Download Measuring Macroeconomic Activity

Measuring Macroeconomic
Activity
Chapter 11
Measuring Gross Domestic Product
(GDP)
• The comprehensive measure of the market
value of all currently produced final goods and
services within a country in a given period of
time by domestic and foreign supplied
resources.
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The Circular Flow of Economic Activity
Foreign Sector
M
X
Domestic Market for currently
Produced goods and services
C
Revenue
I
G
Household Sector
Government
Sector
TB
S
Income,
Wages,
Rent,
Interest,
Profit
Borrowing
TP
Firm Sector
Borrowing
Borrowing
Financial Markets
Expenses
Resource Markets
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National Income Accounting System
• A system of accounts
developed for each
country, based on the
circular flow, whose
purpose is to measure
the level of economic
activity in that country.
• The U.S. national
income accounting
system is operated by
the Bureau of Economic
Analysis (BEA) in the
U.S.Department of
Commerce.
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Final vs. Intermediate Goods and
Services
• Final goods and services
are goods and services
that are sold to their
end-users.
• Intermediate goods and
services goods and
services that are used in
the production of other
goods and services.
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Real vs. Nominal GDP
• Nominal GDP is the
value of currently
produced final goods
and services measured
in current year prices.
• Real GDP is the value of
currently produced final
goods and services
measured in constant
prices, or nominal GDP
adjusted for price level
changes.
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Nominal and Real GDP, 2000 & 2001
VARIABLE
Nominal GDP
2000
2001
$9,817.0 billion
Percent Change
Real GDP
3.17
$9,817.0 billion
Percent Change
GDP Deflator (price
changes)
$10,128.0 billion
$9,890.7 billion
0.76
100
Percent Change
102.40
2.40
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Nominal vs. Real GDP, 1985-present
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US Real GDP and Recessions
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Expenditure or Output Approach to
Measuring GDP
• Measuring overall economic activity by adding
the expenditure on the output produced in
the economy.
GDP = C + I + G + (X – M)
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Personal Consumption Expenditures
(C)
• The total amount of spending by consumers
on durable goods, nondurable goods, and
services in a given period of time.
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Real Personal Consumption
Expenditures, 1985 - present
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Gross Private Domestic Investment (I)
• The total amount of spending on
nonresidential structures, equipment, and
software; residential structures; and business
inventories in a given period of time.
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Real Gross Private Domestic Product,
1985 - present
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Government Consumption Expenditures and Gross
Investment (G)
• The total amount of spending by federal,
state, and local governments on consumption
outlays for goods and services and for
depreciation charges for existing structures
and equipment and on investment capital
outlays for newly acquired structures and
equipment in a given period of time.
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Real Government Consumption Expenditures and Gross
Investment, 1985 - present
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Net Export Spending (X – M)
• The total amount of spending on exports
minus the total amount of spending on
imports in a given period of time.
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Real Net Export Spending, 1985 present
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Gross Domestic Product and Its
Components, 2007
COMPONENT
GROSS DOMESTIC PRODUCT (GDP)
VALUE IN BILLIONS OF
DOLLARS (% OF GDP)
13,807.5
PERSONAL CONSUMPTION
EXPENDITURES (C )
9,710.2 (70.3)
GROSS PRIVATE DOMESTIC
INVESTMENT (I )
2,130.4 (15.5)
GOVERNMENT CONSUMPTION
EXPENDITURES AND
GROSS INVESTMENT (G)
2,674.8 (19.4)
NET EXPORTS OF GOODS AND SERVICES
(F )
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707.8 (5.1)
19
Earnings or Income Approach to
Measuring GDP
• Measuring overall economic activity by adding
the earnings or income generated by selling
the output produced in the economy.
GDP = compensation of employees +
proprietor’s income + rental income +
corporate profits + net interest
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National Income
• Compensation of employees: the wages and salaries and the fringe
benefits paid by employers to employees.
• Proprietors’ income: the income of unincorporated businesses, such as
medical practices, law firms, small farms, and retail stores.
• Rental income : the income households receive from the rental of their
property.
• Corporate profits: the excess of revenues over costs for the incorporated
business sector of the economy.
• Net interest: the interest private businesses pay to households for lending
money to the firms minus the interest businesses receive plus interest
earned from foreigners.
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National Income
COMPONENT
VALUE IN BILLIONS OF DOLLARS
(% OF NATIONAL INCOME)
GROSS DOMESTIC PRODUCT
13,807.5
Less: Depreciation expenditures
1,618.0
Less: Statistical discrepancy
81.4
EQUALS: NATIONAL INCOME
12,270.9
Compensation of employees
7,812.3 (63.6)
Proprietor’s income
1,056.2 (8.6)
Rental income
40.0 (0.3)
Corporate profits
1,642.4 (13.4)
Net interest
664.4 (5.4)
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National Income, continued
VALUE IN BILLIONS OF DOLLARS
(% OF NATIONAL INCOME)
COMPONENT
Less: Income earned, but not received
4,321.0
Plus: Income received, but not earned
3,713.3
EQUALS: PERSONAL INCOME
11,663.2
Less: Personal taxes
1,492.8
EQUALS: DISPOSABLE INCOME
10,170.5
Personal consumption expenditure ($9,710.2)
plus other outlays ($402.9)
10,113.1
Personal saving
57.4
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Other Important Macroeconomic
Variables
• Price level measures
– GDP deflator
– Consumer price index
– Wholesale price index
• Employment and unemployment
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24
ACTIVE LEARNING 1
GDP and its components
In each of the following cases, determine how much GDP
and each of its components is affected (if at all).
A. Debbie spends $200 to buy her husband dinner
at the finest restaurant in Boston.
B. Sarah spends $1800 on a new laptop to use in her
publishing business. The laptop was built in China.
C. Jane spends $1200 on a computer to use in her editing
business. She got last year’s model on sale for a great
price from a local manufacturer.
D. General Motors builds $500 million worth of cars,
but consumers only buy $470 million worth of them.
ACTIVE LEARNING 1
Answers
A. Debbie spends $200 to buy her husband dinner
at the finest restaurant in Boston.
Consumption and GDP rise by $200.
B. Sarah spends $1800 on a new laptop to use in her
publishing business. The laptop was built in China.
Investment rises by $1800, net exports fall
by $1800, GDP is unchanged.
26
ACTIVE LEARNING 1
Answers
C. Jane spends $1200 on a computer to use in her
editing business. She got last year’s model on sale for
a great price from a local manufacturer.
Current GDP and investment do not change, because
the computer was built last year.
D. General Motors builds $500 million worth of cars, but
consumers only buy $470 million of them.
Consumption rises by $470 million,
inventory investment rises by $30 million,
and GDP rises by $500 million.
27
GDP Deflator
• The GDP deflator compares the price of each
year’s output of real goods and services to the
price of that same output in a base year. It is a
broad measure of price changes because it
reflects the changes in consumption patterns
over time included in GDP.
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Consumer Price Index (CPI)
• A measure of the combined price consumers
pay for a fixed market basket of goods and
services in a given period relative to the
combined price of an identical basket of goods
and services in a base period.
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Producer Price Index (PPI)
• A measure of the prices firms pay for crude
materials; intermediate materials, supplies,
and components; and finished goods.
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30
Measures of Employment and
Unemployment
•
•
•
•
•
Labor force
Number employed
Number unemployed
Unemployment rate
Discouraged workers
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Labor Force
• The civilian labor force is composed of those
individuals 16 years of age and over who are
working in a job (employed) or who are
actively seeking employment (unemployed).
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Employed
• Persons 16 years of age and over who, in the
survey week, did any work as an employee,
worked in their own business, profession, or
farm; or worked without pay at least 15 hours
in a family business or farm.
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Unemployed
• Persons 16 years of age and over who do not
currently have a job, but who are actively
seeking employment.
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Unemployment Rate
• Proportion of the labor force that is
unemployed.
UR = (number of unemployed ÷ labor force) x 100
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Discouraged Workers
• Persons 16 years of age and over who are not
currently seeking work because they believe
that jobs in their area or line of work are
unavailable or that they would not qualify for
existing job openings.
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Natural Rate of Unemployment
• The minimum level of unemployment that can
be achieved with current institutions without
causing inflation to accelerate
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Labor Force Statistics
Unemployment rate (“u-rate”):
% of the labor force that is unemployed
u-rate
# of unemployed
= 100 x
labor force
Labor force participation rate:
% of the adult population that is in the labor force
labor force
labor force
= 100 x
participation rate
adult population
UNEMPLOYMENT
38
ACTIVE LEARNING 1
Calculate labor force statistics
Compute the labor force, u-rate, adult population,
and labor force participation rate using this data:
Adult population of the U.S.
by group, June 2008
# of employed
145.9 million
# of unemployed
8.5 million
not in labor force
79.2 million
39
ACTIVE LEARNING 1
Answers
Labor force
= employed + unemployed
= 145.9 + 8.5
= 154.4 million
U-rate
= 100 x (unemployed)/(labor force)
= 100 x 8.5/154.4
= 5.5%
40
ACTIVE LEARNING 1
Answers
Population = labor force + not in labor force
= 154.4 + 79.2
= 233.6
LF partic. rate
= 100 x (labor force)/(population)
= 100 x 154.4/233.6
= 66.1%
41
GDP and Economic Well-Being
• Real GDP per capita is the main indicator of
the average person’s standard of living.
• But GDP is not a perfect measure of
well-being.
MEASURING A NATION’S INCOME
42
Major Macroeconomic Policy Issues
• What factors influence the spending behavior of the different sectors of
the economy?
• How do behavior changes in these sectors influence the level of output
and income in the economy?
• Can Policy Makers Maintain Stable Prices, Full Employment, and Adequate
Economic Growth over Time?
• How Do Fiscal, Monetary, and Balance of Payments Policies Influence the
Economy?
• What Impact Do These Macro Changes Have on Different Firms and
Industries?
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Real versus Nominal GDP
• Inflation can distort economic variables like
GDP, so we have two versions of GDP:
One is corrected for inflation, the other is not.
• Nominal GDP values output using current
prices. It is not corrected for inflation.
• Real GDP values output using the prices of
a base year. Real GDP is corrected for
inflation.
MEASURING A NATION’S INCOME
44
EXAMPLE:
Pizza
Latte
year
P
Q
P
Q
2005
$10
400
$2.00
1000
2006
$11
500
$2.50
1100
2007
$12
600
$3.00
1200
Compute nominal GDP in each year:
2005:
2006:
2007:
$10 x 400 + $2 x 1000
$11 x 500 + $2.50 x 1100
$12 x 600 + $3 x 1200
Increase:
= $6,000
= $8,250
= $10,800
MEASURING A NATION’S INCOME
37.5%
30.9%
45
EXAMPLE:
Pizza
Latte
year
P
Q
P
Q
2005
400
500
$2.00
$2.50
1000
2006
$10
$11
2007
$12
600
$3.00
1200
Compute real GDP in each year,
using 2005 as the base year:
2005: $10 x 400 + $2 x 1000 = $6,000
1100
Increase:
20.0%
2006: $10 x 500 + $2 x 1100 = $7,200
2007: $10 x 600 + $2 x 1200 = $8,400
MEASURING A NATION’S INCOME
16.7%
46
EXAMPLE:
year
Nominal
GDP
Real
GDP
2005
$6000
$6000
2006
$8250
$7200
2007
$10,800
$8400
In each year,
• nominal GDP is measured using the (then) current
prices.
• real GDP is measured using constant prices from the
base year (2005 in this example).
MEASURING A NATION’S INCOME
47
EXAMPLE:
year
Nominal
GDP
2005
$6000
2006
$8250
2007
$10,800
Real
GDP
37.5%
30.9%
$6000
$7200
$8400
20.0%
16.7%
• The change in nominal GDP reflects both prices and
quantities.
 The change in real GDP is the amount that
GDP would change if prices were constant
(i.e., if zero inflation).
Hence, real GDP is corrected for inflation.
MEASURING A NATION’S INCOME
48
Nominal and Real GDP in the U.S.,
1965-2007
Billions
$12,000
$10,000
Real GDP
$8,000
$6,000
$4,000
$2,000
(base year
2000)
Nominal
GDP
$0
1965 1970 1975 1980 1985 1990 1995 2000 2005
49
The GDP Deflator
• The GDP deflator is a measure of the overall
level of prices.
• Definition:
nominal GDP
GDP deflator = 100 x
real GDP
 One way to measure the economy’s inflation
rate is to compute the percentage increase in
the GDP deflator from one year to the next.
MEASURING A NATION’S INCOME
50
EXAMPLE:
year
Nominal
GDP
Real
GDP
GDP
Deflator
2005
$6000
$6000
100.0
2006
$8250
$7200
114.6
2007
$10,800
$8400
128.6
14.6%
12.2%
Compute the GDP deflator in each year:
2005:
100 x (6000/6000) =
100.0
2006:
100 x (8250/7200) =
114.6
2007:
100 x (10,800/8400) =
128.6
MEASURING A NATION’S INCOME
51
ACTIVE LEARNING 2
Computing GDP
2007 (base yr)
P
Good A
Good B
$30
$100
Q
2008
P
2009
Q
900 $31 1,000
192 $102
200
P
Q
$36
$100
1050
205
Use the above data to solve these problems:
A. Compute nominal GDP in 2007.
B. Compute real GDP in 2008.
C. Compute the GDP deflator in 2009.
52
ACTIVE LEARNING 2
Answers
2007 (base yr)
P
Good A
Good B
$30
$100
Q
2008
P
2009
Q
900 $31 1,000
192 $102
200
P
Q
$36
$100
1050
205
A. Compute nominal GDP in 2007.
$30 x 900 + $100 x 192 = $46,200
B. Compute real GDP in 2008.
$30 x 1000 + $100 x 200 = $50,000
53
ACTIVE LEARNING 2
Answers
2007 (base yr)
P
Good A
Good B
$30
$100
Q
2008
P
2009
Q
900 $31 1,000
192 $102
200
P
Q
$36
$100
1050
205
C. Compute the GDP deflator in 2009.
Nom GDP = $36 x 1050 + $100 x 205 = $58,300
Real GDP = $30 x 1050 + $100 x 205 = $52,000
GDP deflator = 100 x (Nom GDP)/(Real GDP)
= 100 x ($58,300)/($52,000) = 112.1
54
ACTIVE LEARNING 3
CPI vs. GDP deflator
In each scenario, determine the effects on the
CPI and the GDP deflator.
A. Starbucks raises the price of Frappuccinos.
B. Caterpillar raises the price of the industrial tractors
it manufactures at its Illinois factory.
C. Armani raises the price of the Italian jeans it sells in
the U.S.
55
ACTIVE LEARNING 3
Answers
A.
Starbucks raises the price of Frappuccinos.
The CPI and GDP deflator both rise.
B.
Caterpillar raises the price of the industrial
tractors it manufactures at its Illinois factory.
The GDP deflator rises, the CPI does not.
C.
Armani raises the price of the Italian jeans it
sells in the U.S.
The CPI rises, the GDP deflator does not.
56
Correcting Variables for Inflation:
Comparing Dollar Figures from Different Times
Amount
in today’s =
dollars
Amount
in year T
dollars
x
Price level today
Price level in year T
• In our example,
– year T = 12/1964, “today” = 12/2007
– Min wage = $1.15 in year T
– CPI = 31.3 in year T, CPI = 211.7 today
The minimum wage
in 1964 was $7.78
in today’s (2007) dollars.
$7.78 = $1.15 x
MEASURING THE COST OF LIVING
211.7
31.3
57
ACTIVE LEARNING 4
Converting to “today’s dollars”
Annual tuition and fees, average of all public four-year
colleges & universities in the U.S.
– 1986-87: $1,414 (1986 CPI = 109.6)
– 2006-07: $5,834 (2006 CPI = 203.8)
After adjusting for inflation, did students pay more for
college in 1986 or in 2006? Convert the 1986 figure to
2006 dollars and compare.
58
ACTIVE LEARNING 4
Answers
Annual tuition and fees, average of all public four-year
colleges & universities in the U.S.
– 1986-87: $1,414 (1986 CPI = 109.6)
– 2006-07: $5,834 (2006 CPI = 203.8)
Solution
Convert 1986 figure into “today’s dollars”
$1,414 x (203.8/109.6) = $2,629
Even after correcting for inflation, tuition and fees
were much lower in 1986 than in 2006!
59
How the CPI Is Calculated
1. Fix the “basket.”
The Bureau of Labor Statistics (BLS) surveys
consumers to determine what’s in the typical
consumer’s “shopping basket.”
2. Find the prices.
The BLS collects data on the prices of all the
goods in the basket.
3. Compute the basket’s cost.
Use the prices to compute the total cost of the
basket.
MEASURING THE COST
OF LIVING
60
How the CPI Is Calculated
4. Choose a base year and compute the index.
The CPI in any year equals
100 x
cost of basket in current year
cost of basket in base year
5. Compute the inflation rate.
The percentage change in the CPI from the
preceding period.
Inflation
=
rate
MEASURING THE COST
OF LIVING
CPI this year – CPI last year
CPI last year
61
x 100%
EXAMPLE
basket: {4 pizzas, 10 lattes}
year
price of
pizza
price of
latte
2007
$10
$2.00
$10 x 4 + $2 x 10
2008
$11
$2.50
$11 x 4 + $2.5 x 10 = $69
2009
$12
$3.00
$12 x 4 + $3 x 10
cost of basket
= $60
= $78
Compute CPI in each year usingInflation
2007 base
rate:year:
2007: 100 x ($60/$60) = 100
2008: 100 x ($69/$60) = 115
2009: 100 x ($78/$60) = 130
MEASURING THE COST
OF LIVING
62
115 – 100
x 100%
15% =
100
130 – 115
x 100%
13% =
115
ACTIVE LEARNING
1
Calculate the CPI
CPI basket:
{10 lbs beef,
20 lbs chicken}
The CPI basket cost $120
in 2004, the base year.
price price of
of beef chicken
2004
$4
$4
2005
$5
$5
2006
$9
$6
A. Compute the CPI in 2005.
B. What was the CPI inflation rate from 2005-2006?
63
ACTIVE LEARNING
1
Answers
CPI basket:
{10 lbs beef,
20 lbs chicken}
The CPI basket cost $120
in 2004, the base year.
price price of
of beef chicken
2004
$4
$4
2005
$5
$5
2006
$9
$6
A. Compute the CPI in 2005:
Cost of CPI basket in 2005
= ($5 x 10) + ($5 x 20) = $150
CPI in 2005 = 100 x ($150/$120) = 125
64
ACTIVE LEARNING
1
Answers
CPI basket:
{10 lbs beef,
20 lbs chicken}
The CPI basket cost $120
in 2004, the base year.
price price of
of beef chicken
2004
$4
$4
2005
$5
$5
2006
$9
$6
B. What was the inflation rate from 2005-2006?
Cost of CPI basket in 2006
= ($9 x 10) + ($6 x 20) = $210
CPI in 2006 = 100 x ($210/$120) = 175
CPI inflation rate = (175 – 125)/125 = 40%
65
What’s in the CPI’s Basket?
4% 3%
Housing
6%
Transportation
6%
Food & Beverages
43%
6%
Medical care
Recreation
Education and
communication
Apparel
15%
Other
17%
MEASURING THE COST
OF LIVING
66