The GDP deflator
• Definition:
– GDP deflator = nominal GDP/real GDP
• A by-product of measuring real GDP
• Provides a measure of “average” prices in
the economy
• Sometimes called implicit price deflator
Example:
Calculating the GDP Deflator
nd
rd
2 Qtr 1998
3 Qtr 1998
Nominal GDP
8,440.6
8,526.5
(2) Real GDP
7,498.6
7,559.5
GDP Deflator
(1)/(2)
1.126
1.128
A measure of the inflation rate
• Inflation rate: the percent change in the
deflator from one period to the next
• (Pt - Pt-1)/Pt-1 stated in percent
• (1.128 - 1.126)/1.126 = .002 or .2 percent
• At an annual rate this is .8 percent as stated
in the WSJ news story
Recap of our discussion of GDP
• Enough now to read and do “critical
thinking” about the typical news story
• But remember that GDP is not perfect
• misses things: Home Work (two words),
underground economy
• not the only measure of well-being
• For international comparisons, we must take account
of exchange rates and “purchasing power”
differences in different countries
Consumer price index (CPI)
• based on a fixed market basket of goods and
services that a “typical” person purchases
• How much more does that market basket
cost this year than last year?
– Answer (in percentage terms) is the inflation
rate using the CPI
– Example 50 cartons of milk, 300 cookies
– 1998: 2.00x50 + 1x300 = 400
– 1997: 1.50x50 + .5x300 = 225
– 400/225 = 1.78: inflation rate would be 78%
CPI Inflation Bias
• Many complain that the CPI gives an
upward biased measure of inflation
– misses quality improvements
– market basket changes
• indexing social security makes this an
important public policy issue
– commission chaired by Michael Boskin of
Stanford found the bias was about 1 percent
(maybe larger)
How do inflation rates based on the
CPI and GDP deflator compare?
20_07
INFLATION RATE
(PERCENT PER YEAR)
15.0
CPI
12.5
10.0
7.5
GDP
deflator
5.0
2.5
1960
1965
1970
1975
1980
1985
1990
1995
2000
Unemployment Rate
• A major economy-wide labor market
indicator
• cyclical
• frictional and structural
• concept of natural unemployment rate
– natural does not mean “good”
As stated in this WSJ article, the
October unemployment rate is to
be released tomorrow
Other Economy-Wide Labor
Market Indicators
• Employment (total number of jobs)
• Labor Force Participation Rate
• Employment-To-Population Ratio
21_2
Unemployed
(7.2)
Employed (126.7)
Labor force (133.9)
Working age but not
in labor force (66.6)
(in school, retired, or
performing unpaid work
at home)
Too young to work
or institutionalized
(65.0)
Working age population (200.5)
Total population (265.5)
Three Labor Market Indicators
(7.2)
Unemployment rate =
Unemployed
=
=
Labor force
(7.2) +
Labor force
= 5.4 percent
133.9
(126.7)
(7.2) +
Labor force participation rate =
7.2
FPO
(126.7)
133.9
= 67 percent
200.5
=
=
Working age population
(7.2) +
(126.7) +
(66.6)
(126.7)
Employment-to-population ratio =
Employed
=
=
Working age population
(7.2) +
(126.7) +
(66.6)
126.7
= 63 percent
200.5
Unemployment data are collected
by the U.S. Department of Labor
• Let’s take a look at the DOL web page to
see what’s happening
• You can enter through Econ1 web page
Employment to Population Ratios
21_3
PERCENT
90
Men
80
70
Total
60
50
Women
40
30
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
Three types of unemployment
21_4
PERCENT OF
LABOR FORCE
unemployment
7
6
5
4
3
2
1
0
1987
Normal
Job losers
1989
Cyclical
low
Job leavers
1992
Cyclical
high
Entrants
Duration of Unemployment
21_5
PERCENT OF
LABOR FORCE
7
6
5
4
3
2
1
0
1987
Normal
More than
26 weeks
1989
Cyclical
low
5 to 26
weeks
1992
Cyclical
high
Less than
5 weeks
International Comparisons of
Unemployment Rates (1996)
21A
PERCENT
12
10
8
6
4
2
0
U.S.
Japan
Germany France
Italy
U.K.
Canada
Preview of Coming Attractions
• Next Four Lectures: Long Run
Fundamentals and Economic Growth
–
–
–
–
Labor (Ch 21) partly covered already
Capital (Ch 22) try to read for next lecture
Technology (Ch 23)
Money (Ch 24)
• Then Economic Fluctuations
• Then Economic Policy
End of Lecture