1. Components of Expenditure
GDP has been divided to four broad categories of spending:
Y = C + I + G + NX
GDP
Consumption spending
Government expenditure
Net export
Investment spending
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2. Components of Expenditure
GDP components
Amount in $ C
32144 I
7052 G
8854 NX
2343
GDP =
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3. Consumer Price Index CPI
CPI is a measure of the overall cost of the goods and services bought by a typical consumer. Also, it is the best measure of cost of living.
CPI is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, medical care and so on.
Suppose that the typical consumer buys 5 apples and 2 oranges every month. Then the basket of goods consists of 5 apples and 2 oranges.
CPI = (5 * P current apple)+(2 * P current orange)/ (5 * P 2002 apple) + (2 * P 2002 orange)
… CPI is based on not all goods and services, but the goods and services in the market basket. So, the goods and services in the market basket are representative of the goods and services bought by a typical household.
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4. The quantity should be fixed!
Computing the CPI
Goods in the market basket
Base year prices
Base year expenditure
Current year prices
Current year expenditure
10 A
1 $
10 $
2 $
20 $
20 B
40 $
3 $
60 $
Total
50 $
80 $
CPI = ($ spend market basket Current year/ $ spend market basket base year) * 100
CPI = (80/50)*100 = 160 = CPI for the current year
The quantity should be fixed!
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5. Comparing two CPIs EXAMPLE!!! CPI in year 1 = 140 CPI in year 2 = 160
%change CPI = ( )/140 * 100 = 14.2%
So, 14.2% is the percentage increase in prices between two years. (inflation rate between year 1 & year 2).
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6. CPI vs GDP deflator
The GDP deflator measures the prices of all goods produced, whereas the CPI measures prices of only the goods and services bought by consumers. Thus, an increase in the price of goods bought by the government will show up in the GDP deflator, but not in the CPI.
GDP Deflator includes only domestic goods and not anything that is imported. However, CPI includes anything bought by consumers including foreign (imported) goods.
The GDP deflator measures a changing basket of commodities while CPI always indicates the price of a fixed representative basket.
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