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Consumer Price Index

The document discusses several economic concepts: 1) It defines the consumer price index and how to calculate inflation rates. 2) It explains how wage growth, government subsidies, exchange rates, and monetary policy can impact inflation. 3) Several economic growth models and financial concepts are outlined such as the dividend discount model and how banks create money through fractional-reserve banking. 4) Key macroeconomic relationships involving GDP, consumption, investment, government spending, net exports, and national savings are defined.

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Nguyễn Long Vũ
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56 views

Consumer Price Index

The document discusses several economic concepts: 1) It defines the consumer price index and how to calculate inflation rates. 2) It explains how wage growth, government subsidies, exchange rates, and monetary policy can impact inflation. 3) Several economic growth models and financial concepts are outlined such as the dividend discount model and how banks create money through fractional-reserve banking. 4) Key macroeconomic relationships involving GDP, consumption, investment, government spending, net exports, and national savings are defined.

Uploaded by

Nguyễn Long Vũ
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Consumer price index:

Cost of basket in year t


CPI in year t  100
Cost of basket in base year

Compute the inflation rate:


CPI in Year 2-CPI in Year 1
Inflation Rate in Year 2= 100%
CPI in Year 1

 Wage bargain
 The growth rate of real wage = the growth rate of nominal wage – the
inflation rate

 Government subsidy, wage, exchange rate and monetary policy


 The depreciation of real exchange rate = the depreciation of nominal
exchange rate – (the difference between domestic and foreign
inflation rates)

Labor force participation rate


Labor force
 100%
Adult population

Number unemployed
Unemployment rate= 100%
Labor force
Economic growth rates

 Growth accounting method

 1
Y  AK L
A: Technology L: Productive Labor
variable

: parameters which
K: Stock of capital
is in the range (0,1)

The financial system

Price today = Present value of (DIV1, DIV2,


DIV=
Present value DIV2 DIV3 DIVt
 1
   ...   ...
1 r  1 r   1 r   1 r 
2 3 t

THE DIVIDEND DISCOUNT MODEL


Measure the riskiness of a particular financial asset

  Rt  R 
2

Standard deviation    t 1

N 1

How banks create money

 The first case:


 If you keep this amount to purchase goods and services, then
money supply including currency in circulation (Cu) and demand
deposits (D) equals
M1 = Cu + D = 1000 + 0 = 1000

 The second case


 If you deposit $ 1,000 in cash to open a checking account, and
the commercial bank keeps 100% as reserves, then money supply
equals:

M1 = Cu + D = 0 + 1,000 = $ 1,000

 The third case


 Now, the commercial bank keeps 10% as reserves and makes
loans the rest. Then, money supply equals:

M1 = Cu + D = 900 + 1,000 = $1,900

 Total demand deposit created equals:

1
Money multiplier 
reserve ratio
Money
Money supply = Monetary × multiplier
base

 The general formula of money multiplier


Cash Ratio + 1
Money multiplier 
Cash Ratio + Reserve ratio
Money
Money supply = Monetary base × multiplier

 The aggregate planned expenditure for a closed economy


AE = C + I + G
 C: consumption by households
 I: planned investment by firms
 G: government purchases of goods and services

1
Y   G
1  MPC
I.E: Y = 1000 + MPC×1000 + MPC2×1000 + MPC3×1000 + …

 Net exports is a component of GDP:

Y = C + I + G + NX

 National saving is the income of the nation that is left after


paying for current consumption and government purchases:
Y - C - G = I + NX
 National saving (S) equals Y - C - G so:
S – I = NX
Or
Domestic Net Capital
Saving - Investment = Outflow
Saving, Investment, and Their Relationship to the
International Flows
 For an economy as a whole, NX and NCO must balance each
other so that:
NCO = NX

Exchange rates

P f
 E n
Er 
Pd
Determine equilibrium exchange rate
 Absolute PPP
d
P
E  f
n

P
 Relative PPP
%E n  %Pd  %P f
i.e.

 
Depreciation rate of domestic Domestic Foreign
currency inflation rate inflation rate

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