SECTION A
Gross national Product in GNP is the total value of all final goods and services produced for the marketplace by
relation to Gross Domestic domestic factors of production during a given time period.
Product Net factor payments from abroad (NFP) is defined as income paid to domestic
factors of production by the rest of the world minus income paid to foreign factors
of production by the home economy.
𝐺𝑁𝑃 = 𝐺𝐷𝑃 + 𝑁𝐹𝑃 (1.4)
GNP is the total income earned by a nation’s permanent residents –whether earned
at home or abroad.
Open economy: an economy with trading and financial relations with the rest of the
world. Closed economy: an economy that does not interact economically with other
economies (𝑁𝑋 = 𝑁𝐹𝑃 = 0).
Gross Domestic Product the measure of aggregate output, in the national income accounts.
the total value of the goods and services produced by the whole economy, in a given
period of time (𝑡). $𝒀𝒕 ≡ $𝑷𝒕 × 𝒀t
Closed economy, public
sector
I = I + d1Y = equilibrium income
C = C +c1(Y-T+TR) Or
TR , T =tY -> multiplier ?
= autonomous spending
= multiplier ( 0<c1<1)
Multiplier in good markets goods market:
an increase in public spending (𝐺) has positive effects on real GDP
the increase in public spending (𝐺) can be quite powerful (multiplier).
Compare marginal
propensity to consume in the
Keynesian consumption
function with the one implied
by the permanent income
hypothesis. Under what
circumstances they are likely
to become closer to each
other
So-called paradox of thrift:
what happens to aggregate
saving if people become
more pessimistic about the
future by increasing
autonomous saving (ceteris
paribus)
Difference GDP deflator and GDP Deflator: a measure of the price level calculated as the ratio of nominal GDP to
Consumer Price Index real GDP times 100.
𝐺𝐷𝑃 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟 𝑖𝑛 𝑡 = [𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃 𝑖𝑛 𝑡 / 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑖𝑛 𝑡] × 100
The most important differences between the CPI and the GDP price index are in the
types of goods and services covered by each index.
a. The GDP price index must also include the prices of goods purchased by the
, government, investment goods purchased by businesses, and exports, which are
purchased by foreigners.
b. The GDP price index leaves out prices of used goods and imports, both of which
are included in the CPI.
Why method of “chained Real GDP data may alternatively be constructed by using the “chained $” method.
prices” represents an The primary advantage of this method is that it produces growth rates of real GDP
improvement over the that are invariable to the choice of base period.
method of “constant prices”,
in computing a series for the Constant price:
real GDP growth of an Compute real GDP growth between 2011 and 2012 (base year: 2011):
economy
Chained prices:
1. Compute real GDP growth between 2011 and 2012 (base year: 2011):
2. Compute real GDP growth between 2011 and 2012 (base year: 2012):
3. Compute average real GDP gross rate of growth between 2011 and 2012
4. Choose a base year where the index (chain, C) has got value 1.
5. Construct the index by computing the value of the chain for each subsequent
year.
6. Compute the real GDP in chained (2011) dollars for the year 2012.
‘’chained prices’’ improvement over the method of ‘’constant prices’’. Maintaining a
fixed base is also problematic for GDP in constant prices. The problem is substitution
bias the fixed base keeps prices constant. Consequently, too much weight is given to
components for which relative prices have risen. The method overstates
components with falling relative prices but understand for those with rising relative
prices.
‘’chained prices’’: the base period and relative prices are continuously updated ->
reduce the weights of components with falling relative prices and increase those of
components with high relative prices. Thus, GDP in chained prices removes the base-
period dependence and substitution bias of GDP in constant prices.
Equilibrium in the financial
markets, what happens to
money demand when there
is an exogenous decrease in
bonds supply by the gov
(ceteris paribus)
Equilibrium, what happens to Exogenous variables: Variables which are not explained within the model, but are
the total wealth when there instead taken as given
is an exogenous increase in e.g., autonomous variables: 𝐶 , 𝐼
bonds demand by the private variables fixed by policymakers: 𝐺 , 𝑇 , 𝑇𝑅
sector (ceteris paribus) variables determined outside the economy: X
Money market
, In a closed economy with a Goods market equilibrium:
public sector,
total savings = total
investment plus public
deficit = total investment in
equilibrium
equilibrium total savings =
total investment
Distinguish nominal, real Nominal variable: an economic variable that is measured using current market
exchange rates prices, or equivalently that is not adjusted for the £’s changing value.
Real variable: a variable that is measured using the prices of a base year, or
equivalently a variable that has been adjusted for the £’s changing value.
Real economic variables convey information about the purchasing power of their
nominal counterparts and the physical quantity of economic activity.
We translate nominal variables into their real counterparts using the formula:
𝑅𝑒𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑖𝑛 𝑡 = (𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑖𝑛 𝑡 / 𝑃𝑟𝑖𝑐𝑒 𝑖𝑛𝑑𝑒𝑥 𝑖𝑛 𝑡) × 100
Define Aggregate investment Aggregate investment
function, give economic . amortisable goods and services
rationale of its main . residential (e.g., housing), non-residential (e.g., new machines used in production)
components . typically, made by durable goods ad services
. NOTE: this is not investment in financial assets, but in physical units
variables: • 𝐼 : aggregate investment
• : autonomous investment (constant, unless differently specified) qualitative
relationship:
function:
Accounting system of the an accounting system design to track buy and sell transactions between countries by
Balance of Payments, what an individuals, businesses and government agencies. It is double entry system in
are the main determinants which each transaction creates a credit entry and a debit entry of equal value.
of the Current Account Buying goods and services creates debit entries and selling things produces credits
entries.
We define the current account balance (CA) as the payments received from abroad
in exchange for currently produced goods and services –including factor services–
minus the analogous payments made to residents of foreign countries by the
domestic economy. Thus,
𝐶𝐴 ≡ net exports + net factor payment from abroad
national saving ≡ private investment + 𝐶A
Gross national Product in GNP is the total value of all final goods and services produced for the marketplace by
relation to Gross Domestic domestic factors of production during a given time period.
Product Net factor payments from abroad (NFP) is defined as income paid to domestic
factors of production by the rest of the world minus income paid to foreign factors
of production by the home economy.
𝐺𝑁𝑃 = 𝐺𝐷𝑃 + 𝑁𝐹𝑃 (1.4)
GNP is the total income earned by a nation’s permanent residents –whether earned
at home or abroad.
Open economy: an economy with trading and financial relations with the rest of the
world. Closed economy: an economy that does not interact economically with other
economies (𝑁𝑋 = 𝑁𝐹𝑃 = 0).
Gross Domestic Product the measure of aggregate output, in the national income accounts.
the total value of the goods and services produced by the whole economy, in a given
period of time (𝑡). $𝒀𝒕 ≡ $𝑷𝒕 × 𝒀t
Closed economy, public
sector
I = I + d1Y = equilibrium income
C = C +c1(Y-T+TR) Or
TR , T =tY -> multiplier ?
= autonomous spending
= multiplier ( 0<c1<1)
Multiplier in good markets goods market:
an increase in public spending (𝐺) has positive effects on real GDP
the increase in public spending (𝐺) can be quite powerful (multiplier).
Compare marginal
propensity to consume in the
Keynesian consumption
function with the one implied
by the permanent income
hypothesis. Under what
circumstances they are likely
to become closer to each
other
So-called paradox of thrift:
what happens to aggregate
saving if people become
more pessimistic about the
future by increasing
autonomous saving (ceteris
paribus)
Difference GDP deflator and GDP Deflator: a measure of the price level calculated as the ratio of nominal GDP to
Consumer Price Index real GDP times 100.
𝐺𝐷𝑃 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟 𝑖𝑛 𝑡 = [𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃 𝑖𝑛 𝑡 / 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑖𝑛 𝑡] × 100
The most important differences between the CPI and the GDP price index are in the
types of goods and services covered by each index.
a. The GDP price index must also include the prices of goods purchased by the
, government, investment goods purchased by businesses, and exports, which are
purchased by foreigners.
b. The GDP price index leaves out prices of used goods and imports, both of which
are included in the CPI.
Why method of “chained Real GDP data may alternatively be constructed by using the “chained $” method.
prices” represents an The primary advantage of this method is that it produces growth rates of real GDP
improvement over the that are invariable to the choice of base period.
method of “constant prices”,
in computing a series for the Constant price:
real GDP growth of an Compute real GDP growth between 2011 and 2012 (base year: 2011):
economy
Chained prices:
1. Compute real GDP growth between 2011 and 2012 (base year: 2011):
2. Compute real GDP growth between 2011 and 2012 (base year: 2012):
3. Compute average real GDP gross rate of growth between 2011 and 2012
4. Choose a base year where the index (chain, C) has got value 1.
5. Construct the index by computing the value of the chain for each subsequent
year.
6. Compute the real GDP in chained (2011) dollars for the year 2012.
‘’chained prices’’ improvement over the method of ‘’constant prices’’. Maintaining a
fixed base is also problematic for GDP in constant prices. The problem is substitution
bias the fixed base keeps prices constant. Consequently, too much weight is given to
components for which relative prices have risen. The method overstates
components with falling relative prices but understand for those with rising relative
prices.
‘’chained prices’’: the base period and relative prices are continuously updated ->
reduce the weights of components with falling relative prices and increase those of
components with high relative prices. Thus, GDP in chained prices removes the base-
period dependence and substitution bias of GDP in constant prices.
Equilibrium in the financial
markets, what happens to
money demand when there
is an exogenous decrease in
bonds supply by the gov
(ceteris paribus)
Equilibrium, what happens to Exogenous variables: Variables which are not explained within the model, but are
the total wealth when there instead taken as given
is an exogenous increase in e.g., autonomous variables: 𝐶 , 𝐼
bonds demand by the private variables fixed by policymakers: 𝐺 , 𝑇 , 𝑇𝑅
sector (ceteris paribus) variables determined outside the economy: X
Money market
, In a closed economy with a Goods market equilibrium:
public sector,
total savings = total
investment plus public
deficit = total investment in
equilibrium
equilibrium total savings =
total investment
Distinguish nominal, real Nominal variable: an economic variable that is measured using current market
exchange rates prices, or equivalently that is not adjusted for the £’s changing value.
Real variable: a variable that is measured using the prices of a base year, or
equivalently a variable that has been adjusted for the £’s changing value.
Real economic variables convey information about the purchasing power of their
nominal counterparts and the physical quantity of economic activity.
We translate nominal variables into their real counterparts using the formula:
𝑅𝑒𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑖𝑛 𝑡 = (𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑖𝑛 𝑡 / 𝑃𝑟𝑖𝑐𝑒 𝑖𝑛𝑑𝑒𝑥 𝑖𝑛 𝑡) × 100
Define Aggregate investment Aggregate investment
function, give economic . amortisable goods and services
rationale of its main . residential (e.g., housing), non-residential (e.g., new machines used in production)
components . typically, made by durable goods ad services
. NOTE: this is not investment in financial assets, but in physical units
variables: • 𝐼 : aggregate investment
• : autonomous investment (constant, unless differently specified) qualitative
relationship:
function:
Accounting system of the an accounting system design to track buy and sell transactions between countries by
Balance of Payments, what an individuals, businesses and government agencies. It is double entry system in
are the main determinants which each transaction creates a credit entry and a debit entry of equal value.
of the Current Account Buying goods and services creates debit entries and selling things produces credits
entries.
We define the current account balance (CA) as the payments received from abroad
in exchange for currently produced goods and services –including factor services–
minus the analogous payments made to residents of foreign countries by the
domestic economy. Thus,
𝐶𝐴 ≡ net exports + net factor payment from abroad
national saving ≡ private investment + 𝐶A
