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Chapter 2: The Data of Macroeconomics

Chapter 2: The Data of Macroeconomics. Stock vs. Flow. Stock: quantity measured at a given point in time Wealth Debt Budget Flow: quantity measured per unit of time Income Employment Price. The Circular Flow on Income and Product. Households: sell labor resources to earn income

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Chapter 2: The Data of Macroeconomics

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  1. Chapter 2:The Data of Macroeconomics

  2. Stock vs. Flow • Stock: quantity measured at a given point in time • Wealth • Debt • Budget • Flow: quantity measured per unit of time • Income • Employment • Price

  3. The Circular Flow on Income and Product • Households: • sell labor resources to earn income • spend income to buy products • Firms: • buy labor resources to produce products • sell products to earn income

  4. The Circular Flow on Income and Product Income Payment Labor Resources Labor Market Households Firms Product Market Products Consumption Expenditure

  5. Gross Domestic Product • Market value of all final goods and services an economy produces in a current time period (year or quarter) • Total income = Total expenditure • Total value-added (value of output minus value of inputs at each production stage)

  6. GDP Adjustments • The GDP excludes the following items: • Intermediate goods: avoid double counting • Used goods: already counted • Illegal goods and services: not to be produced • Self-produced goods and services: non-market transactions

  7. GDP Adjustments • Treatment of inventories: • Accumulation is treated as “expenditure,” thus reducing GDP • Reduction is treated as a purchase (+) and a disinvestment (-), hence offsetting each other

  8. GDP Adjustments • Imputation: estimation of the value of services • Market rent for owner-occupied homes • Cost of provision for government services Note: Imputation is not applied to other services such as private transportation

  9. GDP Adjustments • Seasonal adjustment: • GDP increases throughout the year, reaching a peak in the fourth quarter and then falling in the first quarter • We use a statistical technique to “smooth” seasonal variations

  10. GDP Calculations • Nominal GDP = Current year prices * Current year quantities • Real GDP = Base year prices * Current Year quantities • GDP Deflator = Nominal GDP / Real GDP, representing the general price level

  11. Base Year Determination • Real GDP: • Base year changes every five years • Chain-Weighted Real GDP: • Base year changes continuously over time

  12. Components of GDP • Nominal GDP = Consumption + Investment + Government purchases + Net Exports: exports less imports Y = C + I + G + NX (1997 data in %: 100 = 68 + 15 + 18 –1)

  13. Data

  14. National Income Accounting GNP: Gross National Product = GDP + Factor payments from abroad • Factor payments to abroad

  15. National Income Accounting NNP: Net National Products = GNP • Depreciation or Consumption of Fixed Capital (about 10%)

  16. National Income Accounting NI: National Income = NNP Indirect Business Taxes (e.g., sales tax; about 10%)

  17. National Income Accounting PI: Personal Income = NI - Corporate Profits - Social Insurance Contributions - Net Interest + Dividends + Gov’t Transfer Payments to Individuals + personal Interest Income

  18. National Income Accounting DPI: Disposable Personal Income = PI - Personal Income Taxes

  19. Measuring Cost of Living • Consumer Price Index: • Average weighted prices of some 400 consumer products sold in urban areas around the nation • CPI = (current year market basket / base year market basket)*100

  20. GDP Deflator vs. CPI • Variable weights vs. Fixed weights • All products vs. Selected products • Domestic products vs. Domestic and imported products

  21. GDP Deflator vs. CPI

  22. Does CPI Overstates Inflation? • CPI tends to overstate inflation because • Substitution for less expensive goods is not considered in the fixed market basket • New goods are continuously introduced in the market • Improvement in the quality of goods is not considered

  23. Population vs. Labor Force • Population = Labor force + + Not in labor force In 1997, 203.1 million • Labor force = Employed + Unemployed In 1997, 129.6 + 6.7 = 136.3 million

  24. Population vs. Labor Force

  25. Labor Market Data • Unemployment rate = unemployed as % of labor force In 1997, (6.7/136.3)*100 = 4.9% • Labor force participation rate = labor force as % of adult population In 1997, (136.3/203.1)*100 = 67.1%

  26. Unemployment Conditions • Members of the labor force • Out of work • Actively looking for work

  27. The Okun’s Law • For any percentage point increase in the unemployment rate, the real GDP growth rate falls by 2 percent Change in real GDP = 3% - 2(change in unemployment rate) • Example: if unemployment increases from 4 to 6%, GDP growth rate would fall from 3 to –1%

  28. Growth-Unemployment Trade-off

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