GDP measurement and Price index

3 Approaches - review problem set 1 answers

Product Approach

market value of final goods and services

• value added = market value of outputs - market value of inputs

Income Approach

Wages + Profits + Taxes GDP = National Income + depreciation + statistical discrepancy - net factor payments from abroad

Expenditure Approach

GDP = C + I + G + NX

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Fundamental identity of National Income Accounting

Total production = total expenditure = total income

all three approaches are equivalent

Net Factor Payments from abroad: income earned by home residents working abroad - income paid out to foreigners working domestically

GNP = GDP + NFP

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Price Indices

GDP deflator = $100\times \frac{\text{nominal GDP}}{\text{real GDP}}$

measures the prices of final goods and services during a period of time

other price indices

CPI

• fixed basket, base year

Core CPI: $-$food and energy

improvements in quality not captured by CPI substitution is possible and not captured by CPI

PCE similar to CPI but chain weighted index also includes items and expenditures out of scope of CPI

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Growth of Y between $t$ and $t+1$: (period $Y$)

$$g_Y=\frac{Y_{t+1}-Y_t}{Y_t}=\frac{\Delta Y_{t+1}}{Y_t}$$

annualized quarterly growth rate = $4(g_q)$

Inflation Rate:

$${\pi }_{t+1}=\frac{P_{t+1}-P_t}{P_t}=\frac{\Delta P_{t+1}}{P_t}$$

where $P_t$ refers to the price index at time $t$

Inflation Rate = Growth rate of nominal GDP - Growth rate of real GDP

Inflation Rate = nominal interest rate - real interest rate