Lecture 2: Basic Definitions• GDP• Inflation Rate• Unemployment Rate• Trade and Budget DeficitsGross Domestic Product• First thing we look at (its rate of growth)• Aggregate output: Not easy!– Sum of apples and oranges– Double-counting•ExampleA Simple Economy• Steel Company– Revenue from sales $100– Expenses (wages) 80–Profit 20• Car Company– Revenue from sales $210– Expenses•Wages $70• Steel purchases 100–Profit 40• What is this economy’s GDP?Calculating GDP• Method 1: GDP is the value of the final goods and services produced by the economy during a given period• Method 2: GDP is the sum of valued addedproduced….• Method 3: GDP is the sum of incomes in the economy...Nominal vs Real GDP• Nominal GDP: sum of final goods produced times their current price– Growth due to quantity (production)– Growth due to prices• Real GDP: … times their base year price• Example (next trp.)• GDP Growth: (Y(t)-Y(t-1))/Y(t-1)Nominal vs Real GDPYear 0Q P ValuePotatoes 100,000 $1 100,000Cars 10 $10,000 100,000Nominal GDP 200,000Q P ValuePotatoes 100,000 $1.2 120,000Cars 11 $10,000 110,000Nominal GDP 230,000Year 1The Inflation Rate• More than one…. (P(t)-P(t-1))/P(t-1)• GDP deflator and CPI• GDP deflator = Nominal GDP / GDP–P0 = 1– P1 = 230,000/210,000 = 1.1 (approx.)• NGDP growth = GDPg + Inflation (defl)• 15 5 10•Why do we care?The Unemployment Rate• Labor force (L) = Empl. (N) + Unemployed (U)• Unemployment Rate (u) = U/L• Willing to work? Looking for work? L < Pop.– Not in the labor force– Discouraged workers (recessions)• High unemployment often comes hand on hand with low participation rate : • L/Pop of working age• U.S. (u = 4%, pr = 80% ) France (u=13%, pr = 65%)• Why do we care? Too high and…. too low??Deficits• Expenditure > Income• Trade Deficit :– Imports > Exports– U.S. today (FED, Treasury, Japan)• Budget deficit– Gov. Expenditure > Gov. Revenue• Why do we care? Smoothing; Argentina… the USFirst Model: The Goods MarketProduction
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