MGEB05 Week 1
1
Brief Summary of Week 1 Pre-recorded Lectures
Gross Domestic Product
• Gross domestic product (GDP) is the market value of all final goods and
services produced within the economy during a given year.
• According to the expenditure approach, GDP consists of 4 components:
1) Consumption (C): spending by households on goods and services.
2) Investment (I): spending on capital equipment, inventories; I = business
fixed investment + residential investment + inventory investment.
3) Government spending (G): spending on goods and services by all levels
of governments (excludes transfer payments such as EI).
4) Net exports (NX): exports – imports.
GDP = C + I + G + X – IM = C + I + G + NX
Nominal GDP vs. Real GDP
• Nominal GDPt (NGDPt) = P1,tQ1,t + P2,tQ2,t …+ Pn,tQn,t = ∑𝑛𝑖=1 𝑃𝑖,𝑡 𝑄𝑖,𝑡
• Real GDPt (RGDPt) = P1,Base yearQ1,t + P2,Base yearQ2,t …+ Pn, Base yearQn,t
= ∑𝑛𝑖=1 𝑃𝑖,𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑄𝑖,𝑡
• GDP deflatort =
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃𝑡
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃𝑡
× 100
MGEB05 Week 1
2
The consumer price index (CPI)
• Cost of baskett: COBt = ∑𝑛𝑖=1 𝑃𝑖,𝑡 𝑄𝑖,𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟
• CPI in year t =
Cost of (fixed) market basket in year t
Cost of (fixed) market basket in base year
× 100
• CPI is not a perfect measure of the cost of living because
 It ignores the substitution effect.
 It ignores the introduction of new products.
 It fails to capture changes in quality of goods.
The GDP Deflator versus the Consumer Price Index
• Although both the GDP deflator and the CPI measure the overall price
levels, they are not necessarily be the same.
CPIt =
𝐶𝑂𝐵𝑡
𝐶𝑂𝐵𝐵𝑎𝑠𝑒−𝑦𝑒𝑎𝑟
GDP deflatort =
× 100 = =
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃𝑡
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃𝑡
∑𝑛𝑖=1 𝑃𝑖,𝑡 𝑄𝑖,𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟
∑𝑛𝑖=1 𝑃𝑖,𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑄𝑖,𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟
× 100 × 100 =
× 100
∑𝑛𝑖=1 𝑃𝑖,𝑡 𝑄𝑖,𝑡
∑𝑛𝑖=1 𝑃𝑖,𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑄𝑖,𝑡
× 100