chapter 2: the data of macroeconomics
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Chapter 2: The Data of Macroeconomics. Gross Domestic Product (GDP) the Consumer Price Index (CPI Unemployment rate. National Income Accounting- measure the economy’s overall performance. Business firms- measures its flows of income and expenditures regularly - PowerPoint PPT PresentationTRANSCRIPT
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Chapter 2: The Data of Macroeconomics
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Gross Domestic Product (GDP)
the Consumer Price Index (CPI
Unemployment rate
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National Income Accounting- measure the economy’s overall performance
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Business firms- measures its flows of income and expenditures regularly
Usually every 3 months or annually
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National Income Accounting- operates in much the same way as the economy as a whole.
NSO NSCB NEDA
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This accounting enables the economists and policymakers to:
A. Assess the health of the economy by comparing levels of production at regular intervals.
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Track the long-run course of the economy whether it has grown, been constant, or declined.
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Formulate policies that will safeguard and improve the economy’s health.
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Gross Domestic Product
Definition: Value of total final goods and services produced in an economy in a given period of time (measure of economic activity)
There are two ways to compute it:
Total income of everyone in the economy
Total expenditures on the economy’s goods and services
These two measures must be equal:Expenditure of buyers = Income of sellers
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Why expenditure = income
In every transaction, In every transaction, the buyerthe buyer’’s expenditure s expenditure
becomes the sellerbecomes the seller’’s income.s income.
Thus, the sum of all Thus, the sum of all expenditure equals expenditure equals
the sum of all income.the sum of all income.
In every transaction, In every transaction, the buyerthe buyer’’s expenditure s expenditure
becomes the sellerbecomes the seller’’s income.s income.
Thus, the sum of all Thus, the sum of all expenditure equals expenditure equals
the sum of all income.the sum of all income.
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The Circular FlowIncome ($)
Labor
Goods (bread)
Expenditure ($)
Households Firms
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Gross Domestic Product (GDP) Example: an economy with two goods,
apples and oranges
GDP = (papples×qapples) + (poranges×qoranges)
= ($0.50 × 4) + ($1.00 × 3) = $5.00
Quantity produced Market Price
Apples 4 $0.50
Oranges 3 $1.00
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Gross Domestic Product (GDP)
Intermediate Goods
Value Added = value of firm’s output minus value of intermediate inputs
Rancher Sells Meat to McDonald’s
$0.50 Value added =
$0.50 – $0.00 = $0.50
McDonald’s sells hamburger
$1.50 Value added =
$1.50 – $0.50 = $1.00
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Gross Domestic Product (GDP)
GDP is the value of all FINAL goods and services produced and sold in the economy = $1.50
GDP is also equal to the sum of value added in all stages on production = $0.50 + $1.00 = $1.50
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The expenditure components of GDP
• consumption
• investment
• government spending
• net exports
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An important identity
Y = C + I + G + NX
where Y = GDP = the value of total output
C + I + G + NX = aggregate expenditure
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Consumption (C)• durable goods
last a long time ex: cars, home appliances
• non-durable goodslast a short time ex: food, clothing
• serviceswork done for consumers ex: dry cleaning, air travel.
def: the value of all final goods and services bought by households. Includes:
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U.S. Consumption, 2005
$ billions
% of GDP
Consumption 8,746.2 70%
Durables 1026.5 8.2%
Nondurables 2,564.6 20.5%
Services 5,155.1 41.2%
$ billions
% of GDP
Consumption 8,746.2 70%
Durables 1026.5 8.2%
Nondurables 2,564.6 20.5%
Services 5,155.1 41.2%
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Investment (I)
def1: spending on [the factor of production] capital.def2: 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 investmentspending on housing units by consumers and landlords
inventory investmentthe change in the value of all firms’ inventories
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U.S. Investment, 2005
$ billions
% of GDP
Investment $2,103.1 16.8%
Business fixed 1,330.6 10.6
Residential fixed 755.8 6
Inventory 16.6 0.01
$ billions
% of GDP
Investment $2,103.1 16.8%
Business fixed 1,330.6 10.6
Residential fixed 755.8 6
Inventory 16.6 0.01
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Investment vs. Capital
Capital is one of the factors of production. At any given moment, the economy has a certain overall stock of capital.
Investment is spending on new capital.
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Investment vs. Capital
Example (assumes no depreciation): 1/1/2002:
economy has $500b worth of capital
during 2002:investment = $37b
1/1/2003: economy will have $537b worth of capital
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Stocks vs. Flows
stock flow
a person’s wealth a person’s saving
# of people with # of new collegecollege degrees graduates
Flow Stock
More examples:
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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.
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Government spending, 2005
$ billions
% of GDP
Gov spending $2,363.4 18.9%
Federal 877.8 7.0
Non-defense 290.6 2.3
Defense 587.2 4.7
State & local 1,485.6 11.8
$ billions
% of GDP
Gov spending $2,363.4 18.9%
Federal 877.8 7.0
Non-defense 290.6 2.3
Defense 587.2 4.7
State & local 1,485.6 11.8
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Net exports (NX = EX - IM)
def: the value of total exports (EX) minus the value of total imports (IM)
U.S. Net Exports, 1960-2000
-400
-350
-300
-250
-200
-150
-100
-50
0
50
1960 1965 1970 1975 1980 1985 1990 1995 2000
$ b
illio
ns
U.S. Net Exports, 1960-2000
-400
-350
-300
-250
-200
-150
-100
-50
0
50
1960 1965 1970 1975 1980 1985 1990 1995 2000
$ b
illio
ns
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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
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Some Issues of GDP
Home production Illegal activities Underground economy Environment Quality
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GNP vs. GDP
Gross National Product (GNP): total income earned by the nation’s 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) – (factor payments to abroad)
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(GNP – GDP) as a percentage of GDP for selected countries, 1997.
U.S.A. 0.1% Bangladesh 3.3 Brazil -2.0 Canada -3.2 Chile -8.8 Ireland -16.2 Kuwait 20.8 Mexico -3.2 Saudi Arabia 3.3 Singapore 4.2
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Real GDP Is GDP a good measure of well-being/economic
activity?
Recall that: GDP = (papples×qapples) + (poranges×qoranges)
Higher GDP does NOT imply higher well-being GDP can increase if prices increase, with no change in quantities
Real GDP = measure of output keeping prices constant
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Real GDP
In the previous example:
Quantity 2002
Price 2002
Quantity 2003
Price 2003
Apples 4 $0.50 7 $0.40
Oranges 3 $1.00 2 $1.20
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Real GDP
Let 2002 be the base-year, i.e., real GDP will be calculated using 2002 prices
$5.502) ($1.00 7) ($0.50
) () ( Real20032002200320022003
orangesorangesapplesapples qpqpGDP
$5.003) ($1.00 4) ($0.50
) () ( Real20022002200220022002
orangesorangesapplesapples qpqpGDP
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Real GDP
Now with 2003 as base-year:
Notice that, at the base-year: Real GDP = Nominal GDP
$5.202) ($1.20 7) ($0.40
) () ( Real20032003200320032003
orangesorangesapplesapples qpqpGDP
$5.203) ($1.20 4) ($0.40
) () ( Real20022003200220032002
orangesorangesapplesapples qpqpGDP
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Real GDP
Issue: results are sensitive to the choice of base yearBase year 2002, Real GDP goes from
$5.00 to $5.50 (growth rate = 10%)Base year 2003, Real GDP is the same
in both years (growth rate = 0) Solution: Chain-weighting
Take the average of the growth rates = 5%
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Real GDP
Then use this growth rate to calculate Real GDP in 2003:RGDP2003 = $5.00*(1 + .05) = $5.25
RGDP2002 = $5.00
Advantages:It does not depend on the base yearPrices are updated as time passes
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GDP Deflator
Reflects changes in the overall price level how price changes between current year and the base year
GDP RealGDP NominalDeflator GDP
Deflator GDPGDP Nominal GDP Real
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GDP Deflator
In our example, using 2002 as base year:
= $5.20/$5.50 = 0.945
) () (
) () (
GDP RealGDP Nominal
Deflator GDP
2003200220032002
2003200320032003
2003
20032003
orangesorangesapplesapples
orangesorangesapplesapples
qpqp
qpqp
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GDP Deflator
Price level decreased 5.5% from 2002 to 2003
1GDP Real
GDP NominalDeflator GDP
2002
20022002
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Consumer Price Index (CPI)
Measures changes in the price level, i.e., inflation
More specifically, measures how the cost of a given consumption basket evolves over time (cost of living)
The bundle includes goods and services consumed by a typical consumer
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Consumer Price Index (CPI)
For example, suppose a typical consumer buys 5 apples and 2 oranges:
In other words, the cost of this basket is 2% lower in 2003 relative to 2002 (the base year)
98.05.4/4.42)(5)(2)(5)(
2003CPI
20022002
20032003
orangesapples
orangesapples
pppp
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CPI vs. GDP Deflator
CPI GDP Deflator
Includes only goods and services bought by consumers
Includes all final goods and services produced by country
Includes imports bought by consumers
Includes only goods generated domestically
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CPI vs. GDP Deflator
CPI GDP Deflator
Fixed weights (Laspeyres index)
Changing weights (Paasche index)
Tends to overstate the increase in cost of living when prices rise
Tends to understate the increase in cost of living when prices rise
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Two measures of inflation16
14
12
10
8
6
4
2
0
-2
Percentagechange
1948 1953 1958 1963 1968 1973Year
1978 1983 1988 1993 1998
CPI
GDP deflator
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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 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.
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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