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MACROECONOMICS © 2011 Worth Publishers, all rights reserved S E V E N T H E D I T I O N PowerPoint ® Slides by Ron Cronovich N. Gregory Mankiw C H A P T E R The Science of Macroeconomics (edited by L. Lamb, 2011) 2 2 0 1 0 U P D A T E

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MACROECONOMICS

© 2011 Worth Publishers, all rights reserved

S E

V E

N T

H

E D

I T I

O N

PowerPoint® Slides by Ron CronovichN. Gregory Mankiw

C H A P T E R

The Science of Macroeconomics(edited by L. Lamb, 2011)

2

2 0

1 0

U P

D A

T E

Page 2: Mankiw 6e PowerPoints - Thompson Rivers Universityfaculty.tru.ca/llamb/lamb_files/ECON 2950/ECON 2950 ch… · PPT file · Web view2013-01-11 · CHAPTER 1 The Science of Macroeconomics

In this chapter, you will learn:…the meaning and measurement of the

most important macroeconomic statistics: 2.1 Gross Domestic Product (GDP) 2.2 The Consumer Price Index (CPI) 2.3. The unemployment rate

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3CHAPTER 2 The Data of Macroeconomics

2.1 Gross Domestic Product: Expenditure and Income

Two ways to look at GDP: Total expenditure on domestically-produced

final goods and services. Total income earned by domestically-located

factors of production.

Expenditure equals income because every dollar spent by a buyer becomes income to the seller.

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4CHAPTER 2 The Data of Macroeconomics

The Circular Flow

Households Firms

Goods

Labor

Expenditure ($)

Income ($)

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5CHAPTER 2 The Data of Macroeconomics

Value added

Value added: The value of output minus the value of the intermediate goods used to produce that output

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6CHAPTER 2 The Data of Macroeconomics

Final goods, value added, and GDP

GDP = value of final goods produced = sum of value added at all stages of production.

The value of the final goods already includes the value of the intermediate goods, so including intermediate and final goods in GDP would be double-counting.

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7CHAPTER 2 The Data of Macroeconomics

Table 2.1 GDP and the Components of Expenditure: 2008Mankiw and Scarth: Macroeconomics, Canadian Fourth EditionCopyright © 2011 by Worth Publishers

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8CHAPTER 2 The Data of Macroeconomics

The expenditure components of GDP consumption, C investment, I government spending, G net exports, NX

An important identity:

Y = C + I + G + NX

aggregate expenditure

value of total output

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9CHAPTER 2 The Data of Macroeconomics

Consumption (C)

durable goods nondurable goods services

definition: The value of all goods and services bought by households. Includes:

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10CHAPTER 2 The Data of Macroeconomics

Investment (I) Spending on goods bought for future use

(i.e., capital goods) Includes:

Business fixed investment

Residential fixed investment

Inventory investment

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11CHAPTER 2 The Data of Macroeconomics

Investment vs. CapitalNote: Investment is spending on new capital.

Example (assumes no depreciation): January 1, 2012:

economy has $500b worth of capital during 2012:

investment = $60b January 1, 2013:

economy will have $560b worth of capital

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12CHAPTER 2 The Data of Macroeconomics

Government spending (G) G includes all government spending on goods

and services. G excludes transfer payments

because they do not represent spending on goods and services.

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NOW YOU TRY: An expenditure-output puzzle?Suppose a firm: produces $10 million worth of final goods only sells $9 million worth

Does this violate the expenditure = output identity?

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14CHAPTER 2 The Data of Macroeconomics

GNP vs. GDP Gross National Product (GNP):

Total income earned by the nation’s factors of production, regardless of where located

Gross Domestic Product (GDP):Total income earned by domestically-located factors of production, regardless of nationality

GNP – GDP = factor payments from abroad minus factor payments to

abroad

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15CHAPTER 2 The Data of Macroeconomics

Real vs. nominal GDP GDP is the value of all final goods and services

produced. nominal GDP measures these values using

current prices. real GDP measure these values using the prices

of a base year.

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16CHAPTER 2 The Data of Macroeconomics

GDP Deflator Inflation rate: the percentage increase in the

overall level of prices One measure of the price level: GDP deflator

Definition:

Nominal GDPGDP deflator = 100

Real GDP

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17CHAPTER 2 The Data of Macroeconomics

Chain-Weighted Real GDP Over time, relative prices change, so the base

year should be updated periodically. In essence, chain-weighted real GDP

updates the base year every year, so it is more accurate than constant-price GDP.

Your textbook usually uses constant-price real GDP, because: the two measures are highly correlated. constant-price real GDP is easier to compute.

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18CHAPTER 2 The Data of Macroeconomics

2.2 Consumer Price Index (CPI)

A measure of the overall level of prices In Canada, it is published by Statistics Canada

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19CHAPTER 2 The Data of Macroeconomics

How CPI is constructed1. Survey consumers to determine composition of

the typical consumer’s “basket” of goods

2. Every month, collect data on prices of all items in the basket; compute cost of basket

3. CPI in any month equals

Cost of basket in that monthCost of basket in base period

100

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20CHAPTER 2 The Data of Macroeconomics

Why the CPI may overstate inflation Substitution bias

Introduction of new goods

Unmeasured changes in quality

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21CHAPTER 2 The Data of MacroeconomicsFigure 2.3 The Inflation Rate as Measured by the GDP Deflator and the CPIMankiw and Scarth: Macroeconomics, Canadian Fourth EditionCopyright © 2011 by Worth Publishers

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22CHAPTER 2 The Data of Macroeconomics

2.3 Measuring Joblessness: Categories of the population employed

unemployed

labor force

not in the labor force

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23CHAPTER 2 The Data of Macroeconomics

Figure 2.4 The Three Groups of the PopulationMankiw and Scarth: Macroeconomics, Canadian Fourth EditionCopyright © 2011 by Worth Publishers

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24CHAPTER 2 The Data of Macroeconomics

Two important labor force concepts

unemployment rate

labor force participation rate

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25CHAPTER 2 The Data of Macroeconomics

Figure 2.5 Okun’s LawMankiw and Scarth: Macroeconomics, Canadian Fourth EditionCopyright © 2011 by Worth Publishers

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2.4 Chapter Summary Gross Domestic Product (GDP) measures both

total income and total expenditure on the economy’s output of goods & services.

Nominal GDP values output at current prices; real GDP values output at constant prices. Changes in output affect both measures, but changes in prices only affect nominal GDP.

GDP is the sum of consumption, investment, government purchases, and net exports.

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Chapter Summary The overall level of prices can be measured

by either: the Consumer Price Index (CPI),

the price of a fixed basket of goods purchased by the typical consumer, or

the GDP deflator, the ratio of nominal to real GDP

The unemployment rate is the fraction of the labor force that is not employed.

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28CHAPTER 2 The Data of Macroeconomics

Homework

End of chapter 2 in textbook:

Questions for review: 1,2,3,4

Problems & Applications: 2, 3, 4, 6, 7, 8 & 9