cost for intermediate good, so the Value-added Approach coincides with Expenditure Approach in this case. ECON2123 Tutorial 1: GDP, Unemployment and Inflation 11 / 21

12 GDP Accounting Approaches Economy B with two firms, called Tree and Sunbucks; with three people, called Steven, Jobs and Cook respectively. The firm Tree is owned by Steven, is managed by Jobs and sells its product, apple, to Cook. Apple is produced from water and air at no cost. The firm Sunbucks is owned and managed by Cook, who purchases apple from Steven and sells its product, apple juice, to residents in Economy B. At year 2017, Cook spent 1,000 HKD on apples as input for apple juice (Jobs got paid for 500 HKD, while Steven kept the profit of 500 HKD), and sold apple juice for 2000 HKD. What is the GDP of Economy B at year 2017? Using three approaches to show. ECON2123 Tutorial 1: GDP, Unemployment and Inflation 12 / 21

13 What is the GDP of Economy B at year 2017? 2000 HKD. 1. Expenditure Approach: (goods and service) There is only one final good now: Apple Juice. The total value is 2000 HKD. 2. Income Approach: 500 HKD (of Jobs)+ 500 HKD (of Steven) HKD (of Cook) =2000 HKD. 3. Value-Added Approach: (final goods-intermediate goods) At stage one, there is no intermediate good, so the value added in stage one is 1000 HKD; At stage two, the final good sells for 2000 HKD, while intermediate good costs 1000 HKD, so the value added in stage two is 1000 HKD. The value added in two stages is 2000 HKD in total. ECON2123 Tutorial 1: GDP, Unemployment and Inflation 13 / 21

14 GDP: Nominal vs. Real GDP Nominal GDP = Quantity * Current Price. Real GDP = Quantity * Base-Year Price. Economy A with one firm, called Tree,that produces apples using air and water (at no cost); with three people, called Steven, Jobs and Cook respectively. At year 2017, Tree sells 100 apples to Cook, at a price of 10 each. At year 2016, Tree sells 200 apples to Cook, at a price of 4 each. What is the nominal and real GDP of year 2017? (suppose 2016 is the base year) Which year has a higher nominal GDP? Which year has a higher real GDP? ECON2123 Tutorial 1: GDP, Unemployment and Inflation 14 / 21

15 Unemployment: Accounting Working Age Population (P) = People in the labor force (L) + People not in the labor force(n). People in the labour force (L) = employed people (E) + unemployed people (U). Labour Participation Rate= L P. Unemployment Rate = U L. Is unemployment a stock or a flow variable? ECON2123 Tutorial 1: GDP, Unemployment and Inflation 15 / 21

16 Inflation: Definition and Measurement The inflation rate is the rate at which the (aggregate) price level increases. Inflation rate is normally measured by: The GDP Deflator. The Consumer Price Index(CPI). Discussion: Why do we need the GDP Deflator? ECON2123 Tutorial 1: GDP, Unemployment and Inflation 16 / 21

17 Inflation: GDP Deflator Recall our previous example: Economy A with one firm, called Tree,that produces apples using air and water (at no cost); with three people, called Steven, Jobs and Cook respectively. At year 2017, Tree sells 100 apples to Cook, at a price of 10 each. (Nominal GDP=1,000 HKD; Real GDP=400 HKD) At year 2016, Tree sells 200 apples to Cook, at a price of 4 each. (Nominal GDP= 800 HKD = Real GDP=800 HKD) GDP Deflator = Nominal GDP/ Real GDP GDP Deflator (2017) = 2.50 GDP Deflator (2016) = 1.00 Inflation rate= ( ) /100 = 150%. ECON2123 Tutorial 1: GDP, Unemployment and Inflation 17 / 21

18 Inflation: Consumer Price Index CPI: Consumer Price Index, the price level of a market basket of consumer goods and services purchased by households. The Basket of U.S.: 7 categories including Housing, FoodBeverage, Transportation, Medical Care, Clothing, Entertainment and others. The Basket of China: 8 categories including Food, Beverage, Clothing, House Appliance, Medical Care, Transportation, Entertainment and Clothing. The Basket of HKUSTers:? ECON2123 Tutorial 1: GDP, Unemployment and Inflation 18 / 21

19 Inflation: Consumer Price Index Think about one basket of CPI: Bread of 10 pounds(food); Monthly metro travel pass(transportation); A double room at University Hall(housing); Dental Scaling for twice(medical care). At year 2017, bread cost 200 HKD/pound, Monthly metro travel pass costs 1,000 HKD; A double room costs 1,000 HKD; and dental scaling costs 500 HKD once. At year 2016, bread cost 100 HKD/pound, Monthly metro travel pass costs 1,000 HKD; A double room costs 800 HKD; and dental scaling costs 600 HKD once. CPI(2017) = 10* *500 =5,000 CPI(2016) = 10* *600 =4,000 Inflation rate= (5,000-4,000) /4,000 = 25%. ECON2123 Tutorial 1: GDP, Unemployment and Inflation 19 / 21

20 GDP and Unemployment: Okun s Law Output growth and unemployment rate are negatively related (empirically). i.e., Output growth that is lower than usual is associated with an increase in the unemployment rate. Policy implication: The key to decreasing unemployment is a high enough rate of growth. Does it make sense? ECON2123 Tutorial 1: GDP, Unemployment and Inflation 20 / 21

21 Inflation and Unemployment: Phillips Curve Inflation rate and unemployment rate are negatively related (empirically). i.e, A low unemployment rate leads to an increase in the inflation rate. Possible Explanations: a. (supply side) lower unemployment rate higher wage higher cost of production higher prices; b. (demand side) lower unemployment rate higher wage= higher income higher demand for goods higher prices. Discussion on Policy implication : The key to decreasing unemployment is a high enough inflation rate. Does it make sense? ECON2123 Tutorial 1: GDP, Unemployment and Inflation 21 / 21