M02 Mishkin424332 02 Macro C02 IL

Chapter 2
Measuring
Macroeconomic
Data
Copyright 2015 Pearson Education, Inc. All rights reserved. 2-2
Preview
To examine the different approaches to
measuring gross domestic product
To understand real versus nominal GDP
To understand how to measure inflation
To understand how to measure
unemployment
To understand different interest rates
Lecture outline (tentative)
Lecture 1. Measuring GDP
Lecture 2. Measuring inflation,
unemployment and interest rates.
(possibly spilling over into lecture 3)
Review questions
1. What three macroeconomic data series are
of particular interest to macroeconomists?
2. What is the business cycle? What part of
the business cycle is of particular concern
to macroeconomists?
3. What is fiscal policy?
4. What is monetary policy?

Measuring Economic Activity:
GDP
Gross domestic product (GDP) is the
total value of goods and services produced
in an economy
the broadest measure of economic activity
Measuring Economic Activity:
National Income Accounting (contd)
National income accounting is an
accounting system that measures economic
activity and its components
Created by Simon Kuznets in the 1930s, born in
Belarus, studied in Kharkiv, Ukraine after that
immigrated to US. Got a Nobel prize in 1971

Fundamental identity of national income
accounting:
Total Production = Total Expenditure = Total Income
Example
Total Production = Total Expenditure = Total
Income

Suppose you get a $15 haircut
You spend $15, it is ____________
Barber received $15, it is ___________
Barber delivered $15 service, it is ______
Measuring GDP: The Production
Approach
GDP is the current market value of all final
goods and services newly produced in the
economy during a fixed period of time
In the case of apples and oranges, we
multiply the their prices and quantities, and
then add them up:
GDP = (price of apples quantity of apples)
+ (price of oranges quantity of oranges)
Your turn:
Suppose there are two countries producing
apples and oranges. In both countries 2
billion of apples and 1 billion of oranges are
produced.
Country A: apples and oranges cost $1 each
Country B: apples cost $0.50 and oranges
cost $1.

What are the GDPs of countries A and B?
What about intermediate goods?
Suppose Apple computer uses $400 worth
of microprocessors that are produced by
Intel.
Also shipping services by UPS cost $50
Apple computer is sold for $1500

What is the total final value of all goods and
services newly produced that should go into
GDP in this case?
Valued-Added Technique
Value added is the value of a firms
output minus the cost of the intermediate
goods purchased by the firm
By adding up the value added from each firm,
we get the final value of the goods and
services produced
Your Turn:
Microchip: $400
Shipping: $50
Computer: $1500
What is the value added of the computer?
Your turn:
If you buy a 3-year-old car from a car
dealership for $4000, would its value be
included in GDP calculation?
How about car dealers commission on
sale?
Suppose there were 35 fires a year in
Honolulu. How would you calculate the
value of firefighters service production?

Fixed Period of Time
We calculate GDP over a fixed period of
time, such as a quarter or a year
GDP is a flow, which is an amount per a
given unit of time
By contrast, a stock is a quantity at a
given point in time
A stock is often an accumulation of flows
over time

FIGURE 2.1 Stocks Versus Flows
Your turn: Stocks Versus Flows
Is this a stock or a flow?
Your monthly wages?
Your balance in the checking account?
Your student loan?
Your tuition expenses each semester?
The value of your car?
Investment in new computer equipment?
US governments budget deficit?
US government debt?
Other examples of stock vs. flow?

Measuring GDP: The Expenditure
Approach
GDP is the total spending on currently
produced final goods and services in the
economy
National income identity:

Y = C + I + G + NX
where
Y = GDP = total production (output)
C = consumption expenditure
I = investment
G = govt. purchases of goods & services
NX = net exports = exports imports

TABLE 2.1 GDP AND ITS
COMPONENTS, 2012
Consumption Expenditure
Total spending for currently produced
consumer goods and services
Consumption was 68.7% of GDP in 2012
Basic categories:
1. Consumer durables
2. Nondurable goods
3. Services
Investment
Spending on currently produced capital
goods that are used to produce goods and
services over an extended period of time
Investment was 15.2% of GDP in 2012
Basic categories:
1. Fixed investment
2. Inventory investment
3. Residential investment
Box: Meaning of the Word
Investment
For non-economists, an investment
normally refers to the purchase of common
stocks or bonds
For economists, investment spending refers
to the purchase of physical assets, such as
new machines or new housespurchases
that add to GDP
Government Purchases
Spending by the government on currently
produced goods and services
Government purchases were 19.2% of GDP
in 2012
Government consumption includes
government purchases for short-lived goods
and services like health care and police
Government investment includes spending
for capital goods like buildings and computers
represents
What about government transfers (e.g., Social
Security and Medicare)? Are they part of GDP?
Net Exports
Net exports (or trade balance) are
exports minus imports
Why subtract imports from GDP?
FIGURE 2.2 Expenditure Components
of U.S. GDP, 1950-2013
Source: Federal Reserve Bank of St. Louis, FRED Database. http://research.stlouisfed.org/fred2/
What do you observe on this chart?
Changes in the Spending Components
of GDP Over Time
Consumption grew steadily as a share of
GDP from 1970 to 2012
Investment is much more volatile than
other components of GDP
Government purchases have actually
remained quite stable at around 20% of
GDP
Net exports have been negative
Box: An International Comparison of
Expenditure Components
The United States differ from other
countries by having the highest share of
GDP going to consumption, the lowest
share of investment, and net exports have
been negative
By contrast, China has the lowest share of
consumption, the highest share of
investment, and the largest share of net
exports
FIGURE 2.3 Shares of Expenditure
Components for Different Countries
Source: OECD and for China estimates from National Bureau of Statistics. The data are for the year 2010.
Measuring GDP: The Income
Approach
Compensation of employees wages and salaries of
employees, and employee benefits
Corporate profits profits after taxes of corporations
Other income income of the self-employed, royalty income
and net interest earned by individuals, etc.
Depreciation the loss of value of capital from wear and tear
net domestic product = GDP depreciation
Net factor income wages, profits, and rent paid to U.S.
residents by foreigners minus factor income paid by U.S.
residents to foreigners
TABLE 2.2 INCOME APPROACH TO
GDP, 2012
Income Measures
National income = Compensation of
employees + other income + corporate
profits
Gross national product (GNP) = national
income + depreciation
total income earned by U.S. residents
Gross domestic product (GDP) = GNP + net
factor income
domestically produced measure of gross product

Real Versus Nominal GDP
A nominal variable is a measure at
current market (nominal) prices
A real variable is a measure in terms of
quantities of actual goods and services

Your turn: If you want to compare the
standard of living in 1910 and 2010, which
one is a better measure to use - nominal
or real GDP?
(contd)

or

Nominal GDP = Price Level Real GDP
Nominal GDP
Real GDP =
Price Level
(contd)
If 2005 is the base year, then real GDP for
the year 2014 is:

Real GDP in 2014 =
(price of apples in 2005 quantity of apples in 2014)
+ (price of oranges in 2005 quantity of oranges in
2014)

Do you like cold weather?
GDP tends to fall in cold and snowy months
Therefore, economic statistics like GDP data
are seasonally adjusted to account for
regular seasonal fluctuations within a year

Your turn:
1. If real GDP in 2014 is 100 (assuming 2005
as a base year) and inflation was on
average 1% per year, what would be the
nominal GDP in 2014?
2. If nominal GDP is increasing, what does it
say about quantity of goods and services
produced in a country?
3. Explain the difference between gross
national product (GNP) and gross
domestic product (GDP). Which one is
larger for the US and why?
Lecture 2
Starts about here.
Do not use slides past this one
Lecture 2
Review measuring GDP
Measuring inflation
Unemployment
Interest rate (if time allows)
Review questions
Name three approaches to compute GDP
Measuring Inflation
Price indexes are measures of the price
level
Examples:
GDP deflator (or implicit price deflator)
Personal consumption expenditure deflator
Consumer price index (CPI)

GDP Deflator

GDP Deflator for Year y
Nominal GDP in Year y
= 100 x
Real GDP in Year y
Consumer Price Index

A measure of the average prices of consumer goods
and services, i.e., a cost of living index
Calculated monthly by the Bureau of Labor
Statistics using a basket of thousands of consumer
goods and services
Consumers spend more on some items than
others eg. spending on gas are much larger
than spending on apples.
So taking an average of gas and apples prices is
not representative of the cost of living
BLS surveys people to find out what they bye.
The basket represents average consumer
expenditures

Consumer Price Index

Suppose BLS determined that average consumer
buys 10 gallons of gas and 2 apples per week
then the CPI for 2014 with a base year of 2005 is:
Inflation Rate

The inflation rate is the % rate of change of
the price level over a particular period:

where
t t 1 t
t
t 1 t 1
P - P P
= =
P P
t
= inflation rate in period t
t
P = period level at time t
FIGURE 2.4 U.S. Inflation Rates with
Different Price Indexes, 1950-2013
Percentage Change Method and the
Inflation Rate

Because:

We know that:
% Change in ( X ) = (% Change in )
+ (% Change in )
x y x
y
% Change in Nominal GDP =
(% Change in the Price Level)
+ (% Change in Real GDP)
Percentage Change Method and the
Inflation Rate (contd)

Because the % change in the price level is
the inflation rate, while the % changes in
nominal and real GDP are the growth rate:

Inflation Rate = (Growth Rate of Nominal GDP)
- (Growth Rate of Real GDP)
Your turn
1. If the CPI in 2006 is 101 and CPI in 2007 is
103, what is the inflation rate?
2. If GDP in 2010 was 50 trillion and in 2011
it was 51 trillion, what is the annual growth
rate?
3. If real GDP growth is 2% and inflation rate
is 1%, what is the nominal GDP growth?
4. If the real GDP growth is 3% and nominal
GDP growth is 5%, what is the inflation
rate?
Measuring Unemployment

The unemployment rate is the percentage of people
in the civilian population who want to work but who
do not have jobs
The Bureau of Labor Statistics classifies each adult
over age 16 into:
1. Employed
2. Unemployed
3. Not in the labor force
Two types:
Voluntarily unemployed
Discouraged workers (those who would
live to work but have given up looking, and
those who have voluntarily left the labor
force)

(contd)

Labor Force =
Number of Employed + Number of Unemployed

Labor Force
Labor-Force Participation Rate =
Adult Population
Employed
Employment Ratio =
Adult Population
(contd)
FIGURE 2.5 Unemployment in the
Adult Civilian Population, 2013
Macroeconomics In The News:
Unemployment and Employment

The Bureau of Labor Statistics reports
employment and unemployment data using two
alternative surveys: the household survey and
the survey of business establishments
The two surveys sometimes give a different
picture of labor market conditions due to:
The household survey counts workers, while the
establishment survey counts jobs
The household survey counts the self-employed as
working, while the establishment does not
The establishment survey covers more workers

Measuring Interest Rates

An interest rate is the cost of borrowing,
or the price paid for the rental of funds
Example: You borrow $100 from a bank and
have to return $105 in a year.
What is the interest rate?
Interest rates are returns for holding debt
securities, such as bonds

Macroeconomics In The News:
Interest Rates

Interest rates that receive media attention
are:
Prime rate
Federal funds rate
London Inter-Bank Offered Rate (LIBOR)
Treasury bill rate.
Ten-year Treasury bond rate
Federal Home Loan Mortgage Corporation rate

Real Versus Nominal Interest Rates

A nominal interest rate makes no
allowance for inflation
The real interest rate is the amount of
extra purchasing power a lender must be
paid for the rental of his/her money
The ex ante real interest rate is adjusted
for expected changes in the price level
The ex post real interest rate is adjusted
for actual changes in the price level
Real Versus Nominal Interest Rates
(contd)

The Fisher equation:

i = r +
e
i = nominal interest rate
r = nominal interest rate

e
= expected inflation
or r = i -
e
Your turn:

Example: For a one-year loan with a 4%
nominal interest rate (i=4%) and you expect
the inflation to be 6% in a year ( =6%),
What is the real interest rate?

With such interest rate who benefits more
the lenders (i.e. banks) or the borrowers (i.e.
consumers or businesses)?

e
The Important Distinction Between
Real and Nominal Interest Rates

Credit markets are where households and
businesses get funds (credit) from each
other
Because the real interest rate reflects the
real cost of borrowing, it is likely to be a
better indicator of the incentives to borrow,
invest, and lend in credit markets than
nominal interest rates
FIGURE 2.6 Real and Nominal Interest
Rates (Three-Month Treasury Bill), 1955-
2013
Source: Federal Reserve Bank of St. Louis, FRED Database. http://research.stlouisfed.org/fred2/; with the real interest rate calculated
using the Procedure outlined in Mishkin, Frederic S. 1981. The real interest rate: An empirical investigation. Carnegie-Rochester
Conference Series on Public Policy 15: 151200.
Policy and Practice: Can GDP Buy
Happiness?
Is GDP the best measurement of national well-
being?
In 1972, the king of Bhutan proposed the
replacement of GDP by gross national happiness
that incorporates factors such as spirituality and
culture
In 1990, the United Nations began to rank countries
on a so-called human development index, which is a
combination of life expectancy, education, literacy,
educational participation, and GDP
In 2008, a French economic commission led by
Nobel Prize winner Joseph Stiglitz called for
modifications to GDP with factors such as political
freedom, physical safety, and work-life balance

M02 Mishkin424332 02 Macro C02 IL

Diunggah oleh

Informasi Dokumen

Judul Asli

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

M02 Mishkin424332 02 Macro C02 IL

Diunggah oleh

Hak Cipta:

Format Tersedia

Chapter 2

Anda mungkin juga menyukai