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1 Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012

INTRODUCTION

Chapter 2

The Data of Macroeconomics

September 11, 2012


THERE ARE THREE KEY AGGREGATES

1. Measures of economic activity or income:

GDP and GNP

2. Price level

3. Unemployment


1. MEASURES OF ECONOMIC ACTIVITY OR INCOME: GDP AND GNP

Gross Domestic Product (GDP) – measures what is

produced domestically (irrespective of ownership);

domestic economic activity

Gross National Product (GNP) — measures total

income earned by nationals domestically or abroad;

relates to a country’s standard of living (but ignores

inequality; quality of life)

GNP = GDP - Net Income of Foreigners


Nominal vs. Real GDP

Nominal GDP — in current dollars; changes due to

changes in real production/income and price levels.

Nominal

where, is a final good or service produced

domestically and is its price. All at time t.

Real GDP — in constant dollars; should only reflect

changes in real production.

Real

Base year 0


Exercise

Calculating Real and Nominal GDP

2007 2008 2009 P Q P Q P Q

Good A $30 900 $31 1000 $36 1050 Good B $100 192 $102 200 $100 205

a) Calculate nominal GDP for each year

b) Compute real GDP in each year using 2006 as the base year


GDP Deflator

Methods to calculate GDP

Value Added Method

Income method

Expenditure method

Ex. Circular flow diagram

An Identity:

Income = Expenditure components of GDP


Circular Flow Diagram

Expenditure equals Income because every dollar spent by a

buyer becomes income to the seller


Calculating Real GDP

a)

b) Chain-Weighted Real GDP

Over time, relative prices change, so the base year

should be updated periodically.

Chain-weighted real GDP updates the base year

every year, so it is more accurate than constant-

price GDP.


Identifications

Nominal GDP measures the current $ value of the

output of the economy.

Real GDP measures output valued at constant prices.

The GDP deflator measures the price of output

relative to its price in the base year

GDP or GNP is a flow variable


Other Measures

GNP=GDP-Net Income of Foreigners NNP =GNP-Depreciation National Income (NI)=NNP-Indirect business taxes

Personal Income = National Income - Corporate Profits - Social Insurance Contributions - Net Interest + Dividends + Govt. Transfer to Individuals + Personal Interest Income Personal Disposable Income = Personal Income - Personal Tax

Payments


Expenditure Components of GDP

Consumption (C)

The value of all goods and services bought by

households.

Includes: durable goods, nondurable goods, services

Investment (I)

Spending on [the factor of production] capital.

Spending on goods bought for future use

Includes: business fixed investment; residential fixed

investment; inventory investment


Government Spending (G)

Includes: all government spending on goods and

services.

But excludes: transfer payments (e.g., unemployment

insurance payments). Because they do not represent

spending on goods and services.

Net Export (NX: X-M)

Export (X)

Import (M)


Example: Components of GDP

Components Billion $ % of GDP

Consumption 762.0 55.7%

Investment 254.4 18.6%

Government 297.5 21.7%

Net Export 54.8 4%

GDP $1,368.7 100


2. PRICE LEVEL AND INFLATION

Price level

Stabilizing of the monetary system - Indirectly important.

There is no single measure of the price level.

Consumer Price Index (CPI)

an index measure of a the price of a bundle of

consumption goods

where, x represents goods in a typical consumer’s

basket. It changes from time to time.


GDP Deflator

Where, q is a domestically produced good or service

Inflation

It is the rate of change in the price level


Difference between CPI and GDP Deflator


Difference between CPI and GDP Deflator

CPI GDP Deflator

Based on prices of a basket of

goods and services

Based on prices of all goods and

services produced

Includes imported goods as

well as domestic ones

Based only on domestically

produced goods

Uses fixed weights of the

prices of goods (quantities are

fixed)

Uses changing weights of the

prices of goods (quantities

change w/ time)


3. UNEMPLOYMENT

Important policy issue — wasted resources (hence

lower aggregate standard of living); socially costly.

Each adult is categorized as either:

In Labor Force

Employed (E) — in paid work

Unemployed (U) — actively looking for

work

Not in labour force — none of the above

including discouraged workers


Definitions

Labour force:

where E is the employment and U is the

unemployment

Unemployment Rate:

Participation Rate:


Okun’s Law

Negative relationship between cyclical unemployment

and GDP

Change in the Unemployment rate

Any real GDP growth rate below 4% (for Canada) will

cause unemployment to increase

Notes:

Different countries, different definitions of E, U, and L

U may not be a good measure of wasted resources or

social costs

chapter 2web.uvic.ca/~aahoque/fall 2012 uvic/chapter 2.pdf · 1 chapter 2: the data of ... methods...

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