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Ace Institute of Management

Session 2
Instructor Rijan Dhakal
dhakalrijan2010@gmail.com 98510 69004

Other derivations from GDP
• • • • • Gross National Product (GNP) Net National Product (NNP) National Income (NI) Personal Income (PI) Personal Disposable Income (DI)

• GDP + Income earned from domestic national abroad – Income paid to foreign national at home = GNP GNP is the monetary value of final goods and services produced by the nationals (income earned by the nationals on foreign countries minus income earned by foreigners at home) • GNP – Depreciation (Capital Consumption) = NNP Depreciation is the net capital consumption during the accounting year • NNP – Indirect Business Tax = NI (National Income) .National Income Accounting contd..

2 Consumption Income earned by the national abroad Investment Income earned by foreigners at home Capital consumption Indirect Business Tax Government Purchase Net Export Undistributed corporate profit Personal tax payment : 8746.Practice Problem-1.1 : 287 : 86.726.2 : 587.4 : .8 : 2103.6 : 700 : 2363.9 : 350 : 1650 Calculate National Income (NI) from the above data Answer: 12000 .

National Income Accounting (Narrowing to personalized Income) National Income (NI) – Corporate Profits – Social Insurance contributions – Net Interest + Dividends + Government Transfer to Individuals + Personal Interest Income = PI (Personal Income) .

• DI – Saving = Personal Consumption Expenditure (Note: PCE is the one we add in GDP) .National Income Accounting (Narrowing to personalized Income) • Personal Income – Personal tax (Income Tax) – Non-tax payments (such as parking tickets) = DI (Disposable Income) Disposable income is the final income that a consumer spends on the purchase of goods and services • DI – Personal Consumption Expenditure = Saving Or.

(Indicates how much prices have increased over time. nominal GDP • GDP is the value of all final goods and services produced. • Nominal GDP measures these values using current prices.Inflation) . • Real GDP measure these values using the prices of a base year.Real vs.

(Multiply Ps & Qs from same year) • Compute real GDP in each year using 2006 as the base year.050 good B $100 192 $102 200 $100 205 • Compute nominal GDP in each year. part 1 2006 P good A $30 Q 900 P $31 2007 Q 1.Practice problem. (Multiply each year’s Qs by 2006 Ps) .000 P $36 2008 Q 1.

300 real GDP multiply each year’s Qs by 2006 Ps 2006: $46.200 2007: $50.000 2008: $52.200 = $30  900 + $100  192 2007: $51. part 1 nominal GDP multiply Ps & Qs from same year 2006: $46.000 = $30  1050 + $100  205 .400 2008: $58.Answers to practice problem.

000 (billions) 8.000 12.S.000 2.000 6.000 0 1950 Real GDP (in 2000 dollars) Nominal GDP 1960 1970 1980 1990 2000 .U. Nominal and Real GDP.000 10.000 4. 1950–2006 14.

• One measure of the price level is the GDP deflator.GDP Deflator • The inflation rate is the percentage increase in the overall level of prices. defined as Nominal GDP GDP deflator = 100  Real GDP .

• Use GDP deflator to compute the inflation rate from 2006 to 2007.a.200 50.300 Real GDP $46.400 58.000 52. • Use your previous answers to compute the GDP deflator in each year. .200 51. part 2 Nom.Practice problem. and from 2007 to 2008.000 GDP deflator Inflation rate n. GDP 2006 2007 2008 $46.

200 51.1 Inflation rate n.046 . 2.000 GDP deflator 100.300 Real GDP $46.200 50. part 2 Nominal GDP 2006 2007 2008 $46.000 52.8% 9.400 58.a.8 112.0 102.Answers to practice problem.

Consumer Price Index (CPI) • A measure of the overall level of prices • Uses: – tracks changes in the typical household’s cost of living – Adjusts for inflation – allows comparisons of monetary value over time .

How to compute CPI 1. compute cost of basket CPI in any month equals Cost of basket in that month 100  Cost of basket in base period . collect data on prices of all items in the basket. Every month. 2. Survey consumers to determine composition of the typical consumer’s “basket” of goods. 3.

prices: 2002 2003 2004 2005 For each year. compute  the cost of the basket in each year  the CPI (use 2002 as the base year)  the inflation rate from the preceding year pizza $10 $11 $12 $13 CDs $15 $15 $16 $15 .Exercise: Compute the CPI Basket contains 20 pizzas and 10 compact discs.

Answers: 2002 2003 2004 2005 Cost of basket $350 370 400 410 CPI 100.7% 8. 5.3 117.136% 2.a.1 Inflation rate n.7 114.0 105.449% .

GDP Deflator prices of capital goods – included in GDP deflator (if produced domestically) – excluded from CPI prices of imported consumer goods – included in CPI – excluded from GDP deflator the basket of goods – CPI: fixed – GDP deflator: changes every year .CPI vs.

Categories of the population • employed working at a paid job • unemployed not employed but looking for a job • labor force the amount of labor available for producing goods and services. not looking for work . all employed plus unemployed persons • not in the labor force not employed.

Two important labor force concepts • unemployment rate percentage of the labor force that is unemployed • labor force participation rate the fraction of the adult population that “participates” in the labor force .

Thank You .