Measuring Macroeconomic Outcomes:

(“Economics” – Chapters 6 and 7)

How can we measure/observe macroeconomic outcomes of a society? There is tremendous variability in regards to

macroeconomic outcomes across countries Further, it is NOT the case that there are simply

“extremes” of “haves” and “have nots” Rather, the actual values of most measures of

economic outcomes vary continually across countries

Recall our definition of macroeconomics…

Macroeconomics – the branch of economics which studies the functioning and performance of a society’s economy as a whole (often with a focus on levels of and changes in aggregate measures such as the unemployment rate, inflation rate, and Gross Domestic Product growth rate).

When observing macroeconomic outcomes, the focus is often on “current values of” or “changes in value over time in” measures such as “inflation rate,” “unemployment rate,” and “GDP.”

Gross Domestic Product (GDP) – the total market value of final goods and services produced within an economy in a given year.

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GDP is… “the total market value” => weight different items

according to market price “of final” => to avoid ‘double counting,’ only consider

the value of items at their ‘final stage’ (and not at all ‘intermediate stages’)

e.g. , Ford buys $1,500 worth of steel to build a $25,000 car

the $25,000 car “counts” toward GDP, but the $1,500 steel does not => the $25,000 price tag of the car reflects the value of the steel (if we counted both the final good and all intermediate goods, we would be “double counting” the intermediate goods)

intermediate good – a good used in the production process that is not a final good or service

“goods and services” => include both ‘tangible items’ [e.g., food, clothing, cars, computers] and ‘intangible items’ [e.g., haircut, cleaning services, legal services]

“produced” => for the current period, do not include all items sold today, but rather only those produced today [e.g., if Ford produces and sells a car this year, it is included in GDP; if I sell a used car this year, it is not included in GDP]

“within an economy” => include all economic activity which takes places within (and only within) the geographic confines of the country [e.g., when a Mexican citizen works in the U.S., the value of the production is included in U.S. GDP not Mexican GDP]

“in a given year.” => include all economic activity which takes place during the current year

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Recognize that essentially all of the goods and services which are produced are also purchased (picture the circular flow diagram)

From here we can decompose these purchases into four different categories…

1. consumption expenditures (C ) – purchases of newly produced goods and services by households

2. private investment expenditures (I ) – purchases of newly produced goods and services by firms (e.g., spending on new plants and equipment)

3. government purchases (G ) – purchases of newly produced goods and services by local, state, or federal government

4. net exports (NX ) – exports minus imports export – a good or service produced in the home

country and sold in a foreign country import – a good or service produced in a foreign

country and purchased by someone in the home country

trade deficit – the excess of imports over exports trade surplus – the excess of exports over imports

…and recognize that GDP (Y ) can be expressed as:Y=C+ I+G+ NX

The “left side” is production, while the “right side” is essentially consumption

U.S. GDP (4th Quarter 2009; billions of dollars at annual rates)C I G NX GDP

$10,234 $1,716 $2,960 –$449 $14,461

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An Expanded Circular Flow Diagram:

Provides a simplified representation of the roles played by government and the foreign sector

Government : households and firms pay taxes to the government government hires some inputs from the market for

factors of production (e.g., government workers) government provides some finished goods and

services to households (e.g., education and healthcare) Foreign Sector :

some goods consumed by domestic households are produced elsewhere (imports)

some goods produced by domestic firms are consumed elsewhere (exports)

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Households

Markets for “Factors of Production

Markets for “Goods

and Services”

Consumer Expenditures

Firm Revenues

Wages and Rents paid

Income

output of finished

goods and services

consumption of finished goods and services

Supply of factors of

production

factors of production

hired Firms

Government

Taxes

Taxes

factors of production

hired

Finished goods and services

supplied Rest of World

exports

imports

GDP as a “proxy measure” of “economic well-being”:

A “higher value of GDP” is preferable, insomuch as it indicates that people are able to “consume more stuff”…

Historical values of GDP in U.S.:Figures are from: www.measuringworth.com/usgdp 1912: $37.4 billion 1945: $223.0 billion => 6.0 times larger than 1912 1978: $2,293.8 billion => 61.3 times larger than 1912 2011: $15,094.0 billion => 403.9 times larger than 1912

So, were people consuming “403.9 times more stuff” in 2011 than in 1912!?

Real GDP versus Nominal GDP: GDP can increase due to: (i) a greater amount of stuff

being produced or (ii) a general increase in the price at which stuff is traded…

When examining the value of GDP over time, it is often desirable to “take out changes which result from changes in price”

Real GDP essentially answers the hypothetical question: “What would be the value of goods/service produced in a particular year, if we valued them at the prices which prevailed in some other base year?”

Real GDP – a measure of GDP that controls for changes in prices (i.e., in each period goods and services are valued according to a set of common, constant prices).

Nominal GDP – the value of GDP at current prices (i.e., in each period goods and service are valued according to current prices).

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Previously reported values of U.S. GDP were “nominal values,” which increased in part due to increases in prices

Historical values of Real GDP in U.S. (in 2005 dollars): 1912: $576.9 billion 1945: $2,012.4 billion => 3.5 times larger than 1912 1978: $5,677.6 billion => 9.8 times larger than 1912 2011: $13,315.1 billion => 23.1 times larger than 1912

So, were people consuming “23.1 times more stuff” in 2011 than in 1912!?

The “absolute, total amount of output” is “23.1 times more,” but there are more people. Population was: 95.3 million in 1912 139.9 million in 1945 222.6 million in 1978 312.0 million in 2011 (3.3 times as many people)

Real GDP Per Capita – the value of Real GDP divided by total population of the country

Historical values of Real GDP Per Capita in U.S.: 1912: $6,051 1945: $14,382 => 2.4 times larger than 1912 1978: $25,503 => 4.2 times larger than 1912 2011: $42,671 => 7.1 times larger than 1912

So, in fact, people were able to consume about “7.1 times more stuff” in 2011 than in 1912, which still seems like a very big increase.

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Differences in GDP across countries…

Industrially Advanced Countries (IAC’s) – high income nations that have market economies based on large stocks of technologically advanced capital and a well educated labor force (e.g., U.S., Canada, Australia, New Zealand, Japan)

Less Developed Countries (LDC’s) – nations without large stocks of technologically advanced capital and a well educated labor force (e.g., Mozambique, Chile, Panama, Thailand, Bolivia, India, Rwanda, Ethiopia, Bangladesh)

But, there are tremendous differences in GDP between the “most prosperous and least prosperous IAC’s” and between the “most prosperous and least prosperous LDC’s”

That is, it is NOT the case that there are simply “extremes” of “haves” and “have nots”

Rather, the actual values of GDP vary “almost continually” across countries

When comparing values of GDP across different countries, it is necessary to account for “differences in costs of living between countries” when calculating GDP

“Purchasing Power Parity” (PPP) => takes the effects of “differences in costs of living” out of GDP figures across countries

What we will compare across countries is “Per Capita GDP (PPP)”

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(values below gathered from www.indexmundi.com)Country: Per Capita GDP (PPP), 2011:Qatar $179,000Liechtenstein $141,100Luxembourg (E.U.) $82,600Singapore $62,100Norway $54,600United Arab Emirates $49,600United States $47,200Hong Kong $45,900Canada $39,400Sweden (E.U.) $39,100Ireland (E.U.) $37,300Germany (E.U.) $35,700Japan $34,000South Korea $30,000Israel $29,800Czech Republic (E.U.) $25,600Portugal (E.U.) $23,000Poland (E.U.) $18,800Russia $15,900Argentina $14,700Mexico $13,900Brazil $10,800China $7,600Bolivia $4,800India $3,500Ghana $2,500North Korea $1,800Haiti $1,200Zimbabwe $500

So, in terms of Real GDP per capita, are people in the U.S. “$8,100 better off” than people in Sweden and “$35,400 worse off” than people in Luxembourg?

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At what level should we examine the data? Compare: The United States to Sweden…? The United States to the European Union…? North Carolina to Sweden…?

This “choice” can influence our “answers/insights”… “state level” figures from Bureau of Economic Analysis

Country: Per Capita GDP (PPP), 2011:Qatar $179,000D.C. (U.S.) $148,291Liechtenstein $141,100Luxembourg (E.U.) $82,600Delaware (U.S.) $63,159Singapore $62,100Wyoming (U.S.) $55,516Norway $54,600United Arab Emirates $49,600New Jersey (U.S.) $48,380United States $47,200 [≈38.8% greater than E.U.]Texas (U.S.) $44,788North Carolina (U.S.) $39,879Canada $39,400Sweden (E.U.) $39,100Ireland (E.U.) $37,300Georgia (U.S.) $37,270Germany (E.U.) $35,700Florida (U.S.) $34,689European Union $34,000West Virginia (U.S.) $30,056South Korea $30,000Israel $29,800Mississippi (U.S.) $28,293Czech Republic (E.U.) $25,600Portugal (E.U.) $23,000Poland (E.U.) $18,800

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Inflation and Unemployment:

Inflation Rate – the rate at which the overall price level increases on an annual basis

Most stable, developed economies typically have rates of 1% to 6%.

Deflation – a general decrease in the level of overall prices (i.e., a realization of a negative inflation rate)

Hyperinflation – an extremely high rate of inflation, generally above 100% per year

average Inflation Rate 2004 2006 2008 2010

-0.48% Japan -0.30% -0.30% 0.10% -1.40%1.35% France 2.10% 1.70% 1.50% 0.10%1.43% Germany 1.10% 2.00% 2.30% 0.30%1.78% China 1.20% 1.80% 4.80% -0.70%2.10% Spain 3.00% 3.40% 2.80% -0.80%2.40% Australia 2.80% 2.70% 2.30% 1.80%4.03% Mexico 4.50% 4.00% 4.00% 3.60%6.33% India 3.80% 4.20% 6.40% 10.90%9.88% Argentina 13.40% 9.60% 8.80% 7.70%11.28% Nigeria 13.80% 13.50% 5.40% 12.40%11.78% Russia 13.70% 12.70% 9.00% 11.70%17.95% Ghana 26.70% 15.10% 10.70% 19.30%3304.90

% Zimbabwe 384.70% 266.80% 12,563% 5.10%

(“average” is simply the mean of the four valuesreported in the table for each country)

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Unemployment Rate – the percentage of individuals in the workforce that currently do not have jobs

Most stable, developed, industrialized economies typically have rates of 4% to 8%

average

Unemployment Rate 2004 2006 2008 2010

4.03% Mexico 3.30% 3.60% 3.70% 5.50%4.23% Nigeria na 2.90% 4.90% 4.90%4.65% Japan 5.30% 4.40% 3.80% 5.10%5.28% Australia 6.00% 5.10% 4.40% 5.60%

6.85% China10.10

% 9.00% 4.00% 4.30%7.68% Russia 8.50% 7.60% 6.20% 8.40%

9.08% India 9.50% 8.90% 7.20%10.70

%9.15% France 9.70% 9.90% 7.90% 9.10%

9.68% Germany10.50

%11.70

% 9.00% 7.50%

11.53% Argentina17.30

%11.60

% 8.50% 8.70%

11.70% Spain11.30

% 9.20% 8.30%18.00

%15.50% Ghana 20% 20% 11% 11%81.25% Zimbabwe 70% 80% 80% 95%

(“average” is simply the mean of the four valuesreported in the table for each country)

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The Phillips Curve:

There often appears to be a “tradeoff between inflation and unemployment”:

Phillips Curve – a curve illustrating the “inverse relation” between the Unemployment Rate and Inflation Rate (i.e., the “tradeoff” between unemployment and inflation that a society faces) In the 1970’s many economies (including the U.S.)

experienced high levels of both unemployment and inflation => “points beyond the Phillips Curve”

Current thinking: Phillips Curve illustrates a “short-term tradeoff” between Unemployment and Inflation, but the curve may shift over time (and government policy may potentially influence the shift/movement of the curve)

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Inflation Rate

0

0

Unemployment

Rate

Phillips Curve

U.S. Inflation Rate Post WW-II: Annual Inflation Rates (yearly) => 3 distinct periods

1949-1967 (19 year period) => low rateso 3.34% or below in 18 of 19 years (exception was

1951, 7.88%)o average rate of 1.76%

1968-1982 (15 year period) => high rateso 5.46% or above in 12 of 15 yearso lowest value was rate of 3.27% in 1972o highest value of 13.58% in 1980o average rate of 7.38%o above 10% in three consecutive years (1979–1981)

1983-2011 (29 year period) => low rateso 4.83% or below in 28 of 29 years (one exception

was 1990 with a rate of 5.39%)o 3.66% or lower in 23 of 29 yearso average rate of 2.97%o 2009 rate was (–0.34)% [deflation for first year

since 1955]o 2011 rate was 3.16%

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Annual Inflation Rate (monthly) : January 1948 through June 2012:o Mean = 3.71%o Median = 3.05%o Maximum = 14.76% (March 1980)o Minimum = –2.87% (July 1949)

Negative rate in 8 months in 200914

o Previous Post WW-II instances of deflation: May 1949 to June 1950 (14 months); Aug. 1954 to Aug. 1955 (13 months)

“The Great Inflation” => period of very high inflation rates from early 1970’s through early 1980’so Above 6% in 100 of the 110 months (90.9% of

months) between June 1973 and July 1982o Above 6% in only 10 of the 616 “other months”

(1.6% of months) from Jan. 1952 to June 2012 1.66% in June 2012 => 7th straight month with a value

below the median of 3.05%

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U.S. Unemployment Rate Post WW-II: Unemployment Rates (yearly) => 4 distinct periods

1948-1974 (27 year period) => low rateso below 6% in 24 of 27 yearso low of 2.92% in 1953; high of 6.84% in 1958o average rate of 4.80%

1975-1987 (13 year period) => high rateso above 6% in 12 of 13 yearso low of 5.85% in 1979; high of 9.71% in 1982o average rate of 7.47%

1988-2008 (21 year period) => low rateso below 6% in 17 of 21 yearso low of 3.97% in 2000; high of 7.49% in 1992o below 6% every year from 1995-2008o average rate of 5.45%

2009-present => high rateso rates of 9.26%, 9.63%, and 8.95% respectivelyo other years since 1948 with rates above 8%: 8.48%

in 1975, 9.71% in 1982, and 9.60% in 1983o first time with a rate above 8% in three consecutive

years since the Great Depression

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Unemployment Rate (monthly) : January 1948 through July 2012:o Mean = 5.79%o Median = 5.60%o Maximum = 10.8% (Nov. and Dec. 1982)o Minimum = 2.50% (May and June 1953)

8.3% in July 2012 “Above 8%” (since January 1948)…o January 1975 to December 1975 (12 months)o November 1981 to January 1984 (27 months)

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o February 2009 to present (42 months and counting) Below 8% in every month between Feb. 1984 and Jan.

2009 (300 consecutive months) “Above 9%” (since January 1948)…o May 1975 (1 month)o Mar. 1982 to Sept. 1983 (19 months)o 5/09-2/11 (22 months) and 4/11-9/11 (6 months)

Above 10%:o Oct. 2009 (1 month)o Sept. 1982 to June 1983 (10 months)

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Misery Index – economic indicator created by Arthur Okin, calculated by simply adding together the annual inflation rate and the unemployment rate

Monthly values, from January 1948 to June 2012: Low value : 2.97 in July 1953 High value : 21.98 in June 1980 Average value : mean of 9.50; median of 8.66 Most recent value : 9.86 in June 2012 Above median value since October 2009 (33 months

and counting) “Above 10” : 11/09-4/12 (30 straight months); 6/08-

10/08 (5 straight months); 52 of 75 months (69.3%) from 4/87-6/93; 4/73-2/86 (155 consecutive months; one month shy of 13 full years)

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