Chapter Topics
 Aggregate Output
 The Other Major Macroeconomic
Variables
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #1
Aggregate Output
Aggregate Output (national income
and product accounts, or NIPA)
 Gross Domestic Product (GDP)
 The
value of the final goods and services
produced in an economy during a given
period
Y
= C + I + G + X - Im
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #2
Aggregate Output
Defining GDP: Three Approaches
1) Final good
2) Value added
3) Income
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Chapter 2: A Tour of the Book
Slide #3
Aggregate Output
GDP: The final goods approach
Firm 1: Steel Company
Revenues from sales
Expenses (wages)
Profit
What is GDP?
$100
$80
$20
$310 or $210
Firm 2: Car Company
Revenues from sales
Expenses
Wages
Steel purchases
Profit
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$210
$170
$70
$100
Chapter 2: A Tour of the Book
$40
Slide #4
Aggregate Output
Two Firm Example
GDP ($210) 
Value added steel ($100)  value added cars ($110)
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #5
Aggregate Output
Defining GDP
 GDP from the income side
GDP (income)  indirect taxes
 labor income
 capital income
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #6
Aggregate Output
 Income (steel)
 Income (car)

Labor = $80

Labor = $70

Capital = $20

Capital = $40
$100
$110
GDP (income)  $100  $110  $210
Compared to:
GDP (value added - -$210)  value added steel ($100)
 value added car ($110)
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #7
Aggregate Output
Nominal & Real GDP
 GDP = Price x Quantity of final goods
produced
 If price increases and quantity remains
constant, the $ value of final output
increases.
 But
real output hasn’t changed.
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #8
Nominal and Real
U.S. GDP, 1960-1998
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #9
Aggregate Output
Observations
 Real GDP = value of final goods in
constant prices
 The increase in real GDP is less than
nominal GDP when prices are rising
 More variation in real GDP than nominal
GDP
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #10
Aggregate Output
Synonyms for GDP Accounting
 Real GDP
 GDP
in terms of goods
 GDP
in constant dollars
 GDP
adjusted for inflation
 GDP
in 1992 dollars
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #11
Aggregate Output
Technical Notes: For the Course
 GDP -- refers to real GDP
 Yt -- real GDP in year t
 $GDP -- nominal GDP
 $Yt = nominal GDP in year t
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #12
The Other Major
Macroeconomic Variables
The Unemployment Rate
number unemployed (U )
Unemployme nt Rate (u ) 
labor force (L)
Labor Force (L )  employed (N )  unemployed (U )
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #13
The Other Major
Macroeconomic Variables
Counting the Unemployed
 Current population survey
 60,000
households monthly
 Employed
-- job holders
 Unemployed
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-- job seekers
Chapter 2: A Tour of the Book
Slide #14
The Other Major
Macroeconomic Variables
Counting the Unemployed
 1998
N  131.4
U  6.2
6.2 (U )
u  4.5% 
131.4 (N )  6.2(U )
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #15
The Other Major
Macroeconomic Variables
Macro Terms
Unemployed and Discouraged Workers
labor force (L)
Participation Rate 
adult population (16 )
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #16
The Other Major
Macroeconomic Variables
Unemployment and Economic Activity
 Okun’s Law
 High
output growth -- reduces
unemployment
 Low
output growth -- increases
unemployment
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #17
Change in the U.S. Unemployment Rate
versus U.S. GDP Growth 1960 - 1998
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #18
The Other Major
Macroeconomic Variables
 The Inflation Rate
A
sustained rise in the price level
 Two Measures of the Price Level
 GDP
Deflator
 Consumer
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Price Index (CPI)
Chapter 2: A Tour of the Book
Slide #19
The Other Major
Macroeconomic Variables
The GDP Deflator
 Average
 GDP
price of final goods produced
deflator in year t = Pt
nominal GDPt $Yt
Pt 

Real GDPt
Yt
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #20
The Other Major
Macroeconomic Variables
The GDP Deflator
 Pt
is an index number
• P1993 = 102.6 (1992 = 100)
 Index
numbers are used to measure rate of
change over time
Pt  Pt - 1
Rate of inflation 
 %Pt
Pt - 1
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #21
The Other Major
Macroeconomic Variables
The GDP Deflator
$Yt
Pt 
Yt
$Yt  Pt  Yt
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #22
The Other Major
Macroeconomic Variables
The Consumer Price Index (CPI)
 Average prices of goods consumed
 The CPI is not equal to the GDP deflator
 Some
final goods are sold to business,
government, and foreigners
 Some
consumer goods are imported
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #23
The Other Major
Macroeconomic Variables
Steps in Calculating the CPI
1) Consumer expenditure survey to determine a
market basket of items
2) Bureau of labor statistics (BLS) field workers price
the items monthly (85 cities, 22,000 stores)
3) A base period is chosen, currently 1982-84
4) End 2001 CPI = 177.4 (1982-84 = 100)
 A basket of goods that cost $100 in 1982 – 84 cost
$177.40 at end of 2001.
 The price of the representative consumer good
increased by 77.4% over this period.
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #24
Inflation Rate, Using the CPI
and the GDP Deflator, 1960, 1998
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #25
Change in the U.S. Inflation Rate versus
the U.S. Unemployment Rate, 1970-1998
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #26
The Other Major
Macroeconomic Variables
The Phillips Curve
 Low unemployment --inflation rate
increases
 High unemployment -- inflation rate
decreases
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #27
The Central Question of Macroeconomics
 What determines the level of aggregate
output?
 Demand?
 Supply?
 Government, education, and savings?
• Short-run (a few years)  demand
• Medium-run (10+ years)  supply
• Long-run (50+ years)  government,
education, savings
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #28
A Road Map
The Central Question of Macroeconomics
 What determines the level of aggregate
output?
 Short-run
(a few years) -- demand
 Medium-run
(10+ years) -- supply
 Long-run
(50+ years) -- government,
education, savings
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #29