Introduction to Economics Unit 8

GDP

The monetary value of all final goods produced by an economy in a given time period

GDP measurements

• Output → value added

• Income → wages, profits

• Expenditure → changes in inventories, gov. expenditures, intl. trade

GDP = C + I + II + G + (X-M)

• C → by household on consumer goods and services

• I → gov. investment in: bachinery, buildings, housing

• II → firms on changes in inventories

• G → gov. on goods and services

• X → exports

• M → imports

GDP does not include

leisure time, quality of social and physical environment, inequality, depletion of resources, household or volunteer work

Purchasing Power Parity

• to compare various countries → expression in the same currency

  • using PPP exchange rate

PPP exchange rate

rate at which the currency of one country would have to be converted into that of another to purchase the same amount of goods and services in each country

nominal GDP

good’s prices sold in year T are multiplied by quantities sold in year T

• princes and quantities in the same year

• current prices

real GDP

1. estimate the nominal GDP

2. pick a base year

• analysis of GDP growth across years across countries

• adjusts for inflation thus the base-year

nominal GDP

actual amount of money in a given currency received by worker as a payment for work

Consumer Price Index

metric tracking the total price of shopping basket containing goods&services commonly purchased by goods

Recession

significant decline in economic activity that is spread across the economy and that lasts for more than a few months

Central Bank

manages the money supply and interests rates

Monetary Policies

how a country’s bank manages the money supply and interest rates to influence the economy

Expansionary monetary policies

• have a positive effect on GDP

• Tend to decrease unemployment and/or increase wages through a higher demand for labour

• Policies used during economic downs or recessions

• decrease in interest rates

Expansionary monetary policy example from the European Central Bank

Interest rate historically low during COVID-19

• easier for people and companies to borrow money supporting spending and investment

• Additionally:

  • Bought bonds from private banks → more funds for banks to lend to businesses and households

  • Bought bonds from the companies → additional source of profit

  • Make it easier for the banks to borrow from the ECB

Fiscal policies

How government uses spending and taxation to influence the economy

Expansionary fiscal policies

increasing government spending or decreasing taxes

Example of expansionary fiscal policy

Fiscal stimulus packages like COVID-19

• increased investments in R&D, innovation, infrastructure, digitalisation, climate

• + public expenditure + investment + consumption = job creation

• Additionally:

  • job training and upskilling

  • job search assistance

  • subsidized employment

  • unemployment benefits

Inflation

general increase of prices in an economy

Contractionary monetary policies

• have a negative impact on the GDP

• tend to increase unemployment and/or lower wages

• Decrease in demand for labour

• Tend to slow down the inflation

Example of contractionary monetary policies by European Central Bank

• Before 09’/09’ economic crisis → strong economic growth in Europe, prices were rising

• ECB increased interest rates several times between 2005-2008