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
– spend income to buy products
Firms:
– buy labor resources to produce products
– sell products to earn income
The Circular Flow on Income and Product
Income Payment
Labor Resources
Labor Market
Households
Firms
Product Market
Products
Consumption Expenditure
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)
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
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
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
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
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
Base Year Determination
Real GDP:
– Base year changes every five years
Chain-Weighted Real GDP:
– Base year changes continuously over
time
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)
Data
National Income Accounting
GNP: Gross National Product
= GDP
+ Factor payments from abroad
- Factor payments to abroad
National Income Accounting
NNP: Net National Products
= GNP
- Depreciation or Consumption of Fixed Capital
(about 10%)
National Income Accounting
NI: National Income
= NNP
Indirect Business Taxes (e.g., sales tax; about 10%)
National Income Accounting
PI: Personal Income
= NI
- Corporate Profits
- Social Insurance Contributions
- Net Interest
+ Dividends
+ Gov’t Transfer Payments to Individuals
+ personal Interest Income
National Income Accounting
DPI: Disposable Personal Income
= PI
- Personal Income Taxes
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
GDP Deflator vs. CPI
Variable weights vs. Fixed weights
All products vs. Selected products
Domestic products vs. Domestic and imported
products
GDP Deflator vs. CPI
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
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
Population vs. Labor Force
6.7
Unemployed
Not in the labor
force
66.8
129.6
Employed
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%
Unemployment Conditions
Members of the labor force
Out of work
Actively looking for work
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%
Growth-Unemployment Trade-off