Lecture01_note - Macroeconomics II Lecture 1 Macroeconomic...

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Unformatted text preview: Macroeconomics II Lecture 1 Macroeconomic Indicators Macroeconomics Instructor: Dang Vu University of Economics and Business - VNU In this chapter, you will learn… …the meaning and measurement of the most important macroeconomic statistics: Gross Domestic Product (GDP) The Consumer Price Index (CPI) The unemployment rate LECTURE 1 Macroeconomic Indicators slide 1 Gross Domestic Product: Expenditure and Income Two definitions: Total expenditure on domestically-produced final goods and services. Total income earned by domestically-located domestically located factors of production. Expenditure equals income because every dollar spent by a buyer becomes income to the seller. LECTURE 1 Macroeconomic Indicators slide 2 1 Macroeconomics II Value added definition: A firm’s value added is the value of its output minus the value of the intermediate goods the firm used to produce that output. LECTURE 1 Macroeconomic Indicators Exercise: slide 4 (Problem 2, p. 40) 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 & compare value added at each stage of production and GDP LECTURE 1 Macroeconomic Indicators slide 5 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. LECTURE 1 Macroeconomic Indicators slide 6 2 Macroeconomics II The expenditure components of GDP consumption investment government spending net exports LECTURE 1 Macroeconomic Indicators slide 7 Consumption (C) definition: The value of all goods and services bought by households. Includes: LECTURE 1 durable goods last a long time ex: cars, home appliances nondurable goods last a short time ex: food, clothing services work done for consumers ex: dry cleaning, air travel. Macroeconomic Indicators slide 8 U.S. consumption, 2005 $ billions Consumption % of GDP 70.0% Durables 1,026.5 8.2 Nondurables 2,564.4 20.5 Services LECTURE 1 $8,745.7 5,154.9 41.3 Macroeconomic Indicators slide 9 3 Macroeconomics II Investment (I) Definition 1: Spending on [the factor of production] capital. Definition 2: Spending on goods bought for future use Includes: business fixed investment Spending on plant and equipment that firms will use to produce other goods & services. residential fixed investment Spending on housing units by consumers and landlords. inventory investment The change in the value of all firms’ inventories. LECTURE 1 Macroeconomic Indicators slide 10 U.S. investment, 2005 $ billions Investment Business fixed Residential Inventory LECTURE 1 $2,105.0 % of GDP 16.9% 1,329.8 10.6 756.3 6.1 18.9 0.2 Macroeconomic Indicators slide 11 Investment vs. Capital Note: Investment is spending on new capital. Example (assumes no depreciation): 1/1/2006: economy has $500b worth of capital during 2006: investment = $60b 1/1/2007: economy will have $560b worth of capital LECTURE 1 Macroeconomic Indicators slide 12 4 Macroeconomics II 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, 2006.” A flow is a quantity measured per unit of time. E.g., “U.S. investment was $2.5 trillion during 2006.” LECTURE 1 Macroeconomic Indicators slide 13 Stocks vs. Flows - examples stock a person’s wealth a person’s annual saving # of people with college degrees # of new college graduates this year the govt debt LECTURE 1 flow the govt budget deficit Macroeconomic Indicators slide 14 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 LECTURE 1 Macroeconomic Indicators slide 15 5 Macroeconomics II Government spending (G) G includes all government spending on goods and services.. G excludes transfer payments (e.g., unemployment insurance payments), because th d not represent spending on b they do t t di goods and services. LECTURE 1 Macroeconomic Indicators slide 16 U.S. government spending, 2005 $ billions $2,362.9 Govt spending % of GDP 18.9% Federal 877.7 877 7 7.0 70 Non-defense 290.6 2.3 Defense 587.1 4.7 1,485.2 11.9 State & local LECTURE 1 Macroeconomic Indicators slide 17 Net exports: NX = EX – IM def: The value of total exports (EX) minus the value of total imports (IM). U.S. Net Exports, 1950-2006 2% 0 0% -200 -2% -400 -4% -600 -6% -800 1950 percent of GD DP billions of dolla ars 200 -8% 1960 1970 NX ($ billions) 1980 1990 2000 NX (% of GDP) 6 Macroeconomics II An important identity Y = C + I + G + NX value of total output LECTURE 1 aggregate expenditure Macroeconomic Indicators slide 19 A question for you: Suppose a firm produces $10 million worth of final goods but only sells $9 million worth. Does this violate the expenditure = output identity? LECTURE 1 Macroeconomic Indicators slide 20 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. LECTURE 1 Macroeconomic Indicators slide 21 7 Macroeconomics II GDP: An important and versatile concept We have now seen that GDP measures total income total output total expenditure e pendit re the sum of value-added at all stages in the production of final goods LECTURE 1 Macroeconomic Indicators slide 22 Real vs. nominal GDP GDP is the value of all final goods and services produced. nominal GDP measures these values using current prices prices. real GDP measure these values using the prices of a base year. LECTURE 1 Macroeconomic Indicators slide 26 Practice problem, part 1 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. LECTURE 1 Macroeconomic Indicators slide 27 8 Macroeconomics II 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. LECTURE 1 Macroeconomic Indicators slide 29 U.S. Nominal and Real GDP, 1950–2006 14,000 12,000 (billion ns) 10,000 8,000 Real GDP (in 2000 dollars) 6,000 4,000 Nominal GDP 2,000 0 1950 LECTURE 1 1960 1970 1980 1990 2000 Macroeconomic Indicators slide 30 GDP Deflator The inflation rate is the percentage increase in the overall level of prices. One measure of the price level is the GDP deflator defined as deflator, GDP deflator = 100 LECTURE 1 Nominal GDP Real GDP Macroeconomic Indicators slide 31 9 Macroeconomics II Practice problem, part 2 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. LECTURE 1 Macroeconomic Indicators slide 32 Understanding the GDP deflator Example with 3 goods For good i = 1, 2, 3 Pit = the market price of good i in month t Qit = the quantity of good i produced in month t NGDPt = Nominal GDP in month t RGDPt = Real GDP in month t LECTURE 1 Macroeconomic Indicators slide 34 Understanding the GDP deflator GDP deflatort NGDPt P1t Q1t P2t Q2t P3t Q3t RGDPt RGDPt Q1t Q2t Q3t P1t P2t P3t RGDPt RGDPt RGDPt The GDP deflator is a weighted average of prices. The weight on each price reflects that good’s relative importance in GDP. Note that the weights change over time. LECTURE 1 Macroeconomic Indicators slide 35 10 Macroeconomics II 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%. LECTURE 1 Macroeconomic Indicators slide 36 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%. LECTURE 1 Macroeconomic Indicators slide 37 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 household’s cost of living adjusts many contracts for inflation (“COLAs”) allows comparisons of dollar amounts over time LECTURE 1 Macroeconomic Indicators slide 39 11 Macroeconomics II How the BLS constructs the CPI 1. Survey consumers to determine composition of the typical consumer’s “basket” of goods. 2. Every month, collect data on prices of all items ; p in the basket; compute cost of basket 3. CPI in any month equals 100 LECTURE 1 Cost of basket in that month Cost of basket in base period Macroeconomic Indicators slide 40 Exercise: Compute the CPI Basket contains 20 pizzas and 10 compact discs. For each year, compute prices: 2002 2003 2004 2005 LECTURE 1 pizza $10 $11 $12 $13 CDs $15 $15 $16 $15 the cost of the basket the CPI (use 2002 as the base year) the inflation rate from the preceding year Macroeconomic Indicators slide 41 The composition of the CPI’s “basket” 3% 4%3% Food & Beverages Housing 6% Transportation 6% 43% Hhold Equipment Apparel A l 7% Education Medical Care 9% Recreation 9% 10% Post & Tel Other LECTURE 1 Macroeconomic Indicators slide 43 12 Macroeconomics II Understanding the CPI Example with 3 goods For good i = 1, 2, 3 Ci = the amount of good i in the CPI’s basket Pit = th price of good i i month t the i f d in th Et = the cost of the CPI basket in month t Eb = the cost of the basket in the base period LECTURE 1 Macroeconomic Indicators slide 44 Understanding the CPI CPI in month t Et P C + P2t C2 + P3t C3 1t 1 Eb Eb C C C 1 P1t 2 P2t 3 P3t Eb Eb Eb The CPI is a weighted average of prices. The weight on each price reflects that good’s relative importance in the CPI’s basket. Note that the weights remain fixed over time. LECTURE 1 Macroeconomic Indicators slide 45 Reasons 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 b tt off and, in effect, d k better ff d i ff t 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. LECTURE 1 Macroeconomic Indicators slide 46 13 Macroeconomics II The size of the CPI’s 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 bias. Now, the CPI’s bias is probably under 1% per year. LECTURE 1 Macroeconomic Indicators slide 47 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 LECTURE 1 Macroeconomic Indicators slide 49 Two measures of inflation in the U.S. Percenta change age from 12 months earlier m 15% 12% 9% 6% 3% 0% -3% 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 GDP deflator LECTURE 1 Macroeconomic Indicators CPI slide 50 14 Macroeconomics II 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; all employed plus unemployed persons not in the labor force not employed, not looking for work LECTURE 1 Macroeconomic Indicators slide 51 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 LECTURE 1 Macroeconomic Indicators slide 52 Exercise: Compute labor force statistics U.S. adult population by group, June 2006 Number employed = 144.4 million Number unemployed = 7.0 million Adult population = 228.8 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 LECTURE 1 Macroeconomic Indicators slide 53 15 Macroeconomics II Exercise: Compute percentage changes in labor force statistics Suppose population increases by 1% labor force increases by 3% number of unemployed persons increases by 2% Compute the percentage changes in the labor force participation rate: the unemployment rate: LECTURE 1 2% 1% Macroeconomic Indicators slide 55 Summary 1. Gross Domestic Product (GDP) measures both total income and total expenditure on the economy’s output of goods & services. 2. Nominal GDP values output at current p p prices; ; real GDP values output at constant prices. Changes in output affect both measures, but changes in prices only affect nominal GDP. 3. GDP is the sum of consumption, investment, government purchases, and net exports. LECTURE 1 Macroeconomic Indicators slide 58 Summary 4. The overall level of prices can be measured by either the Consumer Price Index (CPI), the price of a fixed basket of goods purchased by the typical consumer, or consumer the GDP deflator, the ratio of nominal to real GDP 5. The unemployment rate is the fraction of the labor force that is not employed. LECTURE 1 Macroeconomic Indicators slide 59 16 ...
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This note was uploaded on 10/30/2010 for the course INTERNATIO 8989989 taught by Professor 90 during the Spring '10 term at Mt. Vernon Nazarene.

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