Macro-Economic 2022

What is Macro-Economic?
(4) Nominal GDP & Real GDP
Nominal GDP (NGDP) Real GDP (RGDP)
 Measures the value of output in a  Measures the value of final
nation during some period of time at output in a nation during some
Current prices period of time at constant base
year prices

 The Change in NGDP may come  The change in RGDP come from
from: change in quantity only
 Change in price level
 Change in quantity  Real GDP is a good measure for
 Change in both price & quantity the performance of the economy
because it reflects only the
 Nominal GDP is not a good measure change in quantity
for the performance of the economy,
it’s misleading because the increase
in the quantity or the increase in
the price level

 Example (1):
The following information belongs to an economy that produces only two goods
(bread & cars). Assuming that 2008 is a based year
1) Nominal GDP each year, the change in nominal GDP & rate of change in it
2) Real GDP each year, the change in real GDP & rate of change in it

Years Quantity produced Prices

Breads Cars Bread Cars
2008 100 20 10 50
2009 110 21 12 55

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Answer
1- Nominal GDP2008 = Q2008 × P2008 = (100 × 10) + (20 × 50) = $ 2000
Nominal GDP2009 = Q2009 × P2009 = (110 × 12) + (21 × 55) = $2475
 Change in Nominal GDP = $2475 - $2000 = $475

 Rate of change in Nominal GDP = × 100

 Rate of change in Nominal GDP = 23.75% increased

2- Real GDP2008 = Q2008 × P2008 = (100 × 10) + (20 × 50) = $2000

Real GDP2009 = Q2009 × P2008 = (110 × 10) + (21 × 50) = $2150
 Change in Real GDP = $2150 - $2000 = $150

 Rate of change in Real GDP = × 100

 Rate of change in Real GDP = 7.5% increased

 Important Note
 The value Of RGDP in the base year Equal NGDP

(5) Inflation
A) Definitions:
 Price Level (P): The average level of all the prices of goods & services in
the economy
 Inflation: is the continuous increase in the overall price level.
 Deflation: is the decrease in the overall price level.
 Hyperinflation: is a period of very repaid increase in the overall price level

P2 P1
Inflation Rate = P1
× 100

 Inflation lowers the overall standard of living

because it reduces the purchasing power of money 

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 Example: If the price level in year 2000 was 177 & in 2019 was 155,
calculate the inflation rate
Answer
P2 P1
Inflation Rate = × 100
P1
1 1
Inflation Rate = × 100 = - 12.4% (deflation)
1
This means that price level has decreased between 2000 & 2019 by 12.4%
and this is called deflation and "affects the consumer positively because
the purchasing power of money increases and the cost of living
decreases"

B) Measures of Inflation (Cost of living):

 We used price index to measure changes in the cost of living over time

(I) Consumer price index (CPI):

 Measure the average price of a consumer basket goods & services

𝐂𝐨𝐬𝐭 𝐎𝐅 𝐆𝐨𝐨𝐝𝐬 𝐈𝐧 𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐘𝐞𝐚𝐫

CPI = X 100
𝐂𝐨𝐬𝐭 𝐎𝐟 𝐆𝐨𝐨𝐝𝐬 𝐈𝐧 𝐁𝐚𝐬𝐞 𝐘𝐞𝐚𝐫

 Example: suppose the consumer Year Price of Price of

basket contains 4 units of hotdogs & 2 units of hotdogs burger

burgers. Suppose the prices are as follows: 2008 1 2

1) Calculate the CPI in each year if 2008 2009 2 3
is the base year 2010 3 4
2) Calculate the inflation rate between 2008 & 2009

Answer
1) The Cost of basket of goods in 2008 = 1(4) + 2(2) = $8.
The Cost of basket of goods in 2009 = 2(4) + 3(2) = $14.
The Cost of basket of goods in 2010 = 3(4) + 4(2) = $20.
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CPI2008 = × 100 = 100 % (In Base Year CPI must equal 100%)

CPI2009 = × 100 = 175 %

CPI2010 = × 100 = 250 %

2) – Inflation rate between 2008 & 2009 = CPI2009 – CPI2008 X 100
CPI2008
Inflation rate between 2008 & 2009 = 175 -100 X 100 = 75%.
100
 This means that price level in 2009 increased by about 75% comparing to the
price level in 2008. And such an increase in price affects the consumer
negatively because the "purchasing power of money decreases and the cost
of living increases"

(II) Implicit GDP deflator

 Measure the average price of all goods & services produced in the country
during some time period
 It's the most comprehensive index of the goods & services that are
produced by the entire economy

Implicit GDP deflator = Normal GDP × 100

Real GDP

 Comparison between GDP deflator & CPI 

a) CPI is calculated monthly while GDP Deflator is calculated yearly

b) CPI is based on Consumer Goods & Services while GDP Deflator is based on
all goods & services.

c) CPI includes the prices of imported goods while GDP Deflator does not.

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 Which Is Better CPI (OR) GDP Deflator 

 It is hard to say which one is better or more “correct” in measuring inflation.
Each index gives us different information. It depends mostly on what you are
interested in knowing where
 If one wants to know how the price level of goods produced in the whole
country is changing, then the GDP deflator would give the most accurate
picture.
 On the other hand, if one was interested in knowing how the price level of
consumer goods was changing over time, then CPI would be the best.

 True (OR) False 

1) The implicit GDP deflator is considered the most comprehensive index of the price level.

2) CPI reflects the change in cost of living during the year.

3) Inflation is bad for the economy because goods and services are more expensive.

4) If GDP deflator for the period 1995-2000 is 140%, this means that we can only buy with
$40 in 2000 what we can buy with $100 in 1995.

5) If GDP deflator for the period 2000-2002 is 120%, this means that the value of output
with 2002 prices is $1000 million, when the value of the same output in 2000 prices is
$800 million.

6)
If in the same period output doubles and the price level remains the same, nominal GDP
doubles.

7) If real GDP rises, then so must nominal GDP.

8) If the GDP deflator next year is less than the GDP deflator this year, then the price level
has fallen.

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 Example (1) Consider the following table

Year Price Quantity
2017 10 1000
2018 20 1500

♣♣♣ Assuming that year 2017 is the base year price. Calculate:
1) The nominal GDP in each year.
2) The change in nominal GDP between the two years.
3) The % increase in nominal GDP.
4) The real GDP in each year.
5) The change in real GDP between the two years.
6) The % increase in real GDP.
7) The implicit GDP deflator in 2018.
Answer
1- Nominal GDP (2017) = P2017 × Q2017 = 10 × 1000= $10,000
Nominal GDP (2018) = P2018 × Q2018 = 20 × 1500= $30,000

2- The change in nominal GDP between the year 2017 and year 2018
= nominal GDP in year (2018) - nominal GDP in year (2017)
= 30,000 - 10,000 = $20,000

3- The % increase in nominal GDP = ×

4- Real GDP (2017) = P2017 × Q2017 = 10 × 1000 = $10,000

Real GDP (2018) = P2017 × Q2018 = 10 × 1500 = $15,000

5- The change in Real GDP between the year 2017 and year 2018
= 15,000 – 10,000 = $5,000

6- The % change in real GDP = ×

7- The implicit GDP deflator (2017) = ×

The implicit GDP deflator (2018) = ×

That means that price level increases by 100% (doubled)
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 Example (2)
The following table gives data for output and price in the economy for two years:
Quantity Produced Prices
Wheat Steel Wheat ($) Steel ($)
Year (1) 200 40 20 100
Year (2) 220 32 24 110

a) Calculate the nominal GDP for the two year

b) Calculate the rate of change in nominal GDP between the two year
c) Calculate the real GDP for the two year using year (2) prices
d) Calculate the rate of change in real GDP between the two year
e) Calculate the GDP implicit deflator
f) What is the inflation rate?
Answer
a- The nominal GDP for the year (1) = [(200 × 20) + (40 × 100)]
= 4,000 + 4,000 = $8,000

The nominal GDP for the year (2) = [(220 * 24) + (32 * 110)]
= 5,280 + 3,520 = $8,800

b- Rate of change in nominal GDP between the two year = ×

c- Assuming that year 2 is the base year

Real GDP for year (1) = [(200 × 24) + (40 × 110)] = 4,800 + 4,400 = $9,200
Real GDP for year (2) = [(220 × 24) + (32 × 110)] = 5,280 + 3,520 = $8,800

d- Rate of change in real GDP between the two year = ×

Real output decreased by 4.3% between the two years

e- Implicit GDP deflator for year (1) = ×

Implicit GDP deflator for year2 = ×

f- Inflation rate= 100% - 88% = 12%

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 Example (3):
Year Nom. GDP Real GDP GDP Deflator Inflation Rate
2009 $46,200 $46,200 …………. -
2010 $51,400 $50,000 ………….. …………
2011 $58,300 $52,000 ………. ………….

Solution
Year Nom. GDP Real GDP GDP Deflator Inflation Rate
2009 $46,200 $46,200 100% -
2010 $51,400 $50,000 102.8% 2.8%
2011 $58,300 $52,000 112% 9.2%

 Example (4)
Year Nom. GDP GDP deflator Real GDP
2004 500 125 …………...
2005 600 180 …………….

 Example (5)
- If you know that in a certain economy the rate of inflation between year 2000
(base year) & year 2018 was 20% & the real national income in year 2018 was
$1500

Calculate the nominal national income for year 2018

Answer
Implicit deflator in base year = 100%
Implicit deflator in 2018 = 100% + inflation rate = 100% + 20% = 120%

Implicit deflator in 2018 = × 100

Nominal national income = Implicit deflator × Real national income
Nominal national income = 120% × 1500
Nominal national income = $1800
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 Example (6)
- If you know that in a certain economy the rate of inflation between year 1990
(base year) & year 2016 was 30% & the nominal national income in year 2018 was
$2080

Calculate the real national income for year 2016

Answer
Implicit deflator in base year = 100%
Implicit deflator in 2016 = 100% + inflation rate = 100% + 30% = 130%

Implicit deflator in 2016 = × 100

Real national income =

Real national income = = $1,600

 Example (7)
If you know that in a certain economy the price level in year 2016 (base year)
is "higher than" in 2017 by 20% & the real national income in year 2017 was
$1600

Calculate the nominal national income for year 2017

Answer
Implicit deflator in base year = 100%
Implicit deflator in 2018 = 100% + inflation rate = 100% + (- 20%) = 80%
20% ‫ بي‬2016 ‫ عن‬2017 ‫ علشان األسعار قلت في سنة‬inflation rate ‫هنا في المسألة دي طرحنا ال‬

Implicit deflator in 2018 = × 100

Nominal national income = Implicit deflator × Real national income
Nominal national income = 80% × 1500
Nominal national income = $1,280

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