Chapter In 2, you will learn:
In
the meaning and measurement of the
most important macroeconomic statistics:
Gross Domestic Product (GDP)
The Consumer Price Index (CPI)
The unemployment rate
Gross Domestic Product:
Expenditure and Income
Two definitions:
Total expenditure on domestically-produced
final goods and services.
Total income earned by domestically-located
factors of production.
Expenditure equals income because
Expenditure equals income because
every dollar spent by a buyer
every dollar spent by a buyer
becomes income to the seller.
becomes income to the seller.
The Circular Flow
Income ($)
Labor
Households
Firms
Goods
Expenditure ($)
Value added
Value added:
The value of output minus the value of the
intermediate goods used to produce that
output
NOW YOU TRY:
A farmer grows a bushel of wheat
and sells it to a miller for $1.00.
The miller turns the wheat into flour
and sells it to a baker for $3.00.
The baker uses the flour to make a loaf of
bread and sells it to an engineer for $6.00.
The engineer eats the bread.
Compute value added at each stage
of production and GDP
Final goods, value added, and GDP
GDP = value of final goods produced
= sum of value added at all stages
of production.
The value of the final goods already includes the
value of the intermediate goods, so including
intermediate and final goods in GDP would be
double-counting.
The expenditure components of GDP
consumption, C
investment, I
government spending, G
net exports, NX
An important identity:
Y
=
C + I + G + NX
value of
total output
aggregate
expenditure
Consumption (C)
definition: The value of all
goods and services bought
by households. Includes:
durable goods
last a long time
e.g., cars, home
appliances
nondurable goods
last a short time
e.g., food, clothing
services
work done for
consumers
e.g., dry cleaning,
air travel
U.S. consumption, 2008
$ billions
Consumption
$ 10,057.9
% of GDP
70.5%
Durables
1,023.2
7.2
Nondurables
2,965.1
20.8
Services
6,069.6
42.6
Investment (I)
Spending on goods bought for future use
(i.e., capital goods)
Includes:
Business fixed investment
Spending on plant and equipment
Residential fixed investment
Spending by consumers and landlords on
housing units
Inventory investment
The change in the value of all firms inventories
U.S. Investment, 2008
$ billions
Investment
Business fixed
$1,993.5
% of GDP
14.0%
1,552.8
10.9
Residential
487.7
3.4
Inventory
47.0
0.3
Investment vs. Capital
Note: Investment is spending on new capital.
Example (assuming no depreciation):
1/1/2009:
economy has $500b worth of capital
during 2009:
investment = $60b
1/1/2010:
economy will have $560b worth of capital
Stocks vs. Flows
Flow
Stock
A stock is a
quantity measured
at a point in time.
E.g.,
The U.S. capital stock
was $26 trillion on
January 1, 2009.
A flow is a quantity measured per unit of time.
E.g., U.S. investment was $2.5 trillion during 2009.
Stocks vs. Flows - examples
stock
flow
a person s wealth
a person s
annual saving
# of people with
college degrees
# of new college
graduates this year
the govt debt
the govt budget deficit
NOW YOU TRY:
Stock or Flow?
the balance on your credit card statement
how much you study economics outside of class
the size of your compact disc collection
the inflation rate
the unemployment rate
Government spending (G)
G includes all government spending on goods
and services.
G excludes transfer payments
(e.g., unemployment insurance payments),
because they do not represent spending on
goods and services.
U.S. Government Spending, 2008
$ billions
% of GDP
Govt spending
$2,882.4
20.2%
- Federal
1,071.9
7.5
Non-defense
337.0
2.4
Defense
734.9
5.2
1,810.4
12.7
- State & local
Net Exports: NX = EX IM
def: the value of total exports (EX) minus the value
of total imports (IM)
Question
Suppose a firm:
produces $10 million worth of final goods
only sells $9 million worth
Does this violate the
expenditure = output identity?
Why output = expenditure
Unsold output goes into inventory,
and is counted as inventory investment
whether or not the inventory buildup was
intentional.
In effect, we are assuming that
firms purchase their unsold output.
GDP:
An important and versatile concept
We have now seen that GDP measures:
total income
total output
total expenditure
the sum of value- added at all stages
in the production of final goods
GNP vs. GDP
Gross National Product (GNP):
Total income earned by the nations factors of
production, regardless of where located
Gross Domestic Product (GDP):
Total income earned by domestically-located
factors of production, regardless of nationality
GNP GDP = factor payments from abroad
minus factor payments to abroad
Examples of factor payments: wages, profits,
rent, interest & dividends on assets
NOW YOU TRY:
Discussion Question
which would you
want to be bigger,
GDP or GNP?
Why?
GNP vs. GDP in select countries, 2007
Country
Philippines
Japan
China
GNP
GDP
GNP GDP
(% of GDP)
$157,087
$144,062
9.0%
$4,530,191
$4,384,255
3.3%
0.8%
$3,229,841
$3,205,507
$13,827,201
$13,751,400
0.6%
$1,318,304
$1,329,885
0.9%
South Africa
$274,141
$283,007
3.1%
New Zealand
$125,936
$135,667
7.2%
$98,625
$107,297
8.1%
United States
Canada
Peru
GNP and GDP in millions of current U.S. dollars
Real vs. nominal GDP
GDP is the value of all final goods and services
produced.
nominal GDP measures these values using
current prices.
real GDP measure these values using the prices
of a base year.
NOW YOU TRY:
Real & Nominal GDP
2006
2007
2008
P
Q
P
Q
P
Q
good A
$30
900
$31
1,000
$36
1,050
good B
$100
192
$102
200
$100
205
Compute nominal GDP in each year.
Compute real GDP in each year using 2006 as
the base year.
NOW YOU TRY:
Answers
nominal GDP multiply Ps & Qs from same year
2006: $46,200 = $30 900 + $100 192
2007: $51,400
2008: $58,300
real GDP multiply each years Qs by 2006 Ps
2006: $46,200
2007: $52,000 $50,000
2008: = $30 1050 + $100 205
Real GDP controls for inflation
Changes in nominal GDP can be due to:
changes in prices.
changes in quantities of output produced.
Changes in real GDP can only be due to
changes in quantities,
because real GDP is constructed using
constant base-year prices.
U.S. Nominal and Real GDP,
1960-2009
Real GDP
(in 2000 dollars)
Nominal GDP
GDP Deflator
Inflation rate: the percentage increase in the
overall level of prices
One measure of the price level: GDP deflator
Definition:
GDP deflator = 100
Nominal GDP
Real GDP
NOW YOU TRY:
GDP deflator and inflation rate
Nom. GDP
Real GDP
2006
$46,200
51,400
50,000
2008
58,300
Inflation
rate
$46,200
2007
GDP
deflator
52,000
n.a.
Use your previous answers to compute
the GDP deflator in each year.
Use GDP deflator to compute the inflation rate
from 2006 to 2007, and from 2007 to 2008.
NOW YOU TRY:
Answers
Nominal
GDP
Real GDP
GDP
deflator
Inflation
rate
2006
$46,200
$46,200
100.0
n.a.
2007
51,400
50,000
102.8
2.8%
2008
58,300
52,000
112.1
9.1%
Two arithmetic tricks for
working with percentage changes
1. For any variables X and Y,
percentage change in (X Y )
percentage change in X
+ percentage change in Y
EX:
If your hourly wage rises 5%
and you work 7% more hours,
then your wage income rises
approximately 12%.
Two arithmetic tricks for
working with percentage changes
2. percentage change in (X/Y )
percentage change in X
percentage change in Y
EX: GDP deflator = 100 NGDP/RGDP.
If NGDP rises 9% and RGDP rises 4%,
then the inflation rate is approximately 5%.
Chain-Weighted Real GDP
Over time, relative prices change, so the base
year should be updated periodically.
In essence, chain-weighted real GDP
updates the base year every year,
so it is more accurate than constant-price GDP.
Your textbook usually uses
constant-price real GDP, because:
the two measures are highly correlated.
constant-price real GDP is easier to compute.
Consumer Price Index (CPI)
A measure of the overall level of prices
Published by the Bureau of Labor Statistics
(BLS)
Uses:
tracks changes in the typical households
cost of living
adjusts many contracts for inflation (COLAs)
allows comparisons of dollar amounts over time
How the BLS constructs the CPI
1. Survey consumers to determine composition of
the typical consumers basket of goods
2. Every month, collect data on prices of all items
in the basket; compute cost of basket
3. CPI in any month equals
100
Cost of basket in that month
Cost of basket in base period
The composition of the CPIs basket
Food and bev.
17.4%
Housing
Apparel
6.2%
5.6%
3.0%
3.1%
3.8%
3.5%
Transportation
Medical care
Recreation
15.1%
Education
Communication
Other goods
and services
42.4%
Why the CPI may overstate inflation
Substitution bias:
The CPI uses fixed weights, so it cannot reflect
consumers ability to substitute toward goods
whose relative prices have fallen.
Introduction of new goods:
The introduction of new goods makes consumers
better off and, in effect, increases the real value of
the dollar. But it does not reduce the CPI, because
the CPI uses fixed weights.
Unmeasured changes in quality:
Quality improvements increase the value of the
dollar, but are often not fully measured.
The size of the CPIs bias
In 1995, a Senate-appointed panel of experts
estimated that the CPI overstates inflation by
about 1.1% per year.
So the BLS made adjustments to reduce the
bias.
Now, the CPIs bias is probably under 1% per
year.
NOW YOU TRY:
Discussion Questions
1. If your grandmother receives Social Security,
how is she affected by the CPIs bias?
2. Where does the government get the money to pay
COLAs to Social Security recipients?
3. If you pay income and Social Security taxes,
how does the CPIs bias affect you?
4. Is the government giving your grandmother
too much of a COLA?
5. How does your grandmothers basket differ from
the CPIs? Does this affect your answer to Q4?
CPI vs. GDP Deflator
Prices of capital goods:
included in GDP deflator (if produced
domestically)
excluded from CPI
Prices of imported consumer goods:
included in CPI
excluded from GDP deflator
The basket of goods:
CPI: fixed
GDP deflator: changes every year
Two measures of inflation in the U.S.
Percentage change
from 12 months earlier
CPI
GDP deflator
Categories of the population
employed
working at a paid job
unemployed
not employed but looking for a job
labor force
the amount of labor available for producing
goods and services
Sum of all employed plus unemployed persons
not in the labor force
not employed, not looking for work
Two important labor force concepts
unemployment rate
percentage of the labor force that is unemployed
labor force participation rate
the fraction of the adult population
that participates in the labor force
NOW YOU TRY:
Computing labor statistics
U.S. adult population by group, May 2009
Number employed
=
Number unemployed
=
140.57 million
14.51 million
Adult population
=
235.45 million
Use the above data to calculate
the labor force
the number of people not in the labor force
the labor force participation rate
the unemployment rate
NOW YOU TRY:
Answers
data: E = 140.57, U = 14.51, POP = 235.45
labor force
L = E +U = 140.57 + 14.51 = 155.08
not in labor force
NILF = POP L = 235.45 155.08 = 80.37
unemployment rate
U/L x 100% = (14.51/155.08) x 100% = 9.4%
labor force participation rate
L/POP x 100% = (155.08/ 235.45) x 100% = 65.9%
http://www.bls.gov/news.release/pdf/empsit.pdf
The establishment survey
The BLS obtains a second measure of
employment by surveying businesses,
asking how many workers are on their payrolls.
Neither measure is perfect, and they
occasionally diverge due to:
treatment of self-employed persons
new firms not counted in establishment survey
technical issues involving population inferences
from sample data
Percentage change
from 12 months earlier
Two measures of employment growth