¡Descarga Understanding the World Economy: Gross Domestic Product, Unemployment, and Inflation y más Apuntes en PDF de Negocios Internacionales solo en Docsity! TOPIC 1.1. A LOOK AT THE WORLD ECONOMY TOPIC 1.2. MAIN ECONOMIC AGGREGATES 1.2.1 Aggregate output National income and product accounts are an accounting system used to measure aggregate economic activity. The measure of aggregate output in the national income accounts is called the gross domestic product or GDP. 1. GDP is the value of the final goods and services produced in the economy during a given period → We want to count only the production of final goods, not intermediate goods. 2. GDP is the sum of value added in the economy during a given period → The value added by a firm is defined as the value of its production minus the value of the intermediate goods used in production. (We don’t include wages). 3. GDP is the sum of incomes in the economy during a given period → Capital and labor income and taxes. The circular flow diagram Firms and households interact in two markets: goods and factors market. The sum of the flows in these markets are identical and equal to GDP, measured as production or income. The Nominal GDP is the sum of the quantities of final goods produced multiplied by their current price. Nominal GDP increases over time because: - The production of most goods increases over time. - The prices of most goods also increase over time. If our goal is to measure production and its change over time, we need to eliminate the effect of increasing prices on our measure of GDP. The Real GDP is constructed as the sum of the quantit ies of final goods multiplied by constant (rather than current) prices. The terms nominal GDP and real GDP each have many synonyms: - Nominal GDP is also called GDP at current prices. - Real GDP is also called GDP in terms of goods, GDP at constant prices, GDP adjusted for inflation or GDP in 2005 Euros in our example. - GDP will refer to real GDP, and Yt will denote real GDP in year t. - Nominal GDP and variables measured in current dollars will be denoted by a euro sign in front of them—for example, $Yt for nominal GDP in year t. The GDP deflator is s defined as the ratio of nominal to real GDP. In the base year P0= 1 by assumption (as real GDP is equal to nominal GDP). The GDP deflator inflation is a measure of the increase in the price level of the goods produced in the economy during a given year, Yt. π = growth rate of nominal GDP – growth rate of real GDP The level of Real GDP per capita is the ratio of real GDP to the population of the country (good to compare standard of living across countries). Eg. The increase in the HICP was slightly smaller than the increase in the GDP deflator. That means that the price of goods consumed in the euro area (measured by the HICP) was lower than the price of goods produced in the euro area (measured by the GDP deflator). The overall inflation differs from the core (underlying) inflation because this last one excludes unproduced food and energy. Economists care about inflation for two reasons: 1. During periods of inflation(deflation), not all prices and wages rise proportionate ly, inflation affects income distribution. 2. Inflation leads to other distortions. More uncertainty, affecting investment Price adjustment lag behind if regulated Taxation interacts with inflation increasing distortion Inflation specially damaging for lenders or retired people with pensions and income from rents. Deflation also similar negative effects. Income redistribution goes against borrowers. If related to oil-price fall, and temporary, may have a boosting effect on economies in Europe (large energy importers). If deflation persists, can delay recovery further: Postpone purchases to pay lower prices, further reduction in aggregate demand Higher burden on borrowers (European countries highly indebted) As nominal interest rate (in principle) cannot be negative, real interest rate (nomina l minus inflation) may be too high to boost demand. 1.2.3 Relation between macroeconomic aggregates High output growth leads to a decrease in the unemployment rate and low output growth to an increase in the unemployment rate. A low unemployment rate is related to an increase in the inflation rate, a high unemployment rate to a decrease in the inflation rate. 1.2.4 The nominal vs real interest rate The interest rate: is the relative price of goods today in terms of goods tomorrow. It is an intertemporal price, relative price of goods available at different time periods. • When we borrow: how many goods we will have to give up in the future in exchange for the goods we get today. • When we lend: how many goods we will get in the future for the goods we give up today. Interest Rates expressed in Euros (or, more generally, in units of the national currency) are called nominal interest rates. Interest rates expressed in terms of a basket of goods are called real interest rates. 1. When expected inflation equals 0, the nominal and the real interest rates are equal. 2. Because expected inflation is typically positive, the real interest rate is typically lower than the nominal interest rate. But if the expected inflaction is negative, the real interest rate is larger than the nominal interest rate. 3. For a given nominal interest rate, the higher the expected rate of inflation, the lower the real interest rate. 1.2.5 The short, medium and long run The level of aggregate output in an economy is determined by: • Demand for goods and services, in the short run. • Supply factors, how much the economy can produce, in the medium run. The level of technology, the capital stock and the labor force. • Factors of growth, such as education, research, saving and the quality of government, in the long run.
