Price level and Inflation Nominal v.s Real GDP Instructor: Xi Wang

Transcription

1 Sep-Oct, 2016 Price level and Inflation Nominal v.s Real GDP Instructor: Xi Wang

2 Does GDP overestimate our living standard? As we have already known GDP can be calculated by income method Back to 1929, a worker works in Manufacturing industry has weekly wage $27.36 Now this weekly wage rate would be $673 Question: Does manufacturing worker enjoy a better living standard now? It seems like they are earning more!

3 Does GDP overestimate our living standard?

4 Living standard: I Say I have a bagel, an apple, a cup of milk as breakfast And I have a piece of steak (0.6 pound) as lunch Furthermore, I have a bowel of white rice, 1 mango, 0.5 pound of lamb as dinner Then my daily consumption basket would be 1 bagel + a cup of milk pound steak + 1 bowel of rice + 1 mango +0.5 pound of lamb Then my weekly consumption basket would be 7 times this daily basket

5 Living standard: II If My daily consumption basket worth $ 3 in 1929 My weekly consumption basket then worth $3X7= $21 Yes? Ok, what if I have weekly wage $21? I can consume one consumption basket, right? Then, what if I have weekly wage $25? Will I have a better living standard? Yes, since you could consume more now! From Econ 101, more is better(25/21>1)

6 Living standard: III Does this Logic make sense? If not, is the meansure still right? Consume more is not always true. Will you consume two iphone if you are right? In some circumstance, consuming more is not an option. But upgrading your consumption can be always a candidate. Example: Yes I only need to consume one daily consumption basket. NO More

7 Living standard: IV

8 Living standard: V

9 Summary I

10 Summary II

11 Consumption Bundle: CPI Value Value of of Basket in 1929 Basket in 1980

12 CPI: An Example Year Apple Banana Avacado Pineapple Value of Basket CPI(Base year: 1980) / / Basket

13 CPI

14 GDP adjustment by CPI Given a basket of consumption How many consumption bundles does our current GDP worth? GDP t Value of basket t Pepole are lazy so they use: GDP t Real GDP Index of Value of basket t

15 GDP adjustment by CPI: Example CPI 1980, 1990 = 1, 1.5 GDP of 1980, 1990 is 2.8, 5.9 trillion U.S. dollars Then GDP (adjusted by CPI) 1980 = 2.8/1=2.8 Trillion u.s dollars(1980 dollar) Then GDP (adjusted by CPI) 1990 = 5.9/1.5=3.93 Trillion u.s dollars(1980 dollar)

16 Price Level and Real GDP Then we are using 2009 price!!

17 Real GDP, another way to adjust price Real GDP is the GDP excluding price effect! Nominal GDP is the total market value of production, using current prices to determine value per unit produced. Real GDP( xxxx dollars), is the total market value of production, using base year prices to determine value per unit produced.

18 Price Level and Real GDP, Example 2012 Nominal GDP=(10 Fords) ($30,000/Ford) + (5 Chevrolets) ($20,000/Chevrolet) = $400, Nominal GDP= (10 Fords) ($40,000/Ford) + (20 Chevrolets) ($25,000/Chevrolet) = $900,000

19 Price Level and Real GDP, Example 2012 real GDP (2012 dollars)=(10 Fords) ($30,000/Ford) + (5 Chevrolets) ($20,000/Chevrolet) = $400, real GDP (2012 dollars)= (10 Fords) ($30,000/Ford) + (20 Chevrolets) ($20,000/Chevrolet) = $700,000.

20 CPI : An Example, Base year: 1980 Year Apple Banana Avacado Pineapple Value of Basket CPI(Base year: 1980) / / Basket

21 CPI : An Example, Base year: 1960 Year Apple Banana Avacado Pineapple Value of Basket CPI(Base year: 1960) / / / Basket

22 Real GDP: An Example, base year : 1960 Year Apple Banana Avacado Pineapple GDP Real GDP you can calculate CPI here Production quantities x1+2x0.6+3 x1+4x0.7 2x2+3x0.8+4 x2+5x0.9 3x2.3+4x0.9 +5x2.6+6x x1+2x0.6+3 x1+4x0.7 2x1+3x0.6+4 x1+5x0.7 3x1+4x0.6+5 x1+6x0.7

23 Another Price Index, GDP deflator GDP deflator(2013) = Nominal GDP in 2013 (Real) GDP in GDP deflator(1995)= Nominal GDP in 1995 (Real) GDP in

24 Another level, GDP deflator, example GDP deflator(2013) = =90000/70000*100 =128.6 NominalGDPin (Real)GDPin 2013 How about GDP deflator(2012)?

25 Real GDP: An Example, base year : 1960 Year Apple Banana Avacado Pineapple GDP Real GDP you can calculate CPI here GDP deflator? Production quantities x1+2x0.6+ 3x1+4x0.7 1x1+2x0.6+ 3x1+4x x2+3x0.8+ 4x2+5x0.9 2x1+3x0.6+ 4x1+5x /11.3= x2.3+4x0. 9+5x2.6+6x 1.1 3x1+4x0.6+ 5x1+6x /14.6=2 033

26 Price Index, Consumer Price Index, CPI GDP deflator (2013) Nominal GDP(2013) Real GDP(2013) 100 Cost of buying everything produced domestically in 2013 using 2013 prices 100 Cost of buying everything produced domestically in 2013 using base year prices Cost of buying a particular basket of consumer goods using 2013 prices Cost of buying a particular basket of consumer goods using base year prices

27 CPI, GDP deflator are two Price Index 1. Both formulas use 2013 prices in the numerator and base-year prices in the denominator. 2. Both formulas contain a ratio that compares what it would cost to buy stuff in 2013 (in the numerator) to what it would have cost to buy the same stuff using base-year prices (in the denominator). 3. Both formulas also have the same interpretation: a higher ratio implies a greater price increase from the base year to 2013.

28 Inflation and adjusting Nominal variables Inflation rate (Price Index in 2013) - (Price Index in 2012) Price Index in 2012

29 Growth ((Real) GDP in 2013) - ((Real) GDP in 2012) (Real) GDP in 2012 ((Real) GDP in 2010) - ((Real) GDP in 1990) (Real) GDP in 1990

30 Inflation and adjusting Nominal variables