The data of macroeconomics

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The data of macroeconomics

• Chap 2, Mankiw

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In this chap. we discuss how three most important
macro-variables are measured, I. total
output II. average price of goods in particular
goods which the typical consumer consumes III.
total employment
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• I. Measuring total output/income in an economy
• How to define income of an economy?
• In economics income is a return for a productive
  service rendered. Transfer payments are not
  income
• GDP (gross domestic product) market value of
  all final goods and services produced in a year
  within the geographical bounds of a nation
• GNP (gross national product) income earned by
  the factors of production belonging to a nation,
  no matter where they are located

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• GDP (gross domestic product) market value of
  all final goods and services produced in a year
  within the geographical bounds of a nation
• why use market prices?
• only currently produced goods and services are
  included
• only final goods are considered, intermediate
  goods excluded includes addition to
  inventories.
• some non-marketed goods are included by imputing
  a value some non-marketed goods are not
  included, although they are valued.

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• Measuring GDP
• Obsv. In an economy, with only firms and
  households (no govt.),
• market value of all final goods and
  services produced in a year total income (of
  households and firms) from factor services
  rendered during production total expenditure on
  final goods and services by households and firms.
  
• The equality of the three is demonstrated
  by the circular flow diagram.
• In every transaction, buyers expenditure
  sellers income. Revenue from goods gets
  distributed as factor income.

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Measuring GDP the three methods

• 1. Total income earned by domestically-located
  factors of production income method
• Total expenditure on domestically-produced final
  goods and services expenditure method
• Total value of final goods and services produced
  output method.
• Concept of value added shows the equivalence of 1
  and 2. Both are sometimes referred to as the
  value added method
• value added by firm value of output value of
  intermediate goods
• value of all final goods and services sum of
  value added by all firms

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The expenditure components of GDP

• consumption
• investment
• government spending
• net exports
• GDP using expenditure method Y C I G
  NX
• where Y GDP the value of total output
• C I G NX aggregate expenditure

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Other measures of income - GNP vs. GDP

• Gross National Product (GNP) total income
  earned by the nations factors of production,
  regardless of where located
• Gross Domestic Product (GDP)total income earned
  by domestically-located factors of production,
  regardless of nationality.
• (GNP GDP) (factor payments from abroad)
  (factor payments to abroad)

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Other measures of income NNP, NI, PI, DI

• Net National Product or NNP GNP depreciation
• National Income or NI NNP Indirect Business
  taxes
• National income (by types of income) wages,
  salaries proprietors business income rental
  income interest income corporate profits
• Personal Income or PI NI undistributed
  business profits government transfer payment
  social security payments interest income on
  govt. debt

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Disposable Income or DI PI - taxes adjusting
for changes in GDP because of changes in market
prices over time real GDP vs. nominal GDP GDP
deflator (nominal GDP real GDP) 100 Real
GDP can be calculated by using a price in a fixed
year as the base price or by using an average
price calculated over several years as base price
the latter is the chain-weighted measure of
real GDP. advantage of chain-weighted method
relative prices do not get outdated.
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Understanding the GDP deflator
The GDP deflator is a weighted average of prices.
The weight on each price reflects that goods
relative importance in GDP. Note that the
weights change over time.
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II. Measuring average price or the price level in
an economy
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• Two measures of the average price level
  frequently used by macroeconomists the GDP
  deflator, the CPI
• The Consumer Price Index or CPI
• Published by the Bureau of Labor Statistics (BLS)
  
• Used to
• track changes in the typical households cost of
  living
• adjust many contracts for inflation (i.e.
  COLAs)
• allow comparisons of dollar figures from
  different years

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How the BLS constructs the CPI

• Survey consumers to determine composition of the
  typical consumers basket of goods.
• Every month, collect data on prices of all items
  in the basket compute cost of basket
• CPI in any month equals

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The composition of the CPIs basket
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Understanding the CPI
The CPI is a weighted average of prices. The
weight on each price reflects that goods
relative importance in the CPIs basket. Note
that the weights remain fixed over time.
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Reasons why the CPI may overstate inflation

• Substitution bias The CPI uses fixed weights,
  so it cannot reflect consumers ability to
  substitute toward goods whose relative prices
  have fallen.
• Introduction of new goods The introduction of
  new goods makes consumers better off and, in
  effect, increases the real value of the dollar.
  But it does not reduce the CPI, because the CPI
  uses fixed weights.
• Unmeasured changes in quality Quality
  improvements increase the value of the dollar,
  but are often not fully measured.

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CPI vs. GDP deflator

• prices of capital goods (generally all producer
  goods)
• included in GDP deflator (if produced
  domestically)
• excluded from CPI
• prices of imported consumer goods
• included in CPI
• excluded from GDP deflator
• the basket of goods
• CPI fixed
• GDP deflator changes every year

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III. Measuring total employment
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Categories of the population

• employed working at a paid job
• unemployed not employed but looking for a job
• labor force the amount of labor available for
  producing goods and services all employed plus
  unemployed persons
• not in the labor force not employed, not
  looking for work.

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Two important measures relating to labor force

• unemployment rate percentage of the labor force
  that is unemployed
• labor force participation rate the fraction of
  the adult population that participates in the
  labor force

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Okuns Law
Okuns Law states that a one-percent decrease in
unemployment is associated with two percentage
points of additional growth in real GDP
Percentage change in real GDP
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1951
1984
2000
1999
1993
1975
1982
Change in unemployment rate