The Output Market

“national accounts leave out a crucial dimension of the economy – the part that exists outside the realm of

monetary exchange.”

The output marketThe output market

The output market has two of the macro variables that are most often used as indicators of the economy’s performance – GDP and the inflation rate. In fact GDP was traditionally the measure used to determine when the economy was in a recession. In this unit we look at the strengths and weaknesses of these measures plus the track record so you will be looking at a lot of graphs. We will also look at some alternatives to GDP that have surfaced in recent years. The Consumer Price Index (CPI) is the statistic we use to measure inflation, and here we will look at what it is, the track record, and the controversy over Social Security and the CPI adjustement,

As a starter, consider to question; When would you want to be born – into the world in your time, your parents’ time, or that of your grandparents – and what would be the factor that most affects your decision?

In the news

1. “’Are you better off?’ The answer is less clear than it was in 1980.”

2. “Why do we still care about the Dow?”

3. “GDP fetishism”

4. “Paradox of ‘94: Gloomy voters in good times”

5. “Whose economy is it anyway?”

6. “Grossly distorted picture”

7. “Life is better; It isn’t better. Which is it?”

8. “Is inflation dead?” “Inflation is dead”

9. “Commodity prices spell inflation danger”

10.“The Boskin Commission’s trillion dollar fantasy”

Output MarketOutput Market

• Measures of Quantity (Q = GDP) • Adjustment for prices (real v nominal)

• Measures of Price (CPI / inflation)• Limitations of measures– What should count / – What should not count• Track record (GDP CPI)– Trends– Cycles– Composition• Alternatives

P

Q

P*

Q*

=W

= E

Headlines

U*

We are talking markets here, so we have…

Question: When & where to Live

Who has it best – and how do you decide?

Some possible factors affecting the choice

• Health (blood letting, diseases, life expectancy, height, Novocain)– "he was bled till symptoms of fainting came on.

• Living conditions (central heat, indoor plumbing, electricity, recreation (music))– "Would you like to hear some music?”

• Family life (“toys,” # children, divorce, education, retirement, entertainment)-”The typical working-class mother of the 1890's, married in

her teens or early twenties and experiencing ten pregnancies, spent about fifteen years in a state of pregnancy and in nursing”

• Purchasing ‘power’

Total number of births per woman if she experienced the current period age-specific fertility rates throughout her lifeMichael Haines, “Fertility and Mortality in the United States,” EH.net

Is there an indicator of progress?

At least it is correlated with some of the factors you thought were

important in your choice

Richard Steckel, "Biological Measures of the Standard of Living," JEP, Winter 2008

What do you see here and in the next graph?

Output Measure: GDP

Gross Domestic Product (GDP) is a measure of a country’s economic output and there are many adjustments made to account for changes in prices, size of the population, and cost of living. Also, there are alternative ways to measure size – by how much we produce, how much we earn, or how much we spend. They all give the same number – GDP – and we use the spending one most often. We also look at some of the weaknesses of GDP as a policy goal.

Output Measure: GDP

GDP (Current value or nominal)

Definition: the market value of final goods and services produced annually within a country. 

This is computed by adding up the money spent on all currently produced goods and services in a year. If you do not buy it ( stay at home parent), it is not here and if you buy it and it was not produced this year (used car, corporate stock), it is not here.

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Related measures

Real GDP: (Constant $ GDP) GDP adjusted for changes in prices / value of money. Used when we want to see how a country does over time.

PPP GDP (Purchasing Power Parity): GDP adjusted for differences in the cost of living in countries. We use this when we want to make international comparisons.

GDP (US$): GDP adjusted for differences in the value of currencies so all GDP figures are in US$s. We use this when we want to make international comparisons. China looks bigger with this than the PPP measure because prices are lower in China.

Related measures

Per capita GDP: GDP divided by population. This gives us a measure of standard of living. China has the second largest economy in the world based on GDP, but it is a poor country when we look at GDP per capita because all of that production is divided among the 1.3 billion people. Or Austria is way down he list of countries ranked by GDP, but it is near the top when measured by GDP per capita.

GDP in “Pictures”

Now you will see a number of graphs and tables. With that pad of paper make sure you take some notes on what you see in the diagrams. Look for trends, cycles, and changes in trends or cycles. In the Real GDP graph you can barely see the Great Depression and W II, and the shape of the curve is similar to what we would see with a constant growth rate. In the Annual% change graph you see a pattern of good (Positive values) years and bad years (negative values), but there is a difference between those before and after WW II In the two column graphs you see the impact that the adjustment for inflation can make. Look at the difference in the 1970s and be sure you can explain it – and then you will understand why the country took an ideological shift after that decade.

How does this differ in the pre and post WW II periods?

Why the BIG difference in the 1970s between this and next graph?

Decomposition of GDP

• Consumption ( C )– Durables– Nondurables– Services

• Investment ( I )– Fixed investment

• Residential• Nonresidential

– Structures

– Producers’ durables

– Inventory investment

• Government ( G )– Federal– State & Local

• Net Exports (X-M)– Exports ( X )– Imports ( M )

Look at the next graph and jot down what you see

International Comparisons

Is the US “different?”

Look at the next graphs and tables and jot down what you see is “different” about the US – and how are China and the US different?

Why the big change in China, Germany, and Mexico? What does the difference between Germany and US 2008 columns mean?

What does this tell us about China v US?

Some observations

1. Why the big change in China and Mexico? What does the difference between China and US columns mean? China and Mexico initially had a far bigger share of their people living/working on farms.

2. Why the big change in China, Germany, and Mexico? What does the difference between Germany and US 2008 columns mean? the difference between China and US columns mean? This is the growth in their international trade – and trade is more important in China than the US

3. What explains the difference between Japan and China? Japan did its industrialization right after the war – Chinas was more recent and Japan’s service sector is now growing faster

4. What does this tell us about China v US? That China’s people save far more than Americans.

Let’s see how the US compares

GDP & GDP per capita

 

real GDP domestic currency

real GDP US $s

real GDP per capita domestic currency

real GDP per capita US $s

Austria 274 382 32,801 45,685

China 34,050 4,984 25,511 3,734

India 5,763 1,236 49,638 1,031

US 14,119 14,119 45,934 45,934

Alternative GDP measures: 2009

 

GDP national currency

GDP US $

GDP PPP $

% of US in GDP US $

% of US in GDP PPP

$

Austria 274 382 323 3% 2%

China 34,051 4,985 9,047 35% 64%

Germany 2,397 3,339 2,812 24% 20%

Greece 237 331 333 2% 2%

India 59,520 1,237 3,615 9% 26%

Japan 474,297 5,069 4,152 36% 29%

Taiwan 12,513 379 735 3% 5%

US 14,119 14,119 14,119 100% 100%

Alternative GDP per capita measures: 2009

 

GDP national currency

GDP US $

GDP PPP $

GDP US $

GDP PPP $

Austria 32,802 45,686 38,567 99% 84%

China 25,511 3,735 6,778 8% 15%

Germany 29,316 40,832 34,388 89% 75%

Greece 21,277 29,635 29,839 65% 65%

India 49,639 1,032 3,015 2% 7%

Japan 3,718,500 39,740 32,554 87% 71%

Taiwan 541,211 16,372 31,776 36% 69%

US 45,934 45,934 45,934 100% 100%

Real GDP Growth (% change) IMF

1980s 1990s 2000s 2010s est

World 8% 4% 7% 6%

Advanced economies 8% 4% 5% 4%Newly industrialized Asian economies 14% 7% 5% 7%

Developing Asia 5% 8% 15% 11%

Latin America and the Caribbean 3% 6% 8% 6%

Middle East and North Africa 1% 3% 11% 8%

Sub-Saharan Africa 1% 1% 12% 8%

Output / GDP

“a nation’s well-being depends on many factors ignored by GDP, such as leisure time, income inequality and quality of the environment.” "Measuring economies: Grossly distorted picture," The Economist 2/11/2006

Limitations of GDP

1. Bads1. Crime2. Pollution

2. Nonmarket activities1. Underground economy2. Leisure

3. Inequality 4. Infrastructure5. Resource depletion6. Measurement

1. New Goods and Quality Changes2. Service Sector and Government

These are some of the potential limitations of GDP as a measure of welfare – of why bigger is not necessarily better

Leisure: Average annual workweek

  2001 Change

U.S. 1821 -17

Australia 1837 -29

Japan 1821 -210

Korea 2447 -67

New Zealand 1817 -3

France 1532 -125

Germany 1467 -93

Ireland 1674 -248

Italy 1606 -68

Netherlands 1346 -308

Norway 1364 -68

U.K. 1711 -127

We work more hours

Is bigger better?

1. “By the standard of the GDP, the worst families in America are those that actually function as families – they cook their own meals, take walks after dinner, and talk together instead of just farming the kids out to the commercial culture. …It is not accidental that the two major protest movements of recent decades – environmentalists and pro-family – both deal with parts of the real economy that GDP leaves out and that the commercial culture that embodies GDP tends to avoid.” Rowe

2. TED talk “It is a story about us, people, being persuaded to spend money we don’t have on things we don’t need, to create impressions that won’t last on people we don’t care about.” Rowe

Is bigger better?1. “How did it happen that the nation’s economic hero is a

terminal cancer patient going through a costly divorce?” Rowe

2. “GDP not only masks the breakdown of the social structure and the natural habitat upon which the economy – and life itself – ultimately depend; worse, it actually portrays such breakdown as economic gain” Rowe

3. “Expenditure is a means, not an end, and to assess the health of an agency, or system, you need to know what it has accomplished, not just what motion it has generated and money it has spent.” Rowe

4. “the assumption that every purchase is beneficial simply because someone has paid the price.” Rowe

What is wrong with this picture?

One is a happily married woman (man) who goes home after work to her husband (his wife). Both may go home after a working day. They get pleasure from cooking their gourmet meal together, using ingredients which they have grown in their garden, and which they follow by a quiet evening reading together. The net contribution to GDP is the value of the few ingredients in their meal that they had to purchase and the cost of the books. By contrast, the lonely bachelor eats an unhealthy meal at a fast food restaurant, then goes to a bar where he drinks excessively as solace for his loneliness, visits a prostitute, and then wrecks his car while driving back home, taking a taxi the remaining distance. “The Commission on the Measurement of Economic Performance and Social Progress” established 2008 by Sarkozy

Three approaches to creating alternatives to GDP

1. Modify GDP1. Green GDP, Genuine Progress Inidicator

2. Direct measure of well-being1. Happiness index

3. Composite indexes1. Human development index

2. Happy planet index

Approaches to creating alternatives to GDP

1. Modify GDP1. Measure of Economic Welfare

2. Index of Sustainable Economic Welfare

3. Genuine Progress Indicator

4. Green GDPs

5. Adjusted Net Savings

6. Genuine Wealth

Approaches to creating alternatives to GDP

2. Direct measure of well-being1. Ecological footprint

2. Subjective happiness

3. Gross National Happiness (Bhutan in early 1980s)

World Database of Happiness is a compilation of studies and data related to happiness and satisfaction surveys

Beyond GDP: The Need for New Measures of Progress, BU, THE PARDEE PAPERS / No. 4 / January 2009

Some efforts2008 President Sarkozy of France establishes

Commission on the Measurement of Economic Performance and Social Progress– suggests 3 alternatives to GDP1.Subjective measure (how do you ‘feel’?)2.Objective measure (health, education, balance of time,

political voice, social connections, environmental conditions, personal insecurity)

3.Sustainability http://www.stiglitz-sen-fitoussi.fr/en/index.htm

2010 Prime Minister David Cameron of England proposes Office of National Statistics measure country’s ‘general well-being’(GWB) to complement GDP

Approaches to creating alternatives to GDP

3. Composite indexes1. Human Development Index (1990 UN)

2. Happy Planet Index

3. Living Planet Index

• Best

Best

WorstLongevity = life expectancyKnowledge = literacy rate & school enrollmentAccess to decent life = GDP per capita

Prices CPI / inflation

Price Measure: CPI (Consumer Price Index)

CPI: designed to be a number that captures the cost of living or price level. Based on market basket developed from detailed expenditure information provided by families and individuals. BLS simply looks at what we spend money on and how much we spend and then compare it to a base year when BLS surveys buying patterns. If the CPI is 128, this means that the price level has risen 28% from the base year (When the CPI is 100).

Inflation: designed to measure how fast prices rise. Equals the percentage change in the CPI (monthly at yearly rate)

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P + P + P

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What is in that CPI1. “In 1983, under the Reagan Administration, inflation was

further finagled when the Bureau of Labor Statistics decide housing, too, was overstating the Consumer Price Index; the BLS substituted an entirely different ‘Owner Equivalent Rent’ measurement, based on what a homeowner might get for renting his or her house” Phillips

2. “The Republican plan to avert the "fiscal cliff" that the White House rejected Monday includes at least one element that's likely to produce controversy: a proposal that would, among other things, affect the cost of living adjustment for Social Security. ‘The basic argument is that the current annual inflation adjustment for Social Security and some other federal benefits overstates the true impact of inflation.’” 2012

CPI in “Pictures”

Now you will see a number of graphs and tables. With that pad of paper make sure you take some notes on what you see in the diagrams. Look for trends, cycles, and changes in trends or cycles. In the Real GDP graph you can barely see the Great Depression and W II, and the shape of the curve is similar to what we would see with a constant growth rate. In the Annual% change graph you see a pattern of good (Positive values) years and bad years (negative values), but there is a difference between those before and after WW II In the two column graphs you see the impact that the adjustment for inflation can make. Look at the difference in the 1970s and be sure you can explain it – and then you will understand why the country took an ideological shift after that decade.

Look at the next graphs and tables and jot down what you see is “different”

about the US – and how are China and the US different?

Europe:Average Annual Inflation Rates

  1970s 1980s 1990s

DENMARK 9% 7% 2%

FRANCE 9% 7% 2%

GERMANY 5% 3% 2%

GREECE 7% 12% 11%

IRELAND 13% 9% 2%

ITALY 12% 11% 4%

PORTUGAL 7% 16% 6%

SPAIN 14% 10% 4%

SWITZERLAND 5% 3% 2%

UNITED KINGDOM 12% 7% 4%

EUROPE Avg.  9% 7% 3%

Latin America: Average Annual Inflation Rates

  1970s 1980s 1990s

BOLIVIA 15% 230% 10%

BRAZIL 30% 237% 325%

CHILE 120% 21% 12%

COLOMBIA 20% 23% 22%

ECUADOR 120% 21% 12%

PARAGUAY 11% 20% 16%

PERU 25% 194% 112%

URUGUAY 59% 56% 45%

VENEZUELA 7% 21% 46%

Former USSR:Average Annual Inflation Rates

Country 1990s

HUNGARY 22%

ARMENIA 232%

AZERBAIJAN 179%

LATVIA 62%

LITHUANIA 92%

MOLDOVA 129%

POLAND 51%

RUSSIA 166%

TAJIKISTAN 260%

TURKMENISTAN 334%

UKRAINE 233%

Inflation rates: 2009

2009  years to doubleDemocratic Rep. of Congo 46.2% 1.56Ethiopia 36.4% 1.98Venezuela 27.1% 2.66Pakistan 20.8% 3.47Russia 11.7% 6.18Sudan 11.7% 6.40India 11.3% 6.62Iran 10.9% 6.67World Avg. 5.4% 14.4Mexico 5.3% 13.59Ecuador 5.2% 13.95Saudi Arabia 5.1% 14.24Spain -0.2% United States -0.3%

  2009 2010

US -0.4 1.2

Canada 0.3 2.4

Japan -1.4 0.2

France 0.1 1.6

Germany 0.4 1.3

Italy 0.8 1.7

Sweden -0.3 1.5

Switzerland -0.5 0.2

UK -0.5 4.5

International Inflation Rates

BLS

Some observationsIn the CPI graph you can barely see the US Civil War and WW I when we had bursts of inflation that raised the price level and beginning around 1970 the pattern changed with the CPI rising uninterrupted after 150ish years of fairly constant price level. In the second graph we also see a difference between before and after WW II, with after WW II having many fewer periods of falling prices and high inflation rates. In the post WWII period we also see the peak in interest rates in the early 1980s – we’ll talk about it later. And then we look at the components of the CPI and see that the most rapidly rising has been tuition, while the opening of trade with China has helped push down apparel prices – although this may end as a result of rapidly rising wages in China. In the tables you see the convergence of inflation rates in Europe so these countries could satisfy the criteria for joining the euro. In Latin America you see the inflation that followed the Latin America debt crisis in the 1980s and in the former Soviet Union you see hyperinflation as these countries “converted” to capitalism.