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Summary Economics: International business awareness
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International Business Awareness – Economics Q1GDP is the market value of all final goods and services produced within a country in a given period of
time.
-output is valued at market prices
-it records only the value of final goods, not intermediate goods
-it includes both tangible goods and intangible services
-it includes goods and services produced in the period, not transactions involving goods produced in
the past
-it measures the value of production within the geographic confines of a country
-it measures the value of production that takes place within a specific interval of time, usually a year
or three months
GDP per capita measures the national income per head of the population. Income must equal
expenditure because every transaction has a buyer and a seller. Every dollar or spending by some
buyer is a dollar of income for some seller.
GDP includes items produced in the economy and sold legally in the markets. GDP excludes products
that are consumed at home and that never enter the marketplace (f.e. babysitting, cleaning the
house). It also excludes products sold and produced illicitly, such as illegal drugs
GDP (Y) is the sum of the following:
-consumption (C)
-investment (I)
-purchases (G)
-net exports (NX)
Y=C+I+G+NX
-consumption (C) is the spending of households on goods and services with the exeption of purchases
of new housing.
-investment (I) is the spending on capital equipment, inventories and structures, including new
housing.
-government purchases (G) is the spending on all goods and services by local and central
governments, does not include transfer payments because they are not made in exchange for
currently produced goods or services.
-net exports (NX) are the exports minus imports.
GDP per capita is the Gross domestic product divided by the population of a country to give measure
of national income per head.
Nominal GDP versus real GDP
Nominal GDP values the production of goods and services at current prices (specific time).
Real GDP values the production of goods and services at constant prices (base year vs other year).
An accurate view of the economy requires adjusting nominal to real GDP by using the GDP deflator.
Real GDP looks at inflation.
Year Prices of applesQuantity of Prices of Quantity of
apples potatoes potatoes
2013 €1 100 €2 50
2014 €2 150 €3 100
2015 €3 200 €4 150
Nominal GDP >2013: €1 x 100 + €2 x 50 = 200
>2014: €2 x 150 + €3 x 100 = 600
, Real GDP >2013: €1 x 100 + €2 x 50 = 200 (base year:2013)
>2014: €1 x 150 + €2 x 100 = 350
>2015: €1 x 200 + €2 x 150 = 500
The GDP deflator is a measure of the price level calculated as the ratio of nominal GDP to real GDP
times 100. It tells us that the rise in nominal GDP is a cause of a rice in prices rather than a rise in the
quantities produced.
GDP deflator = nominal GDP : real GDP x 100
GDP is assumed to be the best single measure of the economic well-being of a society. GDP per
person tells us the mean income and expenditure of the people in the economy. Higher GDP per
person indicates higher standard of living. However the GDP is not a perfect measure of the
happiness or quality of life.
Some things are not included in the GDP that do attribute to the well-being. Think about the value of
leisure or the value of a clean environment. It also does not include valued time parents spend with
their children of the value of volunteer work.
Human development index (HDI) is a tool that is used to measure rank and countries’ levels of social
and economic development (f.e. life-expectancy or level of education).
Interest represents a payment in the future for a transfer of money in the past. The nominal interest
rate is the interest rate usually reported and not corrected for inflation. It is the interest rates that a
bank pays. The real interest rate is the nominal interest rate that is corrected for the effects of
inflation.
Measuring the cost of living
Inflation is the term used to describe a situation in which the economy’s overall price level is rising.
The inflation rate is the percentage change in the price level from the previous period. The consumer
price index (CPI) is a measure of the overall costs of goods and services bought by a typical consumer.
When the CPI rises, the typical family has to spend more money to maintain the same standards of
living.
Calculate CPI, five stages
-fix the basket: determine what prices are most important to the typical consumer.
-find the prices: find prices of each of the goods and services in the basket for each point in time.
-compute the basket’s cost: use the data on prices to calculate the cost of the basket of goods and
services at different times.
-choose a base year and compute the index: choose one year as a base year, making it the benchmark
against other years. Compute the index by dividing the price in one year by the price in the base year
and multiplying by 100.
-compute the inflation rate: the percentage change in the price index from the preceding period.
Inflation rate Y2= CPI Y2 - CPI Y1 : CPI Y1 x 100
Problems in measuring the cost of living
The CPI is an accurate measure of the selected goods that make up the typical bundle, but it is not a
perfect measure of the cost of living. Think about the substitution bias (apples higher price, more
pears consumed), introduction of new goods (Netflix vs cinema’s) and unmeasured quality changes
(smartphones vs digital camera).
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