ECON 112 Measures in Price Level & Macro Identities Templates.pdf

Measures in Price Level GDP Consists of Consumption, Expenditure, Investment Spending and Net Exports via the equation C + G + I + (X-M) GDP per capita income (Welfare) Measured by dividing GDP by the number of citizens, has limitations as it is possible for metrics to be skewed. GNP GDP + NFIA Net...

Measures in Price Level GDP Consists of Consumption, Expenditure, Investment Spending and Net Exports via the equation C + G + I + (X-M) GDP per capita income (Welfare) Measured by dividing GDP by the number of citizens, has limitations as it is possible for metrics to be skewed. GNP GDP + NFIA Net Domestic Product (NDP) GDP - Depreciation. Ideally the best because it includes the actual cost of economic activity. Very difficult to measure as we cannot place a currency to qualitative factors (Ex. The cost of an OFW not raising their children) Nominal vs Real GDP Nominal is what is on paper. Real is based on previous years. To solve for Real GDP it is the Nominal GDP divided by the GDP deflator. Price Index Measures the general price level at a certain period. a. GDP Deflator = Nominal/Real Inflation: π𝑡 = 𝐺𝐷𝑃𝑑𝑡 − 𝐺𝐷𝑃𝑡−1 𝐺𝐷𝑃𝑡−1 π𝑡 = [(𝐺𝐷𝑃𝑑𝑡 / 𝐺𝐷𝑃𝑑𝑡−1) − 1] 𝑥 100 Consumer Price Index (CPI) Measures the cost of living of a fixed basket of goods and services representative of consumer purchases. Non-Weighted: (Previous/Current) Weighted: (Non-weighted x Weight) CPI is indicative of those that are typical of FIlipinos to purchase vs all. This is useful for understanding welfare as these are the necessary commodities to live. GDP Deflator is variable in nature. On one hand, CPI fluctuates as can be tied to imports which can fluctuate as a result. GDP Deflator is slower to change. CPI will be used for Macro, GDP Deflator will be used for international. Limitations of CPI: Selection of goods for what is typical is subjective, differences in income distribution, changes in consumption patterns because what is relevant in consumption changes, and changes in quality over time. Producer Price Index Used to forecast or acts as an indicator for what might happen to the CPI later on. It is the average change in selling prices of domestic producers over time. Macro Identities Expenditure Approach Expenditure ≡ Consumption, Government Expenditure, Investment Spending (Gross Capital Formation, Maintenance Costs, etc.) and Net Exports via the equation E ≡ C + G + I + (X-M) “I” is 𝐾𝑡+1 − 𝐾𝑡 or 𝐾𝑡+1 − 𝐾𝑡 + 𝑑𝐾𝑡 Income Approach Income ≡ Consumption, Taxation, Savings Y≡C+S+T Y-T=C+S (Y - T) - S = C *(Y - T) refers to disposable income. 1. Simple Economy (No Govt. Autarky.) E≡C+I Y≡C+S At equilibrium in a simple economy without government, your investment spendings are also your savings. Think about what you do with extra crops. You would plant them since they are surplus and that will act as an investment later. 2. Simple Economy (Govt. Autarky.) E≡C+I+G Y≡C+S+T G-T=S-I At equilibrium in a simple economy with government, your Government Spending less Tax (Government Budget Deficit) is equal to your Savings less Investment (Crowding Out). The role of the private sector in the economy is diminished. If G-T is positive, that means your government spent more than it collected, if it is negative, it saved more than it spent. The private sector can use what the government saved. S-I refers to the crowding out effect. You would like the private sector to spend more than the government as they are usually more efficient. Crowding out usually results in higher taxes, interest rates, and increased government spending. The government competes in the loanable funds market. 3. Open Economy w/ Govt. E ≡ C + I + G + (X - M) Y≡C+S+T At equilibrium, G - T = (S - I) + (M - X) Where the government budget deficit is equal to the crowding out and trade deficit. Assuming that what the private sector saves is what they invest (S = I) the budget deficit usually results in a trade deficit leading to a twin deficit as that means we are importing more. If the government collects 100B PHP and spends 75B PHP, that means there is an excess of 25B PHP. If the government saves it outside the country, a foreign body purchases the peso, that means they will buy something from the PH, we now have a trade surplus. Solow Model (1950’s) Y = AF (K,N) *where A is technology, K is your capital, and N is your labor and 𝑌𝐴 , 𝑌𝐾 , 𝑌𝑁 > 0 and 𝑌𝐾𝐾 and 𝑌𝑁𝑁 < 0 If you have been given a laptop, your productivity increases but if you were given another laptop, your productivity/output won’t increase by a significant amount. General Cobb-Douglas θ if there are more laborers who have to share the same machine, the per capita output decreases. Formal argument for population management. 1−θ Y = A𝐾 𝑁 *Such that 0 Capital > Population. Population makes the economy grow by increasing activity fbut not the per capita income. Convergence Process of one economy catching up with others. So we say: θ 1−θ Y = A𝐾 𝑁 𝑌 𝑁 𝐾 θ = A( 𝑁 ) θ y = A𝑘 *where y is per capita income and k is the capital labor ratio. It would grow in a concave manner due to the law of diminishing marginal productivity. (Capital labor refers to the proportion of capital to labor) For example, the Philippines and the US. The Philippines has a lower capital labor ratio so less per capita income compared to the US who has the exact opposite. That said, if you were to increase the capital labor of both, the Philippines would see a greater rate of change compared to the US. There is an inherent force that will cause the two economies to eventually converge. So why have we not converged with the US? We are assuming that all economies have the same level of technology and efficiency. Technology raises your ceiling per capita income even with the same capital labor ratio. If you increase the investment in the PH and the US given this new graph, the returns will basically be the same so the two will never converge. Residual 𝑑𝑌 𝑌 − 𝑑𝑌 𝑌 𝑑𝑁 𝑁 𝑑𝑌 𝑌 𝑑𝑌 𝑌 𝑑𝐴 𝑑𝐾 𝑑𝑁 + θ 𝐾 + (1 − θ) 𝑁 𝐴 𝑑𝐴 𝑑𝐾 𝑑𝑁 = 𝐴 + θ 𝐾 + (1 − θ) 𝑁 𝑑𝑁 𝑑𝐴 𝑑𝐾 𝑑𝑁 − 𝑁 = 𝐴 + θ 𝐾 − θ 𝑁 𝑑𝑁 𝑑𝐴 𝑑𝐾 𝑑𝑁 − 𝑁 = 𝐴 + θ( 𝐾 − 𝑁 ) = 𝑑𝑦 𝑦 = 𝑑𝐴 𝐴 + θ 𝑑𝑘 𝑘 − 𝑑𝑁 𝑁 *Where the growth of per capita income (dy/y) is the growth in technology (dA/A) and the share of capital (θ) times the growth rate of capital labor ratio (dk/k) If you want to raise the standard of living in terms of per capita income is technology while growth in capital can improve but not the most. 𝑑𝐴 𝐴 = 𝑑𝑦 𝑦 − θ 𝑑𝑘 𝑘 We now have a mathematical answer, not an economic answer. Technology is whatever is left over from the things we can’t explain anymore. The Solow model argues technology is the most important but we don’t know what it is exactly. Making it hard to manipulate or adjust.