GDP AND INFLATION

Mtra. Ingrid V. Galicia González

Chapter 23 (GDP) and Chapter 24 (inflation)

 GROSS DOMESTIC PRODUCT

• It is the monetary value of all final goods and services that are produced
within the country during a year.
• Why is it "Domestic" and why is it "Gross"?
• There are two ways to calculate GDP:
1. Income approach: wages, interests, rental income, business profits, taxes.
2. Expenditure approach: consumption, domestic private investment, public
spending and net exports

GDP = C + I + G + (X-M)
GROSS DOMESTIC PRODUCT

Consumption
represents more than
60% of GDP
 GROSS DOMESTIC PRODUCT

• What is the difference between nominal GDP and Real GDP?

• Nominal = at current prices  Prices with inflation
• Real = at constant prices  Prices without inflation
• Economic growth over a period is the percent change of GDP

• Which GDP should we use to know if the economy is growing? Nominal or

real?
 NOMINAL GDP

25,000,000

Growth 1Q-1993 to 1Q-2019: 

20,000,000 1500% 

15,000,000

10,000,000

5,000,000

-
1993/01 1994/04 1996/03 1998/02 2000/01 2001/04 2003/03 2005/02 2007/01 2008/04 2010/03 2012/02 2014/01 2015/04 2017/03
Source: INEGI
 REAL GDP

25,000,000

Growth 1Q-1993 to 1Q-2019: 

20,000,000
82% 

15,000,000

10,000,000

5,000,000

-
1993/01 1994/04 1996/03 1998/02 2000/01 2001/04 2003/03 2005/02 2007/01 2008/04 2010/03 2012/02 2014/01 2015/04 2017/03
Source: INEGI
 ECONOMIC
CYCLES

• Economic cycles are neither

predictable nor regular, but two
stages are identified:
• Expansion: Real GDP
increases
• Recession: Real GDP declines
• Two turning points:
• Peak: Termination of an
Expansion
• Through: Ending a recession
 ECONOMIC
CYCLES

• In general, a recession is defined as two

consecutive quarters of declines in real
GDP, lasting no more than a few months.
• On the other hand, a crisis or depression
is much more severe and lasting. It is
accompanied by a large rapid drop in
economic growth (in the case of Mexico,
greater than 5%) and an increase in
unemployment.
• An economic crisis represents a
slowdown in economic
growth and financial instability with
negative effects at the macro and
microeconomic levels.
How much did the Mexican
economy grow in 2019?
 MEXICO’S GDP GROWTH

Crisis 1994 Crisis 2009 Crisis 2020

15

10

0
1994/01 1995/04 1997/03 1999/02 2001/01 2002/04 2004/03 2006/02 2008/01 2009/04 2011/03 2013/02 2015/01 2016/04 2018/03 2020/02

?
%

-5
-8.6%
-10 -8.6% -7.7%

-15

-20
-18.9%
Source: INEGI. BIE
 EXERCISE 1

1. Complete the next table

$ (billions of USD) % of the total

Consumption 10,093
Investment 1,623
Government spending 2,933
Net exports -390
Total GDP 100%
 EXERCISE 2

1. What is the nominal GDP for each year?

2. What is the real GDP for each year? (The base year is 2019)

Year P chairs Q chairs Nominal GDP Real GDP

2019 $100 100
2020 $200 100
Link: https://www.inegi.org.mx/temas/pibo/
Which countries have the highest
economic growth in recent years?
 COUNTRIES WITH THE HIGHEST
ECONOMIC GROWTH

Libya Ethiopia India

Real GDP: 55% Real GDP: 8.5% Real GDP: 8.2%

⚠️Growth ≠ development/ well-being⚠️

Source: International Monetary Fund (2018)
Link: https://www.imf.org/external/datamapper/datasets/WEO
 • Population: When looking at the amount of a
particular good being produced, we are not
taking into consideration the amount of people
in that country. In general, more population,
more GDP.
• The exclusion of non-market transactions:
Household production (childcare, meals,
laundry), financial transactions.
THE LIMITATIONS OF
• Underground Production: Underground
GDP production is the part of the economy that is
hidden from the view of the government either
because people want to avoid taxes and
regulations or because the goods and services
being produced are illegal. –> informal
economy, illegal activities
• Social costs: Pollution, income inequality,
poverty, health issues
 OTHER INDICATORS

Human
Social Progress
GDP per capita Development
Index
Index

Multidimensional Happy Planet

poverty Index
 WHAT’S NEXT AFTER COVID?

GDP GDP

Time Time

GDP GDP

Time Time
Link: https://0-www-oecd--ilibrary-org.biblioteca-ils.tec.mx/economics/oecd-economic-outlook/volume-2020/issue-1_0d1d1e2e-en
Link: https://0-www-oecd--ilibrary-org.biblioteca-ils.tec.mx/economics/oecd-economic-outlook/volume-2020/issue-1_0d1d1e2e-en
GDP projection in April GDP projection in July

Banco de México: -9-9%

INFLATION
 CONSUMER PRICE INDEX (CPI)

• In Mexico, the CPI is called INPC (Índice Nacional de Precios al Consumidor)

• INPC: It is a base number 100 that allows you to see the fluctuations and changes in the
prices of the products. The current base year is the second half of July 2018.
• Inflation is the percent change in the price level What would be the
inflation formula? 
o Inflation =

• To obtain the INPC, it is necessary to make a list of products and services (basket of goods
and services) that is representative of household consumption in the country. → 299 goods
• What products are in the basket?
• https://www.inegi.org.mx/app/biblioteca/ficha.html?upc=702825104177
• Price survey: Around 328 thousand prices are quoted twice a month in 55 cities of the
country.
 CONSUMER PRICE INDEX (CPI)

Cost of market basket in 2015 (base year):

Spending in
Product Quantity Price
the basket
CPI2015 = = 100
Avocado 2 $20 $40
Toasts 6 $15 $90
Total $130

Cost of market basket in 2016:

Spending in
Product Quantity Price
•A price index is NOT a percentage. the basket
•In the base period, the price index = 100 Avocado 2 $22 $44 CPI2016 = = 107.69
Toasts 6 $16 $96
Total $140
 INFLATION CALCULATION

Cost of market basket in 2015 (base year):

Spending in
Product Quantity Price
the basket
CPI2015 = = 100
Avocado 2 $20 $40
Toasts 6 $15 $90
Total $130

• Inflation is calculated as the growth Cost of market basket in 2016:

rate of the CPI between two periods.
• Inflation is a percent change Spending in
Product Quantity Price
the basket
Avocado 2 $22 $44 CPI2016 = = 107.69
Toasts 6 $16 $96
Inflation = = 7.69%
Total $140
 EXERCISE 4

Assumptions:
1. There were only two goods in this country.
2. The typical consumer is assumed to purchase 2 and 3 burgers
3. Base year is 2010.

P of hot Cost of consumer’s Annual

Year Q hot dogs P burgers Q burgers Nominal GDP Real GDP CPI
dogs basket inflation
2010 $1 100 $2 50

2011 $2 150 $3 100

2012 $3 200 $4 150

 INFLATION

• It is defined as the generalized and sustained increase in prices in an

economy. It is a macroeconomic phenomenon in the sense that it affects all
markets in the economy and not a microeconomic one, which would be
restricted to a single market.
• Who calculates inflation?
o INEGI  It is calculated every 15 days.

• When the price level increases persistently, there is inflation; when the price
level decreases continuously, there is deflation.
 ANNUAL INFLATION

Crisis 1982 Crisis 1994 Crisis 2009

200

180

160

140
Variación porcentual (%)

120

100

80
Autonomy of the Banco de México
60

40

20

0
0 1 3 4 6 7 9 0 2 3 5 6 8 9 1 2 4 5 7 8 0 1 3 4 6 7 9 0 2 3 5 6 8 9
n -7 l-7 n-7 l-7 n-7 l-7 n-7 l-8 n-8 l-8 n-8 l-8 n-8 l-8 n-9 l-9 n-9 l-9 n-9 l-9 n-0 l-0 n-0 l-0 n-0 l-0 n-0 l-1 n-1 l-1 n-1 l-1 n-1 l-1
Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju
Source: INEGI
 ANNUAL INFLATION

6
Variación porcentual (%)

3
Inflation target: +/- 3%

0
8 8 8 9 9 0 0 0 1 1 2 2 3 3 3 4 4 5 5 5 6 6 7 7 8 8 8 9 9 0 0
n -0 n-0 v-0 r-0 p-0 b-1 l-1 c-1 y-1 ct-1 r-1 g-1 n-1 n-1 v-1 r-1 p-1 b-1 l-1 c-1 y-1 ct-1 r-1 g-1 n-1 n-1 v-1 r-1 p-1 b-2 l-2
Ja Ju No Ap Se Fe Ju De Ma O Ma Au Ja Ju No Ap Se Fe Ju De Ma O Ma Au Ja Ju No Ap Se Fe Ju

Source: INEGI
 TARGET INTEREST RATE

9.0

8.0
Target interest rate (%)

7.0

6.0

5.0

4.0 4.25%
3.0

2.0

1.0

0.0
8 8 9 9 9 0 0 0 1 1 2 2 2 3 3 4 4 4 5 5 5 6 6 7 7 7 8 8 9 9 9 0 0
200 200 200 200 200 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 201 202 202
/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
01 08 01 06 10 03 08 12 05 09 02 07 11 04 08 01 06 10 03 07 12 05 09 02 06 11 04 08 01 05 10 03 07

Source: INEGI
 EXPANSIONARY AND CONTRACTIONARY
MONETARY POLICIES

• To make the decision, these macroeconomic indicators are analyzed, mainly:

• The inflation rate
• Potential GDP (economic growth)

Inflation Interest Rate Types of monetary policy

Increase Increase Contractionary
Decrease Decrease Expansionary

Production Interest Rate Types of monetary policy

Above potential GDP Increase Contractionary
Below potential GDP Decrease Expansionary