Introduction to Economics and Game Theory

Week 2 Monday

Dawid Walentek

Measuring National Income

Gross Domestic Product

The market value of all final goods and services produced within a country in a given period of time

GDP step by step

• GDP Is the Market Value
• Of All
• Final
• Goods and Services
• Produced
• Within a Country
• In a Given Period of Time

GDP and GNI

Krugman writes "low corporate tax rate, which attracts both real foreign investment in capital-intensive sectors – investment that raises GDP but does little for workers – and also creates an incentive to use transfer pricing to make profits appear in Ireland even though they have nothing much to do with Irish activity."

The components of GDP

• consumption: spending by households on goods and services, with the exception of purchases of new housing
• investment: spending on capital equipment, inventories and structures, including household purchases of new housing
• government purchases: spending on goods and services by local, state and national governments
• net exports: spending on domestically produced goods and services by foreigners (exports) minus spending on foreign goods by domestic residents (imports)

Net exports

There seems to be a problem, as Lukas Linsi and Daniel Mugge (UvA) point out. However, this only matters for bilateral trade, not for the aggregate trade as Hal Varian argues – and Greg Mankiw reassures.

Real and Nominal GDP

• Real GDP: the measure of the value of output in the economy which takes into account changes in prices over time
• Nominal GDP: the production of goods and services valued at current prices

Real and Nominal GDP

GDP deflator

• A measure of the price level calculated as the ratio of nominal GDP to real GDP times 100

Cost of Living

Tools

Consumer Price Index is a measure of the overall prices of the goods and services bought by a typical consumer

Inflation rate  is the percentage change in the price index from the preceding period

Calculating CPI and Inflation

Problems

• Substitution Bias (between close substitutes and brands)
• New Goods
• Unmeasured Quality Change

Key concepts

• indexation: the automatic correction of a money amount for the effects of inflation by law or contract
• nominal interest rate: the interest rate as usually reported without a correction for the effects of inflation
• real interest rate: the interest rate corrected for the effects of inflation

Break!

Seminar

The Data of Macroeconomics

To which component of GDP does the following activity belong?

• A recent graduate purchases a new Skoda
• A family purchases a new home
• Skoda sells a car from its stock
• Skoda (VW) opens a factory in Poland
• Government builds a new highway from Poland to the Czech Republic
• Skoda exports cars from Poland to Germany

Effect on GDP

• A grape grower sells grapes for PLN 10,000 and a wine-maker sells Riesling for PLN 50,000. What is the total contribution to the GDP?
• I have sold my old VHS collection for PLN 200
• Price of bread increased by 10%
• Price of houses in Amsterdam increased by 30%

Computations

• Calculate the nominal GDP, real GDP and the GDP deflator for each year, using 2010 as the base.

• Calculate the percentage change in nominal GDP, real GDP and the GDP deflator for years 2011 and 2012.

Lunch

Guest lecture

Joan van Heijster

Faculty of Political Science

University of Amsterdam

fickleformulas.org

Thank you and see you tomorrow!