Understanding Economic Models: GDP, GNP, and CPI Explained
Understanding Economic Models
Economic models seek to explain the causes of economic problems in modern society to facilitate the design of economic policies to solve them.
Model Structures
These models observe the economic system from a static viewpoint, describing a reality. Factors such as national wealth are considered.
Working Models
These models observe the economic system from a dynamic perspective, analyzing the interrelationships.
Four Areas of Demand
- Consumption Sector: Families or households that demand consumer goods and save.
- Production Sector: Businesses that demand investment goods.
- Public Sector: State intervention to demand consumer goods and services and investment.
- External Sector: Relations with other countries to which they buy and sell goods and services.
Other Factors Influencing Consumption
- The Real Wealth of the Family: Composed of all types of assets held by the family, obtained through savings, inheritance, or donation.
- The Rate of Interest: Consists of the retribution percentage of financial assets.
Multiplier Effect
The cause is due to increased investment demand driving up the same amount. The adjustment process that this causes increased production and raises the rent. To raise the rent increases savings and consumption. The latter part of the application. Produce a further increase in spending and repeat the whole process.
Price Changes
The solution is to choose a base year and calculate the value of goods and services produced in any year with base year prices.
When you compare a variable at current prices for two consecutive years, the difference represents a nominal value of the variable.
When you compare a variable at constant prices for two consecutive years, the difference represents a real change in the value of the variable.
Gross Domestic Product (GDP)
GDP reflects the range of goods and services produced within the borders of the country for a year. This implies that the production of domestic firms abroad is not accounted for.
GDP Growth Rate
The GDP growth rate measures the relative importance of the change in GDP between two consecutive periods. To be expressed as a percentage, allowing comparison between different countries, although their absolute GDP figures are different.
Gross National Product (GNP)
GNP measures the income of residents in the economy, regardless of whether the income is from domestic production or foreign production.
GNP differs from GDP in that it shows the output generated by the factors of production owned by the country’s inhabitants, whether they occur inside or not.
Disposable Income
The value of national income does not display income households may have to make their consumption and savings decisions. There are two items that form part of the RN are not available to families:
- Direct taxes (T) such as income tax.
- The corporate profits undistributed. They correspond to the difference between total benefits (B) and dividends (Dv).
There is another item that is not in the RN but that increases the income of some households:
- The transfers from the state (TR). As can be social benefits, pensions or unemployment insurance.
Personal disposable income (RPD) would therefore be:
RPD = RN – T + TR – B + Dv
The Consumer Price Index (CPI)
Major consumer goods are selected, and the importance of spending in each of them has in the total consumption expenditure. We collected prices of selected products in a sample of establishments representing all business areas of the country. With these prices, the CPI or cost of living index is calculated. Usually present annual rates, monthly and yearly. The latter reflected the price increase in view between the current month and the same last year.