Principles of

Microeconomics (Econ 111-

S1)
Recitation 1

Verda Arif
List of topics we'll discuss today:
• What is GDP vs GDP/capita vs Disposable Income?
• How do we calculate GDP (Nominal)?
• Real GDP
• Growth Rates in GDP to access economic performance
• Types of Graphs
• Limitations of GDP (Nominal)
*Past Recitation notes will be uploaded on LMS.
Introduction to GDP and GDP/capita (visual graph)
GDP vs GDP/capita
• Both are tools used to measure (quantify) economic progress or
living standards of a country.
• Time specific i.e calculated for a given time period (annually).
• There are three main approaches towards measuring GDP:
1. Income Approach
2. Product Approach
3. Expenditure Approach
*The three are covered in detail in Macroeconomics
• GDP/capita is a “standardized tool” and is preferred over GDP.
Why so?
 Calculating Nominal GDP (an example)
Ex 1a: Assume a two product economy. A snapshot of a fixed point in time (t1) is
as follows:
Products: Milk (M) and Oranges (O)
Price per unit of product: Pm = $2/pint and Po = $2/dozen
Total Quantity produced/sold: M = 20pints and O = 20 dozen
What is GDP(level of economic activity in monetary terms) for year, t1?
Ex 1b: You are now given information of price and quantity for the next year, (t2):
Products: Milk (M) and Oranges (O)
Price per unit of product: Pm = $3/pint and Po = $1/dozen
Total Quantity produced/sold: M = 40pints and O = 10 dozen
What is GDP(level of economic activity in monetary terms) for year, t2?
Comment on the progress of economy between t1 and t2
Real GDP
• Why the need?

• Nominal vs Real GDP? – takes into account “Base prices” or “Base period
prices”
• Now using Example 1, keeping base year to be year 1, calculate the Real
GDP1 and Real GDP2
Can you interpret the value of this change in Real GDP number from t1 to t2?
Concept of change and growth
• More fitting measure to answer last question by calculating growth or
growth rate:

Growth in Real GDP: (RGDP2 – RGDP1) / RGDP1

Or
Growth rate in Real GDP: [(RGDP2 – RGDP1) / RGDP1]*100

*where the numerator represents change in Real GDP, keeping year 1 as the base, from t1 to t2
Types of Graphs
• You will be dealing with two types of graphs in this course:
1) Level graph: plots actual quantity (over time)
2) Logarithmic graph: plots trends or growth (over time)

Example: How would the two graphs for an economy look like which is
growing at a constant rate?
Types of Graphs (answer)
Limitations of GDP
• What are some of the limitations of GDP or GDP/capita to serve as a
tool to measure standard of living in an economy?
- Does not take into account non-monetary transactions.
- Does not factor in externalities.
- Ignores non-monetary factors influencing living standards.

What’s missing?
Measuring Inequality
• There are two tools we would be looking in this course:
1) The “90-10 Ratio”

- What does an increase in the value of the 90-10 ratio reveal for
inequality?
2) The “Gini Index” (or “Gini coefficient”)*
 Practice Question (try it out)
Q 1: Assume an economy with only two consumers, Malik and Ahmad. Their consumption bundle is made up of only two commodities:
Food (F) and Cloth (C ).
Malik consumption quantities in T1:
F = 10, C = 5
Ahmad consumption quantities in T1:
F = 30, C = 20
Prices in T1:
Pf = $10, pc = $15
a) Calculate Nominal and Real GDP (base year as T1) for T1
Malik consumption quantities in T2:
F = 15, C = 10
Ahmad consumption quantities in T2:
F = 40, C = 30 
Prices in T2:
Pf = $20, pc = $20 
b) Calculate Nominal and Real GDP (base year as T1) for T2
c) Calculate growth in the Nominal GDP and Real GDP (*do the same exercise keeping T2 as base year)
d) Which growth rate explains performance of the economy?