EC214 - Chapter 2

The Data of Macroeconomics

The Data of Macroeconomics

 IN THIS CHAPTER, YOU WILL LEARN:

…the meaning and measurement of the

most important macroeconomic statistics:
 gross domestic product (GDP)
 the consumer price index (CPI)
 the unemployment rate

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 Gross Domestic Product:
Expenditure and Income
Two definitions:
 Total expenditure on domestically-produced
final goods and services.
 Total income earned by domestically-located
factors of production.

Expenditure equals income because

every dollar a buyer spends
becomes income to the seller.

CHAPTER 2 The Data of Macroeconomics 2

 The Circular Flow
Income ($)

Labor

Households Firms

Goods

Expenditure ($)

CHAPTER 2 The Data of Macroeconomics 3

 Value added

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

CHAPTER 2 The Data of Macroeconomics 4

NOW YOU TRY
Identifying value added
 A farmer grows a bushel of wheat
and sells it to a miller for $1.00.
 The miller turns the wheat into flour
and sells it to a baker for $3.00.
 The baker uses the flour to make a loaf of
bread and sells it to an engineer for $6.00.
 The engineer eats the bread.
Compute value added at each stage
of production and GDP
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 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.

CHAPTER 2 The Data of Macroeconomics 6

 The expenditure components of GDP
 consumption, C
 investment, I
 government spending, G
 net exports, NX
An important identity:
Y = C + I + G + NX

value of aggregate
total output expenditure
CHAPTER 2 The Data of Macroeconomics 7
 Consumption (C)
definition: The value of all  durable goods
goods and services bought last a long time
by households. Includes: e.g., cars, home
appliances
 nondurable goods
last a short time
e.g., food, clothing
 services
intangible items
purchased by
consumers
e.g., dry cleaning,
air travel
CHAPTER 2 The Data of Macroeconomics 8
 U.S. consumption, 2011

$ billions % of GDP

Consumption 10,726 71.1

Durables 1,163 7.7

Nondurables 2,484 16.5

Services 7,079 46.9

CHAPTER 2 The Data of Macroeconomics 9

 Investment (I)
 Spending on capital, a physical asset used in
future production
 Includes:
 Business fixed investment
Spending on plant and equipment
 Residential fixed investment
Spending by consumers and landlords on
housing units
 Inventory investment
The change in the value of all firms’ inventories

CHAPTER 2 The Data of Macroeconomics 10

 U.S. Investment, 2011

$ billions % of GDP

Investment 1,916 12.7

Business fixed 1,532 10.2

Residential 338 2.2

Inventory 46 0.3

CHAPTER 2 The Data of Macroeconomics 11

 Investment vs. Capital
Note: Investment is spending on new capital.
Example (assumes no depreciation):
 1/1/2012:
Economy has $10 trillion worth of capital
 during 2012:
Investment = $2 trillion
 1/1/2013:
Economy will have $12 trillion worth of capital

CHAPTER 2 The Data of Macroeconomics 12

 Stocks vs. Flows
Flow Stock
A stock is a
quantity measured
at a point in time.
E.g.,
“The U.S. capital stock
was $10 trillion on
January 1, 2012.”
A flow is a quantity measured per unit of time.
E.g., “U.S. investment was $2 trillion during 2012.”

CHAPTER 2 The Data of Macroeconomics 13

 Stocks vs. Flows - examples

stock flow

a person’s
a person’s wealth
annual saving

# of people with # of new college

college degrees graduates this year

the govt debt the govt budget deficit

CHAPTER 2 The Data of Macroeconomics 14

NOW YOU TRY
Stock or Flow?
 the balance on your credit card statement
 how much you study economics outside of class
 the size of your compact disc or MP3 collection
 the inflation rate
 the unemployment rate

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 Government spending (G)
 G includes all government spending on goods
and services.
 G excludes transfer payments
(e.g., unemployment insurance payments),
because they do not represent spending on
goods and services.

CHAPTER 2 The Data of Macroeconomics 16

U.S. Government Spending, 2011

$ billions % of GDP

Govt spending 3,031 20.1

- Federal 1,233 8.2

Non-defense 408 2.7

Defense 825 5.5

- State & local 1,798 11.9

CHAPTER 2 The Data of Macroeconomics 17

 Net exports (NX)
 NX = exports – imports
 exports: the value of g&s sold to other
countries
 imports: the value of g&s purchased from
other countries
 Hence, NX equals net spending from abroad on
our g&s

CHAPTER 2 The Data of Macroeconomics 18

U.S. Net Exports, 2011
$ billions % of GDP
Net exports of g & s –579 –3.8
Exports 2,086 13.8
Goods 1,473 9.8
Services 612 4.1

Imports 2,664 17.7

Goods 2,238 14.8
Services 426 2.8
CHAPTER 2 The Data of Macroeconomics 19
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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 Why output = expenditure

 Unsold output goes into inventory,

and is counted as “inventory investment”…
whether or not the inventory buildup was
intentional.
 In effect, we are assuming that
firms purchase their unsold output.

CHAPTER 2 The Data of Macroeconomics 21

 GDP:
An important and versatile concept
We have now seen that GDP measures:
 total income
 total output
 total expenditure
 the sum of value added at all stages
in the production of final goods

CHAPTER 2 The Data of Macroeconomics 22

 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
 Examples of factor payments: wages, profits,
rent, interest & dividends on assets
CHAPTER 2 The Data of Macroeconomics 23
NOW YOU TRY
Discussion Question

In your country,
which would you
want to be bigger,
GDP or GNP?
Why?

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GNP vs. GDP in select countries, 2010
GNP – GDP
Country GNP GDP
(% of GDP)
Bangladesh 109,695 100,357 9.3
Japan 5,601,557 5,458,837 2.6
China 5,957,012 5,926,612 0.5
United States 14,635,600 14,586,736 0.3
India 1,712,645 1,727,111 -0.8
Canada 1,549,652 1,577,040 -1.7
Greece 292,874 301,083 -2.7
Iraq 77,842 82,150 -5.2
Ireland 171,260 206,612 -17.1

GNP and GDP in millions of current U.S. dollars

 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.

CHAPTER 2 The Data of Macroeconomics 26

NOW YOU TRY
Real and Nominal GDP

2010 2011 2012

P Q P Q P Q

good A $30 900 $31 1,000 $36 1,050

good B $100 192 $102 200 $100 205

 Compute nominal GDP in each year.

 Compute real GDP in each year using 2010 as
the base year.
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NOW YOU TRY
Answers

nominal GDP multiply Ps & Qs from same year

2010: $46,200 = $30  900 + $100  192
2011: $51,400
2012: $58,300

real GDP multiply each year’s Qs by 2010 Ps

2010: $46,200
2011: $50,000
2012: $52,000 = $30  1050 + $100  205

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 Real GDP controls for inflation
 Changes in nominal GDP can be due to:
 changes in prices
 changes in quantities of output produced
 Changes in real GDP can only be due to
changes in quantities, because real GDP is
constructed using constant base-year prices.

CHAPTER 2 The Data of Macroeconomics 29

 U.S. Nominal and Real GDP,
1960-2012
$16.000

$14.000

$12.000
(billions)

$10.000

$8.000 Real GDP

(in 2005 dollars)
$6.000

$4.000
Nominal GDP
$2.000

$0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
 GDP Deflator
 Inflation rate: the percentage increase in the
overall level of prices
 One measure of the price level: GDP deflator
Definition:
Nominal GDP
GDP deflator = 100 
Real GDP

CHAPTER 2 The Data of Macroeconomics 31

NOW YOU TRY
GDP deflator and inflation rate

GDP Inflation
Nom. GDP Real GDP
deflator rate

2010 $46,200 $46,200 n.a.

2011 51,400 50,000

2012 58,300 52,000

 Use your previous answers to compute

the GDP deflator in each year.
 Use GDP deflator to compute the inflation rate
from 2010 to 2011, and from 2011 to 2012.
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NOW YOU TRY
Answers

GDP Inflation
Nom. GDP Real GDP
deflator rate

2010 $46,200 $46,200 100.0 n.a.

2011 51,400 50,000 102.8 2.8%

2012 58,300 52,000 112.1 9.1%

 Use your previous answers to compute

the GDP deflator in each year.
 Use GDP deflator to compute the inflation rate
from 2010 to 2011, and from 2011 to 2012.
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 Two arithmetic tricks for
working with percentage changes

1. For any variables X and Y,

percentage change in (X  Y )
 percentage change in X
+ percentage change in Y

EX: If your hourly wage rises 5%

and you work 7% more hours,
then your wage income rises
approximately 12%.
CHAPTER 2 The Data of Macroeconomics 36
 Two arithmetic tricks for
working with percentage changes

2. percentage change in (X/Y )

 percentage change in X
 percentage change in Y

EX: GDP deflator = 100  NGDP/RGDP.

If NGDP rises 9% and RGDP rises 4%,
then the inflation rate is approximately 5%.

CHAPTER 2 The Data of Macroeconomics 37

 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.
CHAPTER 2 The Data of Macroeconomics 38
 Consumer Price Index (CPI)

 A measure of the overall level of prices

 Published by the Bureau of Labor Statistics
(BLS)
 Uses:
 tracks changes in the typical household’s
cost of living
 adjusts many contracts for inflation (“COLAs”)
 allows comparisons of dollar amounts over time

CHAPTER 2 The Data of Macroeconomics 39

 How the BLS constructs the CPI
1. 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 month

100 
Cost of basket in base period

CHAPTER 2 The Data of Macroeconomics 40

NOW YOU TRY
Compute the CPI

Basket: 20 pizzas, 10 compact discs

prices: For each year, compute

pizza CDs  the cost of the basket
2012 $10 $15  the CPI (use 2012 as
2013 11 15 the base year)
2014 12 16  the inflation rate from
2015 13 15 the preceding year

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NOW YOU TRY
Answers

Cost of Inflation
basket CPI rate
2012 $350 100.0 n.a.
2013 370 105.7 5.7%
2014 400 114.3 8.1%
2015 410 117.1 2.5%

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The composition of the CPI’s “basket”
Food and bev. 7.1%
16.9% 6.0%
Housing
3.2%
Apparel 3.6%
3.6% 3.4%
Transportation

Medical care

Recreation

Education 15.3%

Communication

Other goods 41.0%

and services
 Why the CPI may overstate inflation
 Substitution bias:
The CPI uses fixed weights, so it cannot reflect
consumers’ ability to substitute toward goods
whose relative prices have fallen.
 Introduction of new goods:
The introduction of new goods makes consumers
better off and, in effect, increases the real value of
the dollar. But it does not reduce the CPI, because
the CPI uses fixed weights.
 Unmeasured changes in quality:
Quality improvements increase the value of the
dollar but are often not fully measured.
CHAPTER 2 The Data of Macroeconomics 46
 The size of the CPI’s bias
 In 1995, a Senate-appointed panel of experts
estimated that the CPI overstates inflation by
about 1.1% per year.
 So the BLS made adjustments to reduce the
bias.
 Now, the CPI’s bias is probably under 1% per
year.

CHAPTER 2 The Data of Macroeconomics 47

NOW YOU TRY
Discussion Questions
1. If your grandmother receives Social Security,
how is she affected by the CPI’s bias?
2. Where does the government get the money to pay
COLAs to Social Security recipients?
3. If you pay income and Social Security taxes,
how does the CPI’s bias affect you?
4. Is the government giving your grandmother
too much of a COLA?
5. How does your grandmother’s “basket” differ from
the CPI’s? Does this affect your answer to Q4? 48
 CPI vs. GDP Deflator
Prices of capital goods:
 included in GDP deflator (if produced
domestically)
 excluded from CPI
Prices of imported consumer goods:
 included in CPI
 excluded from GDP deflator
The basket of goods:
 CPI: fixed
 GDP deflator: changes every year
CHAPTER 2 The Data of Macroeconomics 49
 Two measures of inflation in the U.S.
14
CPI
12
from 12 months earlier
Percentage change

10

0
GDP deflator
-2
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
 Categories of the population

 employed
working at a paid job
 unemployed
not employed but looking for a job
 labor force
the amount of labor available for producing
goods and services; all employed plus
unemployed persons
 not in the labor force
not employed, not looking for work
CHAPTER 2 The Data of Macroeconomics 51
 Two important labor force concepts
 unemployment rate
percentage of the labor force that is unemployed
 labor force participation rate
the fraction of the adult population that
“participates” in the labor force, i.e. is working or
looking for work

CHAPTER 2 The Data of Macroeconomics 52

NOW YOU TRY
Computing labor statistics

U.S. adult population by group, May 2012

Number employed = 142.3 million
Number unemployed = 12.7 million
Adult population = 243.0 million

Use the above data to calculate

 the labor force
 the number of people not in the labor force
 the labor force participation rate
 the unemployment rate
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NOW YOU TRY
Answers

data: E = 142.3, U = 12.7, POP = 243.0

 labor force
L = E + U = 142.3 + 12.7 = 155.0
 not in labor force
NILF = POP – L = 243 – 155 = 88
 unemployment rate
U/L x 100% = (12.7/155.0) x 100% = 8.2%
 labor force participation rate
L/POP x 100% = (155/243) x 100% = 63.8%
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 The establishment survey
 The BLS obtains a second measure of
employment by surveying businesses,
asking how many workers are on their payrolls.
 Neither measure is perfect, and they
occasionally diverge due to:
 treatment of self-employed persons
 new firms not counted in establishment survey
 technical issues involving population inferences
from sample data

CHAPTER 2 The Data of Macroeconomics 57

 Two measures of employment growth
6%

4%
from 12 months earlier
Percentage change

2%

0%

-2%

-4% household survey

establishment survey
-6%
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
 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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