Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The...

Economics 302 Lecture 2

TopicsTopics

Aggregate Output (Standard Measure)

GDP vs GPI discussion

The Other Major Macroeconomic Variables (Unemployment and Inflation Rate)


Aggregate OutputAggregate Output

Gross Domestic Product (GDP) The value of the final goods and services

produced in an economy during a given period

Aggregate Output (national income and product accounts, or NIPA)Aggregate Output (national income and product accounts, or NIPA)



1) Final good

2) Value added

3) Income

Defining GDP: Three ApproachesDefining GDP: Three Approaches



Firm 1: Steel Company

Revenues from sales $100Expenses (wages) $80Profit $20

Firm 2: Car CompanyRevenues from sales $210Expenses $170

Wages $70Steel purchases $100

Profit $40

What is GDP?$310 or $210

GDP: The final goods approach



Answer: $210 If both firms are summed ($100 + $210)

the $100 in steel is counted twice Counting only the final good (cars) includes

the intermediate good (steel)

Defining GDPDefining GDP



What would GDP be if the firms merged?

Question for DiscussionQuestion for Discussion



2) Value Added Approach

Value added= value of production - value of intermediate goods

Defining GDP: Three ApproachesDefining GDP: Three Approaches



Steel No intermediate goods Value added = $100

Two Firm ExampleTwo Firm Example



Cars Intermediate goods (steel) = $100 Value added = $210 - $100 = $110




($110) cars added value ($100) steel added Value

($210) GDP




Defining GDP

approach added Value approach goods Final

chain production

the along added value the of Sum

goods final of value the of Sum



Defining GDP Approach 1 & 2 define GDP from the

production side



Defining GDP

3) GDP from the income side



Revenues after payment for intermediate goods Some pay indirect taxes (sales taxes) Some pay workers (labor income) Remainder to the firm (capital income)

ConsiderConsider



GDP from the income side

income capital

income labor

taxes indirect (income) GDP

Defining GDPDefining GDP



Firm 1: Steel Company

Revenues from sales $100Expenses (wages) $80Profit $20

Firm 2: Car CompanyRevenues from sales $210Expenses $170

Wages $70Steel purchases $100

Profit $40

GDP: Income Approach


Income (steel) Labor = $80 Capital = $20

$100

Income (car) Labor = $70 Capital = $40

$110

$210 $110 $100 (income) GDP


($110) car added value

($100) steel added value -$210)-added (value GDP

Compared to:


The Composition of GDP byThe Composition of GDP byType of Income, 1960 and 1998Type of Income, 1960 and 1998

Labor income 66% 65%

Capital income 26% 27%

Indirect taxes 8% 8%

In Percent 1960 1998



Output Approach = Income Approach Final goods & value added = sum of

indirect taxes + labor income + capital income

Defining GDP – A SummaryDefining GDP – A Summary



Recall GDP = the value of final goods and

services produced Value is the price of the final good

Nominal & Real GDPNominal & Real GDP



Therefore, GDP = Price x Quantity of final goods

produced

Nominal & Real GDPNominal & Real GDP



If price increases and quantity remains constant, what happens to the value of final output?

Questions for DiscussionQuestions for Discussion



Higher prices bias the GDP measurement of production upward over time.

ObservationObservation



Nominal & Real GDP (correcting for inflation) One good economy

Year Quantity of Cars Price of Cars Nominal GDP

1991 10 $10,000 $100,0001992 12 $12,000 $144,0001993 13 $13,000 $169,000



Nominal & Real GDP (correcting for inflation) One good economy

Year Quantity of Cars Price of Cars Nominal GDP(% increase)

1991 10 $10,000 $100,000 (--)1992 12 $12,000 $144,000 (44%)1993 13 $13,000 $169,000 (17.4%)



Nominal GDP = Pcars x Qcars

QuestionQuestion Did the real output of cars increase 44% from 1991 to 1992?



Real GDP = value of final goods in constant prices

Calculating Real GDPCalculating Real GDP



1991 -- 10,000

1992 -- 12,000 (20% increase)

1993 -- 13,000 (8.33% increase)

Real GDP in UnitsReal GDP in Units

Production of cars



1991 -- 10 x $12,000 = $120,000

1992 -- 12 x $12,000 = $144,000 (20% increase)

1993 -- 13 x $12,000 = $156,000 (8% increase)

Real GDP in 1992 $sReal GDP in 1992 $s

Note: Nominal 1992 GDP = Real 1992 GDPNote: Nominal 1992 GDP = Real 1992 GDP

Car Production x 1992 Prices



Accounting for all final goods Weighted average of the output of final

goods Relative prices serve as weights Must consider the change in relative prices U.S. Real GDP is Real GDP in chained

(1992) dollars

Calculating Real GDP in PracticeCalculating Real GDP in Practice


Nominal and RealNominal and RealU.S. GDP, 1960-1998U.S. GDP, 1960-1998



The increase in real GDP is less than nominal GDP

More variation in real GDP than nominal GDP

ObservationsObservations



Nominal GDP Dollar GDP GDP in current dollars

Synonyms for GDP AccountingSynonyms for GDP Accounting



Real GDP GDP in terms of goods GDP in constant dollars GDP adjusted for inflation GDP in 1992 dollars

Synonyms for GDP AccountingSynonyms for GDP Accounting



GDP growth in year t -- rate of change in real GDP in year t

GDP growth = (yt - yt-1)/yt-1

Expansions -- periods of positive growth

Recessions -- periods of negative growth(2 consecutive quarters)

Technical Notes: For the CourseTechnical Notes: For the Course


The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables

)( force labor

)( unemployed number )( Rate ntUnemployme

L

Uu

)(unemployed )( employed )( Force Labor UNL

The Unemployment RateThe Unemployment Rate


Current population survey 60,000 households monthly Employed -- job holders Unemployed -- job seekers


Counting the UnemployedCounting the Unemployed


1998

)6.2( )( 131.4

)( 6.2 4.5%

6.2

131.4

UN

Uu

U

N


Counting the UnemployedCounting the Unemployed


Unemployed and Discouraged Workers

)(16 population adult

)( force labor Rate ionParticipat

L


Macro TermsMacro Terms


Can the unemployment rate rise when the number of employed increases?


What Do You Think?What Do You Think?


Change in the U.S. Unemployment Rate Change in the U.S. Unemployment Rate versus U.S. GDP Growth 1960 - 1998versus U.S. GDP Growth 1960 - 1998



If unemployment is too high -- high growth policy must be pursued to reduce it

If unemployment is too low -- low growth policy is required

Economic Policy ImplicationsEconomic Policy Implications



Unemployment rates and duration vary by population groups

Certain groups incur a disproportionate share of the unemployed when unemployment increases

Social Implications of UnemploymentSocial Implications of Unemployment



The Inflation Rate A sustained rise in the price level

Two Measures of the Price Level GDP Deflator Consumer Price Index (CPI)



Average price of final goods produced

GDP deflator in year t = Pt

t

t

t

tt Y

$YP

GDP Real

GDP nominal

The GDP DeflatorThe GDP Deflator



Pt is an index number

• P1993 = 102.6 (1992 = 100)

Index numbers are used to measure rate of change over time

t 1- t

1- t t PP

PP

%

inflation of Rate




t

t t Y

YP

$

ttt YP Y $




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

The Consumer Price Index (CPI)The Consumer Price Index (CPI)



Published monthly

Involves several steps

The Consumer Price Index (CPI)The Consumer Price Index (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

Steps in Calculating the CPISteps in Calculating the CPI



5) 1998 CPI = 163 (1982-84 = 100)

100 84)-(1982 price Base

period time in Price4) CPI

Steps in Calculating the CPISteps in Calculating the CPI


Inflation Rate, Using the CPIInflation Rate, Using the CPIand the GDP Deflator, 1960, 1998and the GDP Deflator, 1960, 1998


Change in the U.S. Inflation Rate versus Change in the U.S. Inflation Rate versus the U.S. Unemployment Rate, 1970-1998the U.S. Unemployment Rate, 1970-1998



Low unemployment --inflation rate increases

High unemployment -- inflation rate decreases

The Phillips CurveThe Phillips Curve



Prices and wages do not rise proportionately Inflation creates market distortions due to: Regulation Taxation Uncertainty for business investment

Why Do Economists Care About Inflation?Why Do Economists Care About Inflation?


What Do Macroeconomists What Do Macroeconomists Care About?Care About?

What determines the level of aggregate output? Demand Supply Government, education, and savings

The Central Question of MacroeconomicsThe Central Question of Macroeconomics


Macroeconomic AnalysisMacroeconomic Analysis

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

The Central Question of MacroeconomicsThe Central Question of Macroeconomics

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