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

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Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and Inflation Rate)

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

Page 1: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

TopicsTopics

Aggregate Output (Standard Measure)

GDP vs GPI discussion

The Other Major Macroeconomic Variables (Unemployment and Inflation Rate)

Page 2: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

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)

Page 3: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

1) Final good

2) Value added

3) Income

Defining GDP: Three ApproachesDefining GDP: Three Approaches

Page 4: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

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

Page 5: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

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

Page 6: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

What would GDP be if the firms merged?

Question for DiscussionQuestion for Discussion

Page 7: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

2) Value Added Approach

Value added= value of production - value of intermediate goods

Defining GDP: Three ApproachesDefining GDP: Three Approaches

Page 8: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

Steel No intermediate goods Value added = $100

Two Firm ExampleTwo Firm Example

Page 9: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

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

Two Firm ExampleTwo Firm Example

Page 10: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

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

($210) GDP

Two Firm ExampleTwo Firm Example

Page 11: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

Defining GDP

approach added Value approach goods Final

chain production

the along added value the of Sum

goods final of value the of Sum

Page 12: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

Defining GDP Approach 1 & 2 define GDP from the

production side

Page 13: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

Defining GDP

3) GDP from the income side

Page 14: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

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

ConsiderConsider

Page 15: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

GDP from the income side

income capital

income labor

taxes indirect (income) GDP

Defining GDPDefining GDP

Page 16: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

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

Page 17: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

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

$100

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

$110

$210 $110 $100 (income) GDP

Aggregate OutputAggregate Output

($110) car added value

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

Compared to:

Page 18: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

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

Page 19: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

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

indirect taxes + labor income + capital income

Defining GDP – A SummaryDefining GDP – A Summary

Page 20: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

Recall GDP = the value of final goods and

services produced Value is the price of the final good

Nominal & Real GDPNominal & Real GDP

Page 21: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

Therefore, GDP = Price x Quantity of final goods

produced

Nominal & Real GDPNominal & Real GDP

Page 22: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

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

Questions for DiscussionQuestions for Discussion

Page 23: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

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

ObservationObservation

Page 24: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

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

Page 25: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

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%)

Page 26: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

Nominal GDP = Pcars x Qcars

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

Page 27: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

Real GDP = value of final goods in constant prices

Calculating Real GDPCalculating Real GDP

Page 28: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

1991 -- 10,000

1992 -- 12,000 (20% increase)

1993 -- 13,000 (8.33% increase)

Real GDP in UnitsReal GDP in Units

Production of cars

Page 29: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

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

Page 30: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

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

Page 31: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

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

Page 32: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

The increase in real GDP is less than nominal GDP

More variation in real GDP than nominal GDP

ObservationsObservations

Page 33: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

Nominal GDP Dollar GDP GDP in current dollars

Synonyms for GDP AccountingSynonyms for GDP Accounting

Page 34: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

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

Page 35: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Aggregate OutputAggregate Output

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

Page 36: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

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

Page 37: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

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

The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables

Counting the UnemployedCounting the Unemployed

Page 38: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

1998

)6.2( )( 131.4

)( 6.2 4.5%

6.2

131.4

UN

Uu

U

N

The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables

Counting the UnemployedCounting the Unemployed

Page 39: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

Unemployed and Discouraged Workers

)(16 population adult

)( force labor Rate ionParticipat

L

The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables

Macro TermsMacro Terms

Page 40: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

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

The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables

What Do You Think?What Do You Think?

Page 41: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

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

Page 42: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables

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

Page 43: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables

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

Page 44: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables

The Inflation Rate A sustained rise in the price level

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

Page 45: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables

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

Page 46: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables

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

The GDP DeflatorThe GDP Deflator

Page 47: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables

t

t t Y

YP

$

ttt YP Y $

The GDP DeflatorThe GDP Deflator

Page 48: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables

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)

Page 49: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables

Published monthly

Involves several steps

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

Page 50: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables

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

Page 51: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables

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

Page 52: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

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

Page 53: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

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

Page 54: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables

Low unemployment --inflation rate increases

High unemployment -- inflation rate decreases

The Phillips CurveThe Phillips Curve

Page 55: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables

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?

Page 56: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

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

Page 57: Economics 302 Lecture 2 Topics Topics Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and.

Economics 302 Lecture 2

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