Lecture 2

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# Lecture 2 - PowerPoint PPT Presentation

Lecture 2. G ross national product (GNP): .

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Gross national product (GNP):

Gross national product (GNP): If weadd receipts of factor income (wages, profit, rent and interest) and grant/aid from the rest of the world and subtract payments of factor income and grant/aid to the rest of the world from GDP then we get GNP .

GNP =

GDP VERSUS GNP

Whereas GDP measures the total income produced domestically, GNP measures the total income earned by nationals.

Question: What are the other differences between GDP and GNP?

Price Index: GDP Deflator and CPI
• Price Index is a measure of the economy's price level or a cost of living.
• Most popular price index:

1) GDP Deflator

2) Consumer Price Index (CPI)

GDP Deflator
• It shows the state of overall level of prices in the economy.
• It is also known as implicit price deflator.

GDP Deflator= (Nominal GDP)/(Real GDP) X 100

So it is used to deflate ( by taking inflation out of) nominal GDP to yield real GDP. How ? Because

Real GDP= (Nominal GDP)/( GDP Deflator) X 100

CPI ( Consumer Price Index)
• A consumer price index (CPI) is price index that measures changes in the price level of consumer goods and services purchased by households.
• It is used to monitor changes in the cost of living over time by a typical household
• When the CPI rises, the typical family has to spend more dollars to maintain the same standard of living.
Calculating CPI
• Formula:

CPI = (Total cost of a bundle of goods or service at current price)/ ( Total cost of a bundle of goods or service at base price)

Example:

Suppose a typical household consumes 30kg rice and 20 kg flour in a month. So the basket of goods is consisted of rice and flour. The quantity of rice and flour will be held constant across years. In this case

CPI =

How Inflation rate is calculated from CPI?

Compute the inflation rate: The inflation rate is the percentage change in the price index from the preceding period.

• The Inflation Rate
• The inflation rate is calculated as follows:
GDP Deflator versus CPI
• Economists and policymakers monitor both the GDP deflator and the consumer price index to gauge how quickly prices are rising.
• There are two important differences between the indexes :
• 1) The GDP deflator reflects the prices of all goods and services produced domestically ( So imported goods are not included), whereas the consumer price index reflects the prices of goods and services bought by consumers.
• 2) The consumer price index compares the price of a fixed basket of goods and services to the price of the same basket in the base year whereas the GDP deflator allows goods and services to change over time as the composition of GDP changes.