Tutorial CHAP02

8/7/2019 Tutorial CHAP02

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Chapter Two 1

CHAPTER 2

The Data of Macroeconomics

A PowerPointTutorial

To Accompany

MACROECONOMICS, 6th. ed.N. Gregory Mankiw

By

Mannig J. Simidian


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Chapter Two 3

Two ways

of viewing GDP

Total income of everyone in the economy

Total expenditure on the economys

output of goods and services

Households Firms

Income $

Labor

Goods

Expenditure $

For the economy as a whole, income must equal expenditure.

GDP measures the flow of dollars in the economy.

Income, Expenditure,

And the Circular Flow


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Chapter Two 4

1) To compute the total value of different goods and services, thenational income accounts use market prices.

Thus, if

$0.50 $1.00

GDP = (Price ofapples v Quantity ofapples)

+ (Price oforanges v Quantity oforanges)

= ($0.50 v 4)+ ($1.00 v 3)

GDP = $5.00

2) Used goods are not included in the calculation of GDP.3) The treatment of inventories depends on if the goods are stored or

if they spoil. If the goods are stored, their value is included in GDP.

If they spoil, GDP remains unchanged. When the goods are finally sold

out of inventory, they are considered used goods (and are not counted).


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Chapter Two 5

4) Intermediate goods are not counted in GDP only the value offinal goods. Reason: the value of intermediate goods is already

included in the market price. Value addedof a firm equals the

value of the firms output less the value of the intermediate goods

the firm purchases.

5) Some goods are not sold in the marketplace and therefore dont

have market prices. We must use theirimputed value as an estimate

of their value. For example, home ownership and government services.


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Chapter Two 6

The value of final goods and services measured at current prices is called

nominal GDP. It can change over time, either because there is a change

in the amount (real value) of goods and services or a change in the prices

of those goods and services.

Hence, nominal GDP Y= Pvy, wherePis the price level andy is real

outputand remember we use output and GDP interchangeably.

Real GDPor,y = YzPis the value of goods and services measured usinga constant set of prices.This distinction between real and nominal can also be applied to other

monetary values, like wages. Nominal (or money) wages can be denoted

by Wand decomposed into a real value (w) and a price variable (P).

Hence, W= nominal wage =P ww = real wage = w/P

This conversion from nominal to real units allows us to eliminate the

problems created by having a measuring stick (dollar value) that

essentially changes length over time, as the price level changes.


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Chapter Two 7

Lets see how real GDP is computed in ourapple and

orange economy.

For example, if we wanted to compare output in 2006 and outputin 2007, we would obtain base-year prices, such as 2006prices.

Real GDP in 2006 would be:

(2006 Price ofApples v 2006 Quantity ofApples)+

(2006 Price ofOranges v 2006 Quantity ofOranges).


(2006 Price ofApples v 2007 Quantity ofApples)+

(2006 Price ofOranges v 2007 Quantity ofOranges).


(2006 Price ofApples v 2008 Quantity ofApples)+(2006 Price ofOranges v 2008 Quantity ofOranges).

Note that 2006prices are used to compute real GDP for all three

years. Because prices are held constant from year to year, real

GDP varies only when the quantities vary.


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Chapter Two 8

Nominal GDPmeasures the current dollar value of the output of

the economy.

Real GDPmeasures output valued at constant prices.

The GDP deflator, also called the implicit price deflator for GDP,

measures the price of output relative to its price in the base year. It

reflects whats happening to the overall level of prices in the economy.

GDP Deflator = Nominal GDP

Real GDP

THE IMPLICIT PRICE DEFLATOR FOR GDP


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Chapter Two 9

In some cases, it is misleading to use base-year prices thatprevailed 10 or 20 years ago (i.e., computers and

college). In 1995, the Bureau of Economic Analysis

decided to use chain-weightedmeasures of

real GDP. The base year changes continuously

over time. This new chain-weightedmeasure is better than the more

traditional measure because it

ensures that prices will not be

too out of date.

Average prices in 2006

and 2007 are used to measure

real growth from 2006 to 2007.

Average prices in 2007 and 2008

are used to measure real growth from

2007 to 2008, and so on. These growth

rates are united to form a chain that is

used to compare output between any two

dates.


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Chapter Two 10

Government

purchases of goods

and services

Y= C + I + G + NXY= C + I + G + NX

Total demand

for domestic

output (GDP)

is composed

of

Consumptionspending by

households

Investment

spending by

businesses and

households Net exports

or net foreign

demand

This is the called the national income accounts identity.


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Chapter Two 11

To see how the alternative measures of income relate to one

another, we start with GDP and add or subtract various quantities.

To obtaingross national product (GNP), we add receipts of factor

income (wages, profit, and rent) from the rest of the world and

subtract payments of factor income to the rest of the world.

GNP= GDP+ Factor Payments from Abroad - Factor Payments to AbroadWhereas GDP measures the total income produced domestically, GNP

measures the total income earned by nationals (residents of a nation).

To obtain net national product (NNP), we subtract the depreciation of

capitalthe amount of the economys stock of plants, equipment, andresidential structures that wears out during the year:

NNP = GNP - Depreciation


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Chapter Two 12

The Consumer Price Index (CPI) turns the prices

of many goods and services into a single index

measuring the overall level of prices. The Bureau

of Labor Statistics weighs different items by

computing the price of a basket of goods andservices produced by a typical customer. The CPI

is the price of this basket of goods relative to the

price of the same basket in some base year.


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Chapter Two 13

Lets see how the CPI would be computed in our

apple and orange economy.

For example, suppose that the typical consumer buys 5 apples and 2

oranges every month. Then the basket of goods consists of 5 apples

and 2 oranges, and the CPI is:

CPI = ( 5 v Current Price ofApples)+ (2 v Current Price ofOranges)

( 5 v 2006 Price ofApples)+ (2 v 2006 Price ofOranges)

In this CPI calculation, 2006 is the base year. The index tells how

much it costs to buy 5 apples and 2 oranges in the current year relative

to how much it cost to buy the same basket of fruit in 2006.


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Chapter Two 14

The GDP deflator measures the prices of all goods produced, whereas

the CPI measures prices of only the goods and services bought by

consumers. Thus, an increase in the price of goods bought only by firms

or the government will show up in the GDP deflator, but not in the CPI.

Also, another difference is that the GDP deflator includes only those

goods and services produced domestically. Imported goods are not a

part of GDP and therefore dont show up in the GDP deflator.

The final difference is the way the two aggregate the prices in the

economy. The CPI assigns fixed weights to the prices of different

goods, whereas the GDP deflator assigns changing weights.


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Chapter Two 15

The laborforce is defined as the sum of the employed and

unemployed, and the unemployment rate is defined as the

percentage of the labor force that is unemployed.

The labor-force participation rate is the percentage of the adultpopulation who are in the labor force.

Unemployment Rate = Number of Unemployed

Labor Forcev 100

Labor-Force Participation Rate = Labor Force

Adult Populationv 100


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Chapter Two 16

The Bureau of Labor Statistics (BLS) computes these statistics for the

overall population and for groups within the population: men

and women, whites and blacks, teenagers, and prime-age workers.

Labor Force = 147.4 million

Unemployment rate = 5.5%

Labor-Force Participation Rate = 66.0%


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Chapter Two 17

The BLS conducts two surveys of labor market,and therefore produces two measures of total

employment. The establishment survey estimates the

number of workers firms have on their payrolls.

The household survey estimates the number of people whosay they are working.

Two measures of employment are not necessarily identical,

although positively correlated. The reason? The surveys

measure different things and the surveys in general, areimperfect.

Some economists believe that the establishment survey is

more accurate because it has a larger sample size. Bottom

line: all economic statistics are imperfect!


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Chapter Two 18

National income accounts identity

Consumption

Investment

Government purchases

Net exports

Labor force Labor-

force participation rate

Gross domestic product (GDP)

Consumer Price Index (CPI)

Unemployment rate

National income accountingStocks and flows

Value added

Imputed value

Nominal versus real GDP

GDP deflator

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