EC1B3 REVISION NOTES 2023
CHAPTER 2: GDP (Week 1 Thursday Lecture)
1. Gross Domestic Product: Total market value of all final goods and services produced
within a specific territory in a given period of time.
2. Measuring GDP–
3. The Expenditure Approach:
4. The Income Approach: Measures the sum of all income generated in the economy.
5. Depreciation: Deterioration of capital stock due to wear and tear.
● GDP - Depreciation = Net Domestic Product
6. Total Share of GDP to Inputs: Labour ⅔ and Capital ⅓ .
7. The Production Approach: Only new production counted, no double counting.
8. Nominal GDP: Changing both prices and quantities
9. Real GDP: Changing only quantities and keeping prices of base year
10. Price deflator: Nominal GDP/Real GDP
11. CPI: Cost of base quantities at current prices/Cost of base quantities at base prices
12. Paasche Price Index–GDP
13. Laspeyres Price Index–CPI
14. CPI does not account for substitution effect, whereas GDP accounts for it. Hence, CPI
has a higher inflation rate.
,CHAPTER 3: ECONOMIC GROWTH (Week 2 Monday Lecture)
1. Economic Growth:
2. The rule of 70: If y grows at a rate of g per year, then the number of years it takes y to
double is approximately equal to 70/g.
CHAPTER 4: A MODEL OF PRODUCTION (Week 2 Thursday Lecture)
1. PRODUCTION MODEL:
● Production Function (Cobb-Douglas form): . Here, Y =
output, K = capital, L = labour and A = productivity parameter.
● Production function exhibits constant returns to scale. That is, if we double the amount of
each input, we will double the amount of ice cream produced. This is due to the sum of
exponents being equal to 1. If it was less or more than 1, then we would have decreasing
and increasing returns to scale respectively. The justification for constant returns to scale
is called standard replication argument.
● Assuming that market is in perfect competition i.e economic profits are zero, firms will
maximise profits using following equation: .
Here, r = rental price of capital and w = wage. The solution to the firm’s problem is to
hire capital until the marginal product of capital is equal to the rental price r, and to hire
labour until the marginal product of labour equals the wage w.
● Diminishing Marginal product of capital (MPK): Extra amount of output that is
produced when one unit of capital is added, holding all the other inputs constant. As K
increases, MPK decreases.
,● Diminishing Marginal Product of labour (MPL): the extra amount of output that is
produced when one unit of labour is added, holding all the other inputs constant. As L
increases, MPL decreases.
, ● Solving the model: GENERAL EQUILIBRIUM –
●
CHAPTER 2: GDP (Week 1 Thursday Lecture)
1. Gross Domestic Product: Total market value of all final goods and services produced
within a specific territory in a given period of time.
2. Measuring GDP–
3. The Expenditure Approach:
4. The Income Approach: Measures the sum of all income generated in the economy.
5. Depreciation: Deterioration of capital stock due to wear and tear.
● GDP - Depreciation = Net Domestic Product
6. Total Share of GDP to Inputs: Labour ⅔ and Capital ⅓ .
7. The Production Approach: Only new production counted, no double counting.
8. Nominal GDP: Changing both prices and quantities
9. Real GDP: Changing only quantities and keeping prices of base year
10. Price deflator: Nominal GDP/Real GDP
11. CPI: Cost of base quantities at current prices/Cost of base quantities at base prices
12. Paasche Price Index–GDP
13. Laspeyres Price Index–CPI
14. CPI does not account for substitution effect, whereas GDP accounts for it. Hence, CPI
has a higher inflation rate.
,CHAPTER 3: ECONOMIC GROWTH (Week 2 Monday Lecture)
1. Economic Growth:
2. The rule of 70: If y grows at a rate of g per year, then the number of years it takes y to
double is approximately equal to 70/g.
CHAPTER 4: A MODEL OF PRODUCTION (Week 2 Thursday Lecture)
1. PRODUCTION MODEL:
● Production Function (Cobb-Douglas form): . Here, Y =
output, K = capital, L = labour and A = productivity parameter.
● Production function exhibits constant returns to scale. That is, if we double the amount of
each input, we will double the amount of ice cream produced. This is due to the sum of
exponents being equal to 1. If it was less or more than 1, then we would have decreasing
and increasing returns to scale respectively. The justification for constant returns to scale
is called standard replication argument.
● Assuming that market is in perfect competition i.e economic profits are zero, firms will
maximise profits using following equation: .
Here, r = rental price of capital and w = wage. The solution to the firm’s problem is to
hire capital until the marginal product of capital is equal to the rental price r, and to hire
labour until the marginal product of labour equals the wage w.
● Diminishing Marginal product of capital (MPK): Extra amount of output that is
produced when one unit of capital is added, holding all the other inputs constant. As K
increases, MPK decreases.
,● Diminishing Marginal Product of labour (MPL): the extra amount of output that is
produced when one unit of labour is added, holding all the other inputs constant. As L
increases, MPL decreases.
, ● Solving the model: GENERAL EQUILIBRIUM –
●
