Ch 2 Science of Macroeconomics

7/18/2019 Ch 2 Science of Macroeconomics

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MACROECONOMICSMACROECONOMICS

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PowerPointPowerPointSlides by Ron CronovichSlides by Ron Cronovich

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C H $ P T EC H $ P T E

RR

The Science o%The Science o%!"croecono&ics!"croecono&ics

''

Modified for EC 204by Bob Murphy


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In this chapter, you will learn:In this chapter, you will learn:

the meaning and measurement of themost important macroeconomic statistics:

Gross Domestic Product GDP!

"he Consumer Price #nde$ CP#!

"he %nemp&oyment 'ate


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(CHAPTER 2 "he Data of Macroeconomics

Gross Domestic Prouct !Prou"

Domesti" #ruto$

E%peniture an Income")o definitions:

"ota& e$penditure tota& penge&uaran! terhadap

barang*+asa a,hir yang dihasi&,an secara

domesti,-

"ota& income yang diterima pemi&i, fa,tor2

produ,si di da&am negeri-

Expenditure equals income because

every dollar spent by a buyer

becomes income to the seller.


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4CHAPTER 2 "he Data of Macroeconomics

&he Circular 'low

.ouseho&ds /irms

Goods

Labor,modal, skill,

dll

Expenditure ($)

Income ($)


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CHAPTER 2 "he Data of MacroeconomicsC.1P"E' 2 "he Data of Macroeconomics

Gross Domestic Prouct:

E%peniture an Income

ne ca3eat:

Measurement of income and e$penditure is

imperfect-

Difference in GDP and Gross Domestic #ncome

GD#! is ca&&ed the 5tatistica& Discrepancy-6

ee upplement !"#


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(alue ae

Value added:

"he 3a&ue of output minus

the 3a&ue of the intermediate goods

used to produce that output


7/638CHAPTER 2 "he Data of Macroeconomics

'inal )oos, *alue ae, an GDP

GDP 9 3a&ue of fina& goods produced

9 sum of 3a&ue added at a&& stages

of production-

"he 3a&ue of the fina& goods a&ready inc&udes the

3a&ue of the intermediate goods

so inc&uding intermediate and fina& goods in GDP

)ou&d be doub&e;counting-


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=0CHAPTER 2 "he Data of Macroeconomics

Consumption !C$

durable goods&ast a &ong timee-g- cars homeapp&iances

nondurable goods&ast a short timee-g- food c&othing

services

)or, done forconsumerse-g- dry c&eaningair tra3e&

definition: "he 3a&ue of a&&goods and ser3ices boughtby househo&ds- #nc&udes:


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==CHAPTER 2 "he Data of Macroeconomics

01S1 consumption, 2334

42-7

20-8

>-2

>0-?

707


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In*estment !I$

5pending on goods bought for future use

i.e. capita& goods!

#nc&udes:

Business fixed investment

5pending on p&ant and euipment

Residential fixed investment

5pending by consumers and &and&ords on

housing units Inventory investment

"he change in the 3a&ue of a&& firms in3entories


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=(CHAPTER 2 "he Data of Macroeconomics

01S1 In*estment, 2334

0-(

(-4

=0--0

48>->

=2-8

@=


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In*estment *s1 Capital

Aote: #n3estment is spending on ne) capita&-E$amp&e (assumes no depreciation):

=*=*200


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=CHAPTER 2 "he Data of Macroeconomics

Stoc"s *s1 'lows

1 flowis a uantity measured per unit of time-

E.- %-5- in3estment )as @2- tri&&ion during 200


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Stoc"s *s1 'lows 5 e%amples

the go3t budget deficitthe go3t debt

F of ne) co&&ege

graduates this year

F of peop&e )ith co&&ege

degrees

a persons

annua& sa3inga persons )ea&th

flowstock


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Go*ernment spenin) !G$

Ginc&udes a&& go3ernment spending on goodsand ser3ices-

Ge$c&udes transfer payments

e-g- unemp&oyment insurance payments!because they do not represent spending on

goods and ser3ices-


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=


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Net E%ports: N . E 6 IM

def: the 3a&ue of tota& e$ports EH! minus the 3a&ue

of tota& imports #M!


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NO7 -O0 &R-:

An e%peniture5output pu88le9

5uppose a firm:

produces @=0 mi&&ion )orth of fina& goods

on&y se&&s @< mi&&ion )orth

Does this 3io&ate the

expenditure= output identityI


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7hy output . e%peniture

%nso&d output goes into in3entoryand is counted as in3entory in3estment6

)hether or not the in3entory bui&dup )as

intentiona&- #n effect )e are assuming that

firms purchase their unso&d output-


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2(CHAPTER 2 "he Data of Macroeconomics

GDP:

An important an *ersatile

conceptJe ha3e no) seen that GDP measures:

tota& income

tota& output tota& e$penditure

the sum of 3a&ue;added at a&& stages

in the production of fina& goods


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GNP *s1 GDP

Gross NationalProductGAP!:

"ota& income earned by the nations factors of

production regard&ess of )here &ocated

Gross Domestic ProductGDP!:

"ota& income earned by domestica&&y;&ocatedfactors of production regard&ess of nationa&ity

GAP GDP 9 factor payments from abroad

minus factor payments to abroad

E$amp&es of factor payments: )ages profits

rent interest di3idends on assets


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NO7 -O0 &R-:

Discussion uestion

In your country,

hich ould you

ant to be bier,G' or G*+

hy+


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GNP *s1 GDP in select countries, 233;

Country GN G! GN " G!#$ of G!%

Phi&ippines @=>08> @=44072 9.!

apan @4(0=20= @=(>=400 .$!

Canada @=(=8(04 @=(24=4= @28(00> %".&!

Ae) Kea&and @=2 %'.2!

Peru @2 %#.&!

G* and G' in millions o% current -.. dollars


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2>CHAPTER 2 "he Data of Macroeconomics

Other Measures o+ Income

Aationa& #ncome 9 GAP ; Depreciation

Aationa& #ncome 9 Compensation of

Emp&oyees L Proprietors #ncome L 'enta&

#ncome L Corporate Profits L Aet #nterest L#ndirect Business "a$es

*ote: upplement !"describes recent change

in definition of Aationa& #ncome to inc&ude#ndirect Business "a$es-


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Components o+ National Income


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2


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(0CHAPTER 2 "he Data of Macroeconomics

Real *s1 nominal GDP

GDP is the 3a&ue of a&& fina& goods and ser3icesproduced-

nominal GDPmeasures these 3a&ues using

current prices-

(eal GDPmeasure these 3a&ues using constant

prices-


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(=CHAPTER 2 "he Data of Macroeconomics

Real GDP controls +or in


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Real *s1 nominal GDP

GDPt( P

it)

it

i==

n

RGDPt( P

i*)

it

i==

n


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GDP De


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NO7 -O0 &R-:

GDP e to 2008-

Aom- GDP 'ea& GDPGDP

def&ator#nf&ation

rate

2007 @47200 @47200 n.a.

200> =400 0000

2008 8(00 2000


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NO7 -O0 &R-:

Answers

Aomina&GDP

'ea& GDPGDP

def&ator#nf&ation

rate

2007 @47200 @47200 =00-0 n.a.

200> =400 0000 =02-8 2-8?

2008 8(00 2000 ==2-=


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4=CHAPTER 2 "he Data of Macroeconomics

&wo arithmetic tric"s +or

wor"in) with percenta)e chan)es

EH: #f your hour&y )age rises ?

and you )or, >? more hoursthen your )age income rises

appro$imate&y =2?-

&. /or any 3ariab&es& and '

percentage change in &*'!

9 percentage change in&

L percentage change in '


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&wo arithmetic tric"s +or

wor"in) with percenta)e chan)es

EH: GDP def&ator 9 AGDP*'GDP-

#f AGDP rises


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Measurin) Economic Growth

RGDPt+ RGDP

t=( P

i*)

iti==

n

+ Pi*)it=i==

n

=

Pi*)

it=)

it+ )

it=

i==

n

Pi*)it=i==

n


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RGDPt+ RGDP

t=(

Pi*)

it=)

it+ )

it= i==

n

Pi*)it=i==

n

=+ t

= i )it + )it=

i==

n


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A ,(o-lem a(ises wen usin/ fi0ed

-ase+1ea( wei/ts Growt( will vary

depending on base year c(osen)

Ra,idl1 /(owin/ secto(s wit declinin/

(elati3e ,(ices will -e wei/ted *too

muc(+as -ase 1ea( -ecomes fu(te(

and fu(te( in te ,ast. 4,,osite fo(slowl1 /(owin/ secto(s.


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Chain57ei)hte Real GDP

3er time re&ati3e prices change so the baseyear shou&d be updated periodica&&y;;)hich BE1

used to do-

#n essence cain+wei/ted (eal GDPupdates the base year e3ery year

so it is more accurate than fi$ed base;year GDP-

fficia& measure of GDP no) produced by BE1-

ee upplement !"0.


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,=+ gt-

t;=(

Pi t;=

)it=

)it+ )

it= i==

n

Pi t;=)it=i==

n

=+ t

t;=

= i t;=

)it+ )

it=

i==

n

5tep =:

'e)rite as:


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,=+ gt-

t(

Pi t)

it=)

it+ )

it= i==

n

Pi t)it=i==

n

=+ t

t

= i t

)it+ )

it=

i==

n

5tep 2:

'e)rite as:


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4


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7hen is the Economy in a

Recession9

'u&e of "humb: ")o uarters of dec&ine in 'ea& GDP

Aationa& Bureau of Economic 'esearch uses more nuanced

approach see upplement #"1!:

Month&y #ndicators rather than Nuarter&y-

1 significant dec&ine in acti3ity spread across the

economy &asting more than a fe) months 3isib&e in

industria& production emp&oyment rea& income and)ho&esa&e;retai& trade-6


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)0ic#Ti&e1 "nd "deco&2ressor"re needed to see this 2ict0re.


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(CHAPTER 2 "he Data of Macroeconomics5ource: Department of Commerce Bureau of Economic 1na&ysis-


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4CHAPTER 2 "he Data of Macroeconomics5ource: Board of Go3ernors of the /edera& 'eser3e-


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CHAPTER 2 "he Data of Macroeconomics5ource: Department of Commerce Bureau of the Census and Bureau of Economic 1na&ysis-


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Consumer Price Ine% !CPI$

1 measure of the o3era&& &e3e& of prices

Pub&ished by the Bureau of Oabor 5tatistics

BO5!

%ses:

trac,s changes in the typica& househo&ds

cost of &i3ing

ad+usts many contracts for inf&ation CO1s6!

a&&o)s comparisons of do&&ar amounts o3er time


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>CHAPTER 2 "he Data of Macroeconomics

=ow the #>S constructs the CPI

&- 5ur3ey consumers to determine composition ofthe typica& consumers bas,et6 of goods

2- E3ery month co&&ect data on prices of a&& items

in the bas,et compute cost of bas,et

"- CP# in any month eua&s

&he composition o+ the CPI?s


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&he composition o+ the CPI?s

@as"etB


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0nerstanin) the CPI

CP#=Et

EB

()i*Pit

i==

n

)

i*P

i*

i==

n

(

)i*Pi*P

it+ P

i*

i==

n

)i*Pi*

i==

n


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0nerstanin) the CPI

CP#= EtE

B

( i*

Pit+ P

i*

i==

n

i*

= )

i*Pi*

)i*Pi*

i==

n

)here the )eights aregi3en by:


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0nerstanin) the CPI

,(e CP) is a weig(ted average of prices relative

to t(eir value in t(e base period)

,(e weig(t on eac( *price relative+ reflectst(at good-s relative importance in t(e CP)5s

basket)

Note t(at t(e weig(ts remain fixed over time)

7hy the CPI may o*erstate


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7hy the CPI may o*erstate

in


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&he si8e o+ the CPI?s ias

#n =


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7


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&wo measures o+ in


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>=CHAPTER 2 "he Data of Macroeconomics

Cate)ories o+ the population

em,lo1ed)or,ing at a paid +ob

unem,lo1ednot emp&oyed but &oo,ing for a +ob

la-o( fo(cethe amount of &abor a3ai&ab&e for producinggoods and ser3ices a&& emp&oyed p&us

unemp&oyed persons not in te la-o( fo(ce

not emp&oyed not &oo,ing for )or,

&he =ousehol Sur*ey: &wo


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>2CHAPTER 2 "he Data of Macroeconomics

&he =ousehol Sur*ey: &wo

important laor +orce concepts

unem,lo1ment (ate

percentage of the &abor force that is unemp&oyed

see upplement !"#!for a&ternati3e measures of

the unemp&oyment rate! la-o( fo(ce ,a(tici,ation (ate

the fraction of the adu&t popu&ation

that participates6 in the &abor force


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>>CHAPTER 2 "he Data of Macroeconomics

&he Estalishment Sur*ey

"he BO5 obtains a second measure ofemp&oyment by sur3eying businesses

as,ing ho) many )or,ers are on their payro&&s-

Aeither measure is perfect and they

occasiona&&y di3erge due to:

treatment of se&f;emp&oyed persons

ne) firms not counted in estab&ishment sur3ey

technica& issues in3o&3ing popu&ation inferencesfrom samp&e data

& + l t th


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&wo measures o+ employment )rowth

Percentag

echange

from=

2mo

nthsear&ier


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Chapter SummaryChapter Summary

Gross Domestic Product GDP! measures bothtota& income and tota& e$penditure on the

economys output of goods ser3ices-

Aomina& GDP 3a&ues output at current prices

rea& GDP 3a&ues output at constant prices-

Changes in output affect both measures

but changes in prices on&y affect nomina& GDP-

GDP is the sum of consumption in3estment

go3ernment purchases and net e$ports-


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Chapter SummaryChapter Summary

"he o3era&& &e3e& of prices can be measuredby either:

the Consumer Price #nde$ CP#!

the price of a fi$ed bas,et of goods purchased

by the typica& consumer or

the GDP def&atorthe ratio of nomina& to rea& GDP

"he unemp&oyment rate is the fraction of the&abor force that is not emp&oyed-

Documents

Ch 2 Science of Macroeconomics