Measuring Macroeconomic Outcomes:
(“Economics” – Chapters 6 and 7)
How can we measure/observe macroeconomic outcomes of
a society?
 There is tremendous variability in regards to
macroeconomic outcomes across countries
 Further, it is NOT the case that there are simply
“extremes” of “haves” and “have nots”
 Rather, the actual values of most measures of
economic outcomes vary continually across countries
Recall our definition of macroeconomics…
Macroeconomics – the branch of economics which studies
the functioning and performance of a society’s economy as
a whole (often with a focus on levels of and changes in
aggregate measures such as the unemployment rate,
inflation rate, and Gross Domestic Product growth rate).
 When observing macroeconomic outcomes, the focus is
often on “current values of” or “changes in value over
time in” measures such as “inflation rate,”
“unemployment rate,” and “GDP.”
Gross Domestic Product (GDP) – the total market value
of final goods and services produced within an economy in
a given year.
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GDP is…
 “the total market value” => weight different items
according to market price
 “of final” => to avoid ‘double counting,’ only consider
the value of items at their ‘final stage’ (and not at all
‘intermediate stages’)
 e.g., Ford buys $1,500 worth of steel to build a
$25,000 car
 the $25,000 car “counts” toward GDP, but the
$1,500 steel does not => the $25,000 price tag of
the car reflects the value of the steel (if we counted
both the final good and all intermediate goods, we
would be “double counting” the intermediate goods)
 intermediate good – a good used in the production
process that is not a final good or service
 “goods and services” => include both ‘tangible items’
[e.g., food, clothing, cars, computers] and ‘intangible
items’ [e.g., haircut, cleaning services, legal services]
 “produced” => for the current period, do not include all
items sold today, but rather only those produced today
[e.g., if Ford produces and sells a car this year, it is
included in GDP; if I sell a used car this year, it is not
included in GDP]
 “within an economy” => include all economic activity
which takes places within (and only within) the
geographic confines of the country [e.g., when a
Mexican citizen works in the U.S., the value of the
production is included in U.S. GDP not Mexican GDP]
 “in a given year.” => include all economic activity
which takes place during the current year
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 Recognize that essentially all of the goods and services
which are produced are also purchased (picture the
circular flow diagram)
 From here we can decompose these purchases into four
different categories…
1. consumption expenditures ( C ) – purchases of newly
produced goods and services by households
2. private investment expenditures ( I ) – purchases of
newly produced goods and services by firms (e.g.,
spending on new plants and equipment)
3. government purchases ( G ) – purchases of newly
produced goods and services by local, state, or federal
government
4. net exports ( NX ) – exports minus imports
 export – a good or service produced in the home
country and sold in a foreign country
 import – a good or service produced in a foreign
country and purchased by someone in the home
country
 trade deficit – the excess of imports over exports
 trade surplus – the excess of exports over imports
…and recognize that GDP ( Y ) can be expressed as:
Y  C  I  G  NX
 The “left side” is production, while the “right side” is
essentially consumption
U.S. GDP (4th Quarter 2009; billions of dollars at annual rates)
C
I
G
NX
GDP
$10,234
$1,716
$2,960
–$449
$14,461
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An Expanded Circular Flow Diagram:
Households
Supply of
factors of
production
Consumer
Expenditures
Income
consumption
of finished
goods and
services
Taxes
Markets for
“Factors of
Production”
factors of
production
hired
Wages and
Rents paid
factors of
production
hired
Government
Taxes
Firms
Finished goods
and services
supplied
Markets for
“Goods and
Services”
exports
Rest of
World
imports
Firm
Revenues
output of
finished
goods and
services
 Provides a simplified representation of the roles played
by government and the foreign sector
 Government:
 households and firms pay taxes to the government
 government hires some inputs from the market for
factors of production (e.g., government workers)
 government provides some finished goods and
services to households (e.g., education and healthcare)
 Foreign Sector:
 some goods consumed by domestic households are
produced elsewhere (imports)
 some goods produced by domestic firms are consumed
elsewhere (exports)
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GDP as a “proxy measure” of “economic well-being”:
A “higher value of GDP” is preferable, insomuch as it
indicates that people are able to “consume more stuff”…
Historical values of GDP in U.S.:
Figures are from: www.measuringworth.com/usgdp
 1912: $37.4 billion
 1945: $223.0 billion => 6.0 times larger than 1912
 1978: $2,293.8 billion => 61.3 times larger than 1912
 2011: $15,094.0 billion => 403.9 times larger than 1912
So, were people consuming “403.9 times more stuff” in
2011 than in 1912!?
Real GDP versus Nominal GDP:
 GDP can increase due to: (i) a greater amount of stuff
being produced or (ii) a general increase in the price at
which stuff is traded…
 When examining the value of GDP over time, it is often
desirable to “take out changes which result from changes
in price”
 Real GDP essentially answers the hypothetical question:
“What would be the value of goods/service produced in a
particular year, if we valued them at the prices which
prevailed in some other base year?”
Real GDP – a measure of GDP that controls for changes in
prices (i.e., in each period goods and services are valued
according to a set of common, constant prices).
Nominal GDP – the value of GDP at current prices (i.e., in
each period goods and service are valued according to
current prices).
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Previously reported values of U.S. GDP were “nominal
values,” which increased in part due to increases in prices
Historical values of Real GDP in U.S. (in 2005 dollars):
 1912: $576.9 billion
 1945: $2,012.4 billion => 3.5 times larger than 1912
 1978: $5,677.6 billion => 9.8 times larger than 1912
 2011: $13,315.1 billion => 23.1 times larger than 1912
So, were people consuming “23.1 times more stuff” in
2011 than in 1912!?
The “absolute, total amount of output” is “23.1 times
more,” but there are more people. Population was:
 95.3 million in 1912
 139.9 million in 1945
 222.6 million in 1978
 312.0 million in 2011 (3.3 times as many people)
Real GDP Per Capita – the value of Real GDP divided by
total population of the country
Historical values of Real GDP Per Capita in U.S.:
 1912: $6,051
 1945: $14,382 => 2.4 times larger than 1912
 1978: $25,503 => 4.2 times larger than 1912
 2011: $42,671 => 7.1 times larger than 1912
So, in fact, people were able to consume about “7.1 times
more stuff” in 2011 than in 1912, which still seems like a
very big increase.
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Differences in GDP across countries…
Industrially Advanced Countries (IAC’s) – high income
nations that have market economies based on large stocks
of technologically advanced capital and a well educated
labor force (e.g., U.S., Canada, Australia, New Zealand,
Japan)
Less Developed Countries (LDC’s) – nations without
large stocks of technologically advanced capital and a well
educated labor force (e.g., Mozambique, Chile, Panama,
Thailand, Bolivia, India, Rwanda, Ethiopia, Bangladesh)
But, there are tremendous differences in GDP between the
“most prosperous and least prosperous IAC’s” and between
the “most prosperous and least prosperous LDC’s”
 That is, it is NOT the case that there are simply
“extremes” of “haves” and “have nots”
 Rather, the actual values of GDP vary “almost
continually” across countries
When comparing values of GDP across different countries,
it is necessary to account for “differences in costs of living
between countries” when calculating GDP
 “Purchasing Power Parity” (PPP) => takes the effects
of “differences in costs of living” out of GDP figures
across countries
 What we will compare across countries is “Per Capita
GDP (PPP)”
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(values below gathered from www.indexmundi.com)
Country:
Per Capita GDP (PPP), 2011:
Qatar
Liechtenstein
Luxembourg (E.U.)
Singapore
Norway
United Arab Emirates
United States
Hong Kong
Canada
Sweden (E.U.)
Ireland (E.U.)
Germany (E.U.)
Japan
South Korea
Israel
Czech Republic (E.U.)
Portugal (E.U.)
Poland (E.U.)
Russia
Argentina
Mexico
Brazil
China
Bolivia
India
Ghana
North Korea
Haiti
Zimbabwe
$179,000
$141,100
$82,600
$62,100
$54,600
$49,600
$47,200
$45,900
$39,400
$39,100
$37,300
$35,700
$34,000
$30,000
$29,800
$25,600
$23,000
$18,800
$15,900
$14,700
$13,900
$10,800
$7,600
$4,800
$3,500
$2,500
$1,800
$1,200
$500
So, in terms of Real GDP per capita, are people in the U.S.
“$8,100 better off” than people in Sweden and “$35,400
worse off” than people in Luxembourg?
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 At what level should we examine the data? Compare:
 The United States to Sweden…?
 The United States to the European Union…?
 North Carolina to Sweden…?
 This “choice” can influence our “answers/insights”…
 “state level” figures from Bureau of Economic Analysis
Country:
Per Capita GDP (PPP), 2011:
Qatar
D.C. (U.S.)
Liechtenstein
Luxembourg (E.U.)
Delaware (U.S.)
Singapore
Wyoming (U.S.)
Norway
United Arab Emirates
New Jersey (U.S.)
United States
Texas (U.S.)
North Carolina (U.S.)
Canada
Sweden (E.U.)
Ireland (E.U.)
Georgia (U.S.)
Germany (E.U.)
Florida (U.S.)
European Union
West Virginia (U.S.)
South Korea
Israel
Mississippi (U.S.)
Czech Republic (E.U.)
Portugal (E.U.)
Poland (E.U.)
$179,000
$148,291
$141,100
$82,600
$63,159
$62,100
$55,516
$54,600
$49,600
$48,380
$47,200 [≈38.8% greater than E.U.]
$44,788
$39,879
$39,400
$39,100
$37,300
$37,270
$35,700
$34,689
$34,000
$30,056
$30,000
$29,800
$28,293
$25,600
$23,000
$18,800
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Inflation and Unemployment:
Inflation Rate – the rate at which the overall price level
increases on an annual basis
 Most stable, developed economies typically have rates
of 1% to 6%.
 Deflation – a general decrease in the level of overall
prices (i.e., a realization of a negative inflation rate)
 Hyperinflation – an extremely high rate of inflation,
generally above 100% per year
Inflation
2004
2006
2008
Rate
-0.48%
Japan
-0.30% -0.30%
0.10%
1.35%
France
2.10%
1.70%
1.50%
1.43%
Germany
1.10%
2.00%
2.30%
1.78%
China
1.20%
1.80%
4.80%
2.10%
Spain
3.00%
3.40%
2.80%
2.40%
Australia
2.80%
2.70%
2.30%
4.03%
Mexico
4.50%
4.00%
4.00%
6.33%
India
3.80%
4.20%
6.40%
9.88%
Argentina 13.40%
9.60%
8.80%
11.28%
Nigeria
13.80% 13.50%
5.40%
11.78%
Russia
13.70% 12.70%
9.00%
17.95%
Ghana
26.70% 15.10% 10.70%
3304.90% Zimbabwe 384.70% 266.80% 12,563%
average
2010
-1.40%
0.10%
0.30%
-0.70%
-0.80%
1.80%
3.60%
10.90%
7.70%
12.40%
11.70%
19.30%
5.10%
(“average” is simply the mean of the four values
reported in the table for each country)
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Unemployment Rate – the percentage of individuals in the
workforce that currently do not have jobs
 Most stable, developed, industrialized economies
typically have rates of 4% to 8%
average
4.03%
4.23%
4.65%
5.28%
6.85%
7.68%
9.08%
9.15%
9.68%
11.53%
11.70%
15.50%
81.25%
Unemployment
Rate
Mexico
Nigeria
Japan
Australia
China
Russia
India
France
Germany
Argentina
Spain
Ghana
Zimbabwe
2004
2006
2008
2010
3.30% 3.60% 3.70% 5.50%
na
2.90% 4.90% 4.90%
5.30% 4.40% 3.80% 5.10%
6.00% 5.10% 4.40% 5.60%
10.10% 9.00% 4.00% 4.30%
8.50% 7.60% 6.20% 8.40%
9.50% 8.90% 7.20% 10.70%
9.70% 9.90% 7.90% 9.10%
10.50% 11.70% 9.00% 7.50%
17.30% 11.60% 8.50% 8.70%
11.30% 9.20% 8.30% 18.00%
20%
20%
11%
11%
70%
80%
80%
95%
(“average” is simply the mean of the four values
reported in the table for each country)
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The Phillips Curve:
There often appears to be a “tradeoff between inflation and
unemployment”:
Inflation
Rate
Phillips
Curve
0
Unemployment
Rate
0
Phillips Curve – a curve illustrating the “inverse relation”
between the Unemployment Rate and Inflation Rate (i.e.,
the “tradeoff” between unemployment and inflation that a
society faces)
 In the 1970’s many economies (including the U.S.)
experienced high levels of both unemployment and
inflation => “points beyond the Phillips Curve”
 Current thinking: Phillips Curve illustrates a “short-term
tradeoff” between Unemployment and Inflation, but the
curve may shift over time (and government policy may
potentially influence the shift/movement of the curve)
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U.S. Inflation Rate Post WW-II:
 Annual Inflation Rates (yearly) => 3 distinct periods
 1949-1967 (19 year period) => low rates
o 3.34% or below in 18 of 19 years (exception was
1951, 7.88%)
o average rate of 1.76%
 1968-1982 (15 year period) => high rates
o 5.46% or above in 12 of 15 years
o lowest value was rate of 3.27% in 1972
o highest value of 13.58% in 1980
o average rate of 7.38%
o above 10% in three consecutive years (1979–1981)
 1983-2011 (29 year period) => low rates
o 4.83% or below in 28 of 29 years (one exception
was 1990 with a rate of 5.39%)
o 3.66% or lower in 23 of 29 years
o average rate of 2.97%
o 2009 rate was (–0.34)% [deflation for first year
since 1955]
o 2011 rate was 3.16%
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 Annual Inflation Rate (monthly):
 January 1948 through June 2012:
o Mean = 3.71%
o Median = 3.05%
o Maximum = 14.76% (March 1980)
o Minimum = –2.87% (July 1949)
 Negative rate in 8 months in 2009
o Previous Post WW-II instances of deflation: May
1949 to June 1950 (14 months); Aug. 1954 to Aug.
1955 (13 months)
 “The Great Inflation” => period of very high
inflation rates from early 1970’s through early 1980’s
o Above 6% in 100 of the 110 months (90.9% of
months) between June 1973 and July 1982
o Above 6% in only 10 of the 616 “other months”
(1.6% of months) from Jan. 1952 to June 2012
 1.66% in June 2012 => 7th straight month with a value
below the median of 3.05%
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U.S. Unemployment Rate Post WW-II:
 Unemployment Rates (yearly) => 4 distinct periods
 1948-1974 (27 year period) => low rates
o below 6% in 24 of 27 years
o low of 2.92% in 1953; high of 6.84% in 1958
o average rate of 4.80%
 1975-1987 (13 year period) => high rates
o above 6% in 12 of 13 years
o low of 5.85% in 1979; high of 9.71% in 1982
o average rate of 7.47%
 1988-2008 (21 year period) => low rates
o below 6% in 17 of 21 years
o low of 3.97% in 2000; high of 7.49% in 1992
o below 6% every year from 1995-2008
o average rate of 5.45%
 2009-present => high rates
o rates of 9.26%, 9.63%, and 8.95% respectively
o other years since 1948 with rates above 8%: 8.48%
in 1975, 9.71% in 1982, and 9.60% in 1983
o first time with a rate above 8% in three consecutive
years since the Great Depression
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 Unemployment Rate (monthly):
 January 1948 through July 2012:
o Mean = 5.79%
o Median = 5.60%
o Maximum = 10.8% (Nov. and Dec. 1982)
o Minimum = 2.50% (May and June 1953)
 8.3% in July 2012
 “Above 8%” (since January 1948)…
o January 1975 to December 1975 (12 months)
o November 1981 to January 1984 (27 months)
o February 2009 to present (42 months and counting)
 Below 8% in every month between Feb. 1984 and Jan.
2009 (300 consecutive months)
 “Above 9%” (since January 1948)…
o May 1975 (1 month)
o Mar. 1982 to Sept. 1983 (19 months)
o 5/09-2/11 (22 months) and 4/11-9/11 (6 months)
 Above 10%:
o Oct. 2009 (1 month)
o Sept. 1982 to June 1983 (10 months)
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Misery Index – economic indicator created by Arthur
Okin, calculated by simply adding together the annual
inflation rate and the unemployment rate
Monthly values, from January 1948 to June 2012:
 Low value: 2.97 in July 1953
 High value: 21.98 in June 1980
 Average value: mean of 9.50; median of 8.66
 Most recent value: 9.86 in June 2012
 Above median value since October 2009 (33 months
and counting)
 “Above 10”: 11/09-4/12 (30 straight months); 6/0810/08 (5 straight months); 52 of 75 months (69.3%)
from 4/87-6/93; 4/73-2/86 (155 consecutive months;
one month shy of 13 full years)
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