Macroeconomics

Table of Contents

1. Topic pack - Macroeconomics - introduction
2. 2.1 The level of overall economic activity (notes)
   1. Overall economic activity - introduction
   2. The circular flow of income model (1)
   3. Circular flow - two sector closed
   4. Circular flow - two sector open
   5. Circular flow - three sector open
   6. Circular flow - government
   7. The circular flow of income model (2)
   8. Circular flow - a summary
   9. Some mathematics
   10. Measures of economic activity
   11. Examining the three methods of calculating national income
   12. What is GDP? (video)
   13. Different national income measures
   14. Real v money data
   15. Current and constant prices
   16. Using index numbers
   17. Total and per capita
   18. Case study - rapid economic growth
   19. Using national income data
   20. Purchasing power of GDP
   21. Alternative measures of GDP
   22. Case Study
   23. Short term fluctuations and long term trends
   24. The business cycle in history
3. 2.1 The level of overall economic activity (questions)
4. Section 2.2 Aggregate demand and supply (notes)
5. Section 2.2 Aggregate demand and supply (simulations and activities)
6. 2.2 Aggregate Demand and Aggregate Supply (questions)
7. 2.3 Macroeconomic objectives (notes)
8. Low Unemployment
9. 2.3 Macroeconomic objectives (questions)
10. 2.4 Fiscal policy (notes)
11. 2.4 Fiscal policy (questions)
12. 2.5 Monetary policy (notes)
13. 2.5 Monetary Policy (questions)
14. Section 2.6 Supply-side policies (notes)
15. 2.6 Supply-side policies (questions)
16. Print View

Purchasing power of GDP

You need to be able to

Evaluate the use of national income statistics, including:

• their use for making comparisons over time,

• their use for making comparisons between countries and
  

• their use for making conclusions about standards of living.
  

Allowances for differences in purchasing power when comparing welfare between countries

If we do use GDP as a measure of standard of living, then we also need to take account of differences between the purchasing power of GDP.

If you have travelled, you will be aware that prices of goods in other countries often appear cheaper / more expensive. This may appear the case to us, but not to the people living there.

It may be that a lower nominal GDP per capita nevertheless gives the same standard of living, because the same level of nominal income can buy more in a particular country.

Therefore when comparing GDP between countries, we need to try to adjust for the purchasing power of the GDP.

Differences in purchasing power often relate to exchange rate differentials.

Although purchasing power is one factor affecting exchange rates, there are many others as well if a country's exchange rate is out of line with what is called the purchasing power parity (PPP) exchange rate.

When comparing GDP levels between countries, we should try to compare GDP per capita translated at purchasing power parity rates. In other words to make comparisons between countries we need to remove the effects of Exchange Rate changes.

For a simple yet very effective use of PPP look at the Big mac index in The Economist