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8/13/2019 L2 Measuring Macroeconomic Data
1/16
2-1
Measuring
Macroeconomic
Data
2-2
Today’s Agenda
1. Measuring Economic Activity
2. Measuring Inflation
3. Measuring Unemployment
4. Measuring Interest Rates
2-3
Measuring Economic Activity
2-4
Measuring Economic Activity
• The national income and product accounts are
an accounting framework used to measure
economic activity and its components.
8/13/2019 L2 Measuring Macroeconomic Data
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2-5
National Income Accounting
• Three different approaches:
1. Product approach: the dollar amount of output
newly produced.
2. Expenditure approach: the dollar amount spent
by purchasers on newly produced output.
3. Income approach: the dollar incomes earned by
production of the newly produced output.
2-6
National Income Accounting
• Thus, the fundamental identity of national
income accounting is:
Total Production
≡
Total Expenditure
≡
Total Income
2-7
The Product Approach to GDP
• Gross Domestic Product, GDP, is defined as:
1. The current market value of all
2. final goods and services
3. newly produced
4. in the domestic economy during a
5. specified period of time.
2-8
The Product Approach to GDP
1. Market value: allows adding together unlikeitems by valuing them at their market prices.
a. Imputed values are used for some nonmarketgoods and services.
b. Most nonmarket goods and services are notincluded.
c. Some market goods and services are notincluded.
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2-9
The Product Approach to GDP
2. Final goods and services: those goods andservices that are NOT completely used up inthe production process.
– Intermediate goods and services are thosecompletely used up in the production of othergoods and services in the same period that theythemselves were produced.
• Alternatively, adding up value added would work.
2-10
The Product Approach to GDP
2. Final goods and services: Two caveats
a. Capital goods are used to produce other goods andare treated as final goods because they are NOTcompletely used up in the same period that theyare produced.
b. Inventory investment —the amount thatinventories of unsold finished goods, goods in process, and raw materials have changed duringthe period—is also treated as a final good.
2-11
The Product Approach to GDP
3. Newly produced : counts only goods and
services produced in the specified period of
time.
2-12
The Product Approach to GDP
4. In the domestic economy: counts only goods
and services produced within the geographical
boundaries of the country.
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2-13
The Product Approach to GDP
5. Specified period of time: because GDP is a
flow concept, it must be measured during a
specified period of time.
a. Flows represent an amount per unit of time.
b. Stocks represent an amount at a particular point
in time.
2-14
The Expenditure Approach to GDP
• GDP is also defined as:
1. The total spending on all
2. final goods and services produced
3. within the domestic economy during a
4. specified period of time.
2-15
The Expenditure Approach to GDP
• Four main categories of spending:
1. Consumption (C )
2. Investment ( I )
3. Government purchases, goods and services (G)
4. Net Exports ( NX )
2-16
The Expenditure Approach to GDP
• The national income identity is:
Y = C + I + G + NX
– Also called the income-expenditure identity.
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2-17
The Expenditure Approach to GDP
1. Consumption: spending by domestichouseholds on final goods and services.
– Three categories:
a. Durable goods spending, which is spending byhouseholds on goods that last 3 years or longer.
b. Nondurable goods spending, which is spending byhouseholds on goods that last less than 3 years.
c. Services spending, which is spending by householdsthat is consumed immediately.
2-18
The Expenditure Approach to GDP
Personal Consumption ExpendituresPercent of GDP
10505050505050Source: Haver Analytics
71
68
65
62
59
56
71
68
65
62
59
56
2-19
The Expenditure Approach to GDP
2. Investment: spending by domestic businessesfor new capital goods and inventories.
– Three categories:
a. Business fixed investment, current spending on (1) newequipment, (2) new structures, and (3) new intellectual
property products.
b. Residential fixed investment, current spending on newhousing units.
c. Inventory investment, current spending on additionalholdings of raw materials, parts, and finished goods.
2-20
The Expenditure Approach to GDP
Gross Private Domestic InvestmentPercent of GDP
10505050505050Source: Haver Analytics
20
18
16
14
12
10
20
18
16
14
12
10
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2-21
The Expenditure Approach to GDP
3. Government purchases of goods and services:
spending by units of government on final
goods or services.
– Two categories:
a. Federal government purchases
b. State and local government purchases
2-22
The Expenditure Approach to GDP
Government PurchasesPercent of GDP
10505050505050Source: Haver Analytics
40
36
32
28
24
20
16
40
36
32
28
24
20
16
2-23
The Expenditure Approach to GDP
3. Government spending includes:
a. Government purchases of goods and services (the
G in C + I + G + NX), and
b. Government transfer payments, payments for
which no goods, services, or uses of factors of
production are exchanged in the specified time
period.
• Transfer payments are NOT included in G.
2-24
The Expenditure Approach to GDP
Goverment Transfer PaymentsPercent of GDP
10505050505050Source: Haver Analytics
17
14
11
8
5
2
17
14
11
8
5
2
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2-25
The Expenditure Approach to GDP
Total Government SpendingPercent of GDP
10505050505050Source: Haver Analytics
40
36
32
28
24
20
16
40
36
32
28
24
20
16
2-26
The Expenditure Approach to GDP
4. Net exports: exports minus imports.
– Two categories:
a. Exports are goods produced in the country that are
purchased by foreigners.
b. Imports are goods produced abroad that are purchased
by residents in the country.
2-27
The Expenditure Approach to GDP
Exports of Goods and ServicesPercent of GDPImports of Goods and ServicesPercent of GDP
10505050505050Source: Haver Analytics
16
12
8
4
0
16
12
8
4
0
2-28
The Expenditure Approach to GDP
Net Exports of Goods and ServicesPercent of GDP
10505050505050Source: Haver Analytics
2
0
-2
-4
-6
2
0
-2
-4
-6
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2-29
The Income Approach to GDP
• GDP is also defined as:
1. The total income earned from
2. Newly produced
3. final goods and services
4. in the domestic economy during a
5. specified period of time.
2-30
The Income Approach to GDP
• Five different income measures
1. Gross Domestic Product, GDP
2. Gross National Product, GNP
3. National income, Y
4. Private disposable income
5. Net government income
2-31
The Income Approach to GDP
1. Gross Domestic Product (GDP)
+ Factor income from the rest of the world
– Factor payments to the rest of the world
= Gross National Product (GNP)
2-32
The Income Approach to GDP
2. Gross National Product (GNP)
– Depreciation
– Statistical discrepancy
= National Income
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2-33
The Income Approach to GDP
3. National Income
= Compensation of Employees
+ Corporate Profits
+ Non-Corporate Profits
+ Other Income
2-34
The Income Approach to GDP
GNP, Year-to-Year Percent ChangeGDP, Year-to-Year Percent ChangeNational Income, Year-to-Year Percent Change
10505050505050Sources: Bureau of Economic Analysis /Haver Analytics
20
15
10
5
0
-5
20
15
10
5
0
-5
2-35
The Income Approach to GDP
4. Private disposable income
= GDP
+ Net factor income
+ Transfer payments from the government
+ Interest payments on government debt
– Taxes
2-36
The Income Approach to GDP
5. Net government income (Net tax receipts)
= (Gross) taxes receipts
– Government transfer payments
– Interest payments on government debt
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2-37
Real versus Nominal GDP
• Nominal variables are measured in current
dollar terms.
• Real variables are adjusted for changes in
prices to reflect only quantity terms.
2-38
Real versus Nominal GDP
• Nominal GDP is the dollar value of an
economy’s final output measured at current
market prices.
Nominal GDP = Price Level * Real GDP
2-39
Real versus Nominal GDP
• Real GDP is an estimate of the value of an
economy’s final output, adjusted for changes in
the overall price level .
Real GDP = Nominal GDP
Price Level
2-40
Measuring Inflation
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2-41
Measuring Inflation
• A price index measures the weighted average
level of prices for some specified set of goods
and services, relative to those prices in a
specified base year.
2-42
Measuring Inflation
• Three major price indexes:
1. The Gross Domestic Product (GDP) Deflator
2. The Personal Consumption Expenditure (PCE)
Deflator
3. The Consumer Price Index
2-43
Measuring Inflation
• The inflation rate is calculated as:
t = ( P t – P t-1) / P t-1 = P t / P t-1
– where
• t is the inflation rate in period t, and
• Pt is a price index in period t.
2-44
Measuring Inflation
Inflation Measured by Different Price Indexes
10505050505050Sources: BLS, BEA, BEA /Haver
16
12
8
4
0
-4
16
12
8
4
0
-4
GDP Price Deflator
Personal Consumption Deflator
Consumer Price Index
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2-45
Measuring Unemployment
• The Unemployment Rate is the percentage of
the civilian labor force who are:
1. Willing and able to work and
2. Actively looking for work but
3. Who do not have jobs.
2-46
Measuring Unemployment
2-47
Measuring Unemployment
• The adult population can be categorized as:
1. Employed
2. Unemployed
3. Not in the labor force
• Which includes discouraged workers, those who
would like to work but have given up looking for work because they do not believe there are any jobs available
for them.
2-48
Measuring Unemployment
• The (civilian) labor force is given by:
Labor Force = Employed + Unemployed
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2-49
Measuring Unemployment
• The following can be calculated:
1. Unemployment Rate = Unemployed/Labor Force
2. Participation Rate = Labor Force/Population
3. Employment Ratio = Employed/Population
2-50
Measuring Unemployment
Civilian Unemployment RatePercent
10505050505050Source: Bureau of Labor Statistics /Haver Analytics
12
10
8
6
4
2
12
10
8
6
4
2
2-51
Measuring Unemployment
Labor Force Participation RatePercent
10505050505050Source: Bureau of Labor Statistics /Haver Analytics
68
66
64
62
60
58
68
66
64
62
60
58
2-52
Measuring Unemployment
Employment-to-Population RatioPercent
10505050505050Source: Bureau of Labor Statistics /Haver Analytics
65
63
61
59
57
55
65
63
61
59
57
55
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2-53
Measuring Interest Rates
2-54
Measuring Interest Rates
• An interest rate measures:
1. The cost of borrowing
• OR
2. The return to saving and lending
2-55
Measuring Interest Rates
• There are many different interest rates that
differ primarily in their:
1. Maturity
2. Liquidity
3. Credit risk
2-56
Measuring Interest Rates
Federal Funds Rate10-Year Treasury Note YieldConventional 30-Year Mortgage Rate
Moody's Seasoned Baa Corporate Bond Yield
10505050505050Sources: FRB /Haver
20
16
12
8
4
0
20
16
12
8
4
0
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2-57
Measuring Interest Rates
• Because interest rates usually move together
most macroeconomic models only incorporate
one interest rate— THE interest rate.
2-58
Measuring Interest Rates
• Nominal interest rate (i): rate at which the
nominal value of an asset increases over time
• Real interest rate (r ): rate at which the real
value of an asset increases over time
– Ex ante real rates are based in expected inflation
– Ex post real rate are based on actual inflation
2-59
Measuring Interest Rates
10-Year Nominal Treasury Note YieldPercent10-Year Real ex-port) Treasury Note YieldPercent
10505050505050Source: Haver Analytics
16
12
8
4
0
-4
-8
16
12
8
4
0
-4
-8
2-60
Measuring Interest Rates
• The importance of real interest rates:
– When the real interest rate is low
• There is greater incentive to borrow and invest but
• There is less incentive to save and lend.
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2-61
Measuring Interest Rates
• The Fisher Equation is the relationship between nominal and (ex ante) real interestrates:
– The nominal interest rate is given by:
i = r + e
– The real (ex ante) interest rate is given by:
r = i – e
2-62
Measuring Interest Rates
• Given nominal and (ex ante) real interest rates,
expected inflation can be calculated as:
e = i – r
2-63
Measuring Interest Rates
Expected 10-Year InflationPercent
132109876543Source: Haver Analytics
3.0
2.5
2.0
1.5
1.0
0.5
0.0
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2-64
Measuring Macroeconomic Data
• Building macroeconomic models requires:
1. Measuring the macroeconomic data
2. Looking for patterns in the data
3. Formulating a theory to explain these patterns
4. Testing the model against real world experiences