1. Lecture 16 – academic year 2014/15 Introduction to Economics Fabio Landini Macroeconomic Aggregates: Exercises and Applications 1

2. Definition of gross domestic product (GDP) The GDP is the market value of final goods and services produced within a country in a given period of time

3. Alternative definitions of GDP 1)GDP is equal to the market value of final goods and services produced in the economy 2) GDP is equal to the sum of the value added by the different sectors of the economy 3) GDP is equal to the sum of the incomes obtained in the economy

4. Inflation Inflation rate ( π ) = Rise in the general level of prices in an economy over a period of time Two ways to measure the level of prices: GDP deflator Consumer price index (CPI)

5. The role of prices: Real GDP and nominal GDP Nominal GDP: Value of the final goods and services computed using the current quantities and prices Real GDP: Value of the final goods and services computed using current quantities and prices of a specific year (called “the base year”)

6. Labour market Employed = Those who currently have a job Unemployed = Those who are looking for a job or are going to start a new job (+ those who are under unemployment protection programs) Important: those who are not looking for a job are not considered unemployed (e.g., housewife and students are not unemployed)

7. Labour force  Employed + Unemployed Unemployment rate (u)  Labour market

8. Aggregate demand of national goods and services (Z) is: Z  C + I + G + X – Q Commercial balance  Difference between import and export Public deficit  Difference between Government’s expenditure and Government’s revenues Decomposition of GDP

9. Question: Suppose to measure the GDP of US summing the value of all final goods and services in the economy. Determine the effects on GDP of the following transactions: a)A restaurant purchases fish for $100 from a fisher; b)A household spend $100 eating fish in a restaurant; c)Delta Airlines buys a new jet from Boing for $200million; d)A Greek airline company buy a new jet from Boing for $200million; e)Delta Airlines sells on of her jet to Denzel Washington for $100million; Ex. 10.1 – US’s GDP 9

10. Consider an economy where: i)A company that extract argent pay workers €200,000 to extract 75 kg of argent. The argent is then sold to a jeweller for €300,000; ii)The jeweller pays her workers €250,000 to produce necklaces, which are then sold to final consumers for €1 million; Ex. 10.2 – Mines and Jewels 10

11. Questions: a)Using the approach based on the “value of final goods”, how much is the GDP of this economy; b)Which is the value added at each stage of production? Using the approach based on the added value, how much is the GDP of this economy? c)What is the value of of total wages and profits? Using the approach based on income, how much is the GDP of this economy? Ex. 10.2 – Mines and Jewels 11

12. An economy produces three goods: cars, computers and oranges. Quantity and unitary prices for the years 2006 – 2007 are the following: Ex. 10.3 – Cars, CPU and Oranges (I) 12 20062007 QuantityPriceQuantityPrice Cars10€2,00012€3,000 Computers4€1,0006€500 Oranges1,000€11,000€1

13. Questions: a)Which is the nominal GDP of the of the economy in 2006 and 2007? How much does it vary? b)Using the 2006 prices as a basis, which is the real GDP in 2006 and 2007? How much does it vary? c)Using the 2007 prices as a basis, which is the real GDP in 2006 and 2007? How much does it vary? d)Why doe the growth rates in b) and c) differ? Which is the most appropriate? Motivate your answer. 13 Ex. 10.3 – Cars, CPU and Oranges (I)

14. Consider the same economy described before. Questions: Suppose that we use the 2006 prices as the basis to compute the real GDP in 2006 and 2007. Compute the GDP deflator for the year 2006 and 2007, and the inflation rate between 2006 and 2007 Ex. 10.4 – Cars, CPU and Oranges (II) 14