Chapter 2:The Data of MacroeconomicsChapter 2:The Data of Macroeconomics

Stock vs. Flow

Stock: quantity measured at a given point in time– Wealth– Debt– Budget

Flow: quantity measured per unit of time– Income– Employment– Price

The Circular Flow on Income and Product

Households: – sell labor resources to earn income– spend income to buy products

Firms: – buy labor resources to produce products– sell products to earn income

The Circular Flow on Income and Product

Firms Households

Labor Resources

Income Payment

Products

Consumption Expenditure

Product Market

Labor Market

Gross Domestic Product

Market value of all final goods and services an economy produces in a current time period (year or quarter)

Total income = Total expenditure Total value-added (value of output minus value of inputs at each production stage)

GDP Adjustments

The GDP excludes the following items:

– Intermediate goods: avoid double counting– Used goods: already counted– Illegal goods and services: not to be produced – Self-produced goods and services: non-market

transactions

GDP Adjustments

Treatment of inventories:

– Accumulation is treated as “expenditure,” thus reducing GDP

– Reduction is treated as a purchase (+) and a disinvestment (-), hence offsetting each other

GDP Adjustments

Imputation: estimation of the value of services

– Market rent for owner-occupied homes

– Cost of provision for government services

Note: Imputation is not applied to other services such as private transportation

GDP Adjustments

Seasonal adjustment:

– GDP increases throughout the year, reaching a peak in the fourth quarter and then falling in the first quarter

– We use a statistical technique to “smooth” seasonal variations

GDP Calculations

Nominal GDP = Current year prices * Current year quantities

Real GDP = Base year prices * Current Year quantities

GDP Deflator = Nominal GDP / Real GDP, representing the general price level

Base Year Determination

Real GDP:– Base year changes every five years

Chain-Weighted Real GDP:– Base year changes continuously over time

Components of GDP

Nominal GDP = Consumption + Investment + Government purchases + Net Exports: exports less imports

Y = C + I + G + NX (1997 data in %: 100 = 68 + 15 + 18 –1)

Data

National Income Accounting

GNP: Gross National Product= GDP + Factor payments from abroad- Factor payments to abroad

National Income Accounting

NNP: Net National Products= GNP- Depreciation or Consumption of Fixed Capital

(about 10%)

National Income Accounting

NI: National Income= NNPIndirect Business Taxes (e.g., sales tax; about 10%)

National Income Accounting

PI: Personal Income= NI- Corporate Profits- Social Insurance Contributions- Net Interest+ Dividends+ Gov’t Transfer Payments to Individuals+ personal Interest Income

National Income Accounting

DPI: Disposable Personal Income= PI- Personal Income Taxes

Measuring Cost of Living

Consumer Price Index:

– Average weighted prices of some 400 consumer products sold in urban areas around the nation

– CPI = (current year market basket / base year market basket)*100

GDP Deflator vs. CPI

Variable weights vs. Fixed weights

All products vs. Selected products

Domestic products vs. Domestic and imported products

GDP Deflator vs. CPI

Does CPI Overstates Inflation?

CPI tends to overstate inflation because

– Substitution for less expensive goods is not considered in the fixed market basket

– New goods are continuously introduced in the market

– Improvement in the quality of goods is not considered

Population vs. Labor Force

Population = Labor force + + Not in labor force

In 1997, 203.1 million

Labor force = Employed + Unemployed

In 1997, 129.6 + 6.7 = 136.3 million

129.6

66.8

6.7

Employed

Unemployed

Not in the labor force

Population vs. Labor Force

Labor Market Data

Unemployment rate = unemployed as % of labor force

In 1997, (6.7/136.3)*100 = 4.9%

Labor force participation rate = labor force as % of adult population

In 1997, (136.3/203.1)*100 = 67.1%

Unemployment Conditions

Members of the labor force

Out of work

Actively looking for work

The Okun’s Law

For any percentage point increase in the unemployment rate, the real GDP growth rate falls by 2 percent

Change in real GDP = 3% - 2(change in unemployment rate)

Example: if unemployment increases from 4 to 6%, GDP growth rate would fall from 3 to –1%

Growth-Unemployment Trade-off