ECON2123 Tutorial 1: GDP, Unemployment and Inflation

Transcription

1 ECON2123 Tutorial 1: GDP, Unemployment and Inflation Department of Economics HKUST February 12, 2018 ECON2123 Tutorial 1: GDP, Unemployment and Inflation 1 / 14

2 An Introduction to Macroeconomics ECON2123 Tutorial 1: GDP, Unemployment and Inflation 2 / 14

3 An Introduction to Macroeconomics ECON2123 Tutorial 1: GDP, Unemployment and Inflation 3 / 14

4 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 Feb 12th, ECON2123 Tutorial 1: GDP, Unemployment and Inflation 4 / 14

5 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 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? ECON2123 Tutorial 1: GDP, Unemployment and Inflation 5 / 14

6 GDP: Expenditure and Income Approaches 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. 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 two approaches to show. ECON2123 Tutorial 1: GDP, Unemployment and Inflation 6 / 14

7 GDP: Accounting 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 two approaches to show. ECON2123 Tutorial 1: GDP, Unemployment and Inflation 7 / 14

8 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 8 / 14

9 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 9 / 14

10 Unemployment: Types of Unemployment Unemployment = Frictional Unemployment + Structural Unemployment + Cyclical Unemployment. Natural Unemployment = Frictional Unemployment + Structural Unemployment. Unemployment = Natural Unemployment + Cyclical Unemployment. ECON2123 Tutorial 1: GDP, Unemployment and Inflation 10 / 14

11 Inflation: Definition and Measurement The inflation rate is the rate at which the (aagregate) price level increases. Inflation rate is normally measured by: The GDP Deflator. The Consumer Price Index(CPI). Question:Why do we need the GDP Deflator? ECON2123 Tutorial 1: GDP, Unemployment and Inflation 11 / 14

12 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 *100 GDP Deflator (2017) = 250; GDP Deflator (2016) = 100. Inflation rate= ( ) /100 = 150%. ECON2123 Tutorial 1: GDP, Unemployment and Inflation 12 / 14

13 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 13 / 14

14 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 14 / 14