Ace Institute of Management

Session 2
Instructor Rijan Dhakal
dhakalrijan2010@gmail.com 98510 69004

Other derivations from GDP

Gross National Product (GNP) Net National Product (NNP) National Income (NI) Personal Income (PI) Personal Disposable Income (DI)

National Income Accounting contd..

GDP + Income earned from domestic national abroad Income paid to foreign national at home = GNP GNP is the monetary value of final goods and services produced by the nationals (income earned by the nationals on foreign countries minus income earned by foreigners at home) GNP Depreciation (Capital Consumption) = NNP Depreciation is the net capital consumption during the accounting year NNP Indirect Business Tax = NI (National Income)

Practice Problem-1.2 Consumption Income earned by the national abroad Investment Income earned by foreigners at home Capital consumption Indirect Business Tax Government Purchase Net Export Undistributed corporate profit Personal tax payment : 8746.2 : 587.8 : 2103.1 : 287 : 86.6 : 700 : 2363.4 : - 726.9 : 350 : 1650

Calculate National Income (NI) from the above data Answer: 12000

National Income Accounting (Narrowing to personalized Income)

National Income (NI) Corporate Profits Social Insurance contributions Net Interest + Dividends + Government Transfer to Individuals + Personal Interest Income = PI (Personal Income)

National Income Accounting (Narrowing to personalized Income)

Personal Income Personal tax (Income Tax) Non-tax payments (such as parking tickets) = DI (Disposable Income) Disposable income is the final income that a consumer spends on the purchase of goods and services DI Personal Consumption Expenditure = Saving Or, DI Saving = Personal Consumption Expenditure
(Note: PCE is the one we add in GDP)

Real vs. nominal GDP

GDP is the value of all final goods and services produced. Nominal GDP measures these values using current prices. Real GDP measure these values using the prices of a base year. (Indicates how much prices have increased over time- Inflation)

Practice problem, part 1

2006 P good A $30 Q 900 P $31 2007 Q 1,000 P $36 2008 Q 1,050

good B

$100

192

$102

200

$100

205

Compute nominal GDP in each year. (Multiply Ps & Qs from same year) Compute real GDP in each year using 2006 as the base year. (Multiply each years Qs by 2006 Ps)

Answers to practice problem, part 1

nominal GDP

multiply Ps & Qs from same year

2006: $46,200 = $30 900 + $100 192

2007: $51,400 2008: $58,300

real GDP

multiply each years Qs by 2006 Ps

2006: $46,200 2007: $50,000 2008: $52,000 = $30 1050 + $100 205

U.S. Nominal and Real GDP,

19502006
14,000 12,000 10,000

(billions)

8,000 6,000 4,000 2,000 0 1950

Real GDP (in 2000 dollars) Nominal GDP

1960

1970

1980

1990

2000

GDP Deflator
The inflation rate is the percentage increase in the overall level of prices. One measure of the price level is the GDP deflator, defined as
Nominal GDP GDP deflator = 100 Real GDP

Practice problem, part 2

Nom. GDP 2006 2007 2008 $46,200 51,400 58,300 Real GDP $46,200 50,000 52,000 GDP deflator Inflation rate n.a.

Use your previous answers to compute the GDP deflator in each year. Use GDP deflator to compute the inflation rate from 2006 to 2007, and from 2007 to 2008.

Answers to practice problem, part 2

Nominal GDP 2006 2007 2008 $46,200 51,400 58,300 Real GDP $46,200 50,000 52,000 GDP deflator 100.0 102.8 112.1 Inflation rate n.a. 2.8% 9.046

Consumer Price Index (CPI)

A measure of the overall level of prices Uses:
tracks changes in the typical households cost of living

Adjusts for inflation

allows comparisons of monetary value over time

How to compute CPI

1.

Survey consumers to determine composition of the typical consumers basket of goods.

2.
3.

Every month, collect data on prices of all items in the basket; compute cost of basket
CPI in any month equals
Cost of basket in that month 100 Cost of basket in base period

Exercise: Compute the CPI

Basket contains 20 pizzas and 10 compact discs. prices: 2002 2003 2004 2005 For each year, compute the cost of the basket in each year the CPI (use 2002 as the base year) the inflation rate from the preceding year

pizza $10 $11 $12 $13

CDs $15 $15 $16 $15

Answers:

2002 2003 2004 2005

Cost of basket $350 370 400 410

CPI 100.0 105.7 114.3 117.1

Inflation rate n.a. 5.7% 8.136% 2.449%

CPI vs. GDP Deflator

prices of capital goods included in GDP deflator (if produced domestically) excluded from CPI prices of imported consumer goods included in CPI excluded from GDP deflator the basket of goods CPI: fixed GDP deflator: changes every year

Categories of the population

employed working at a paid job unemployed not employed but looking for a job labor force the amount of labor available for producing goods and services; all employed plus unemployed persons not in the labor force not employed, not looking for work

Two important labor force concepts

unemployment rate percentage of the labor force that is unemployed labor force participation rate the fraction of the adult population that participates in the labor force

Thank You