Aggregate Output (Standard Measure)

1
Topics

• Aggregate Output (Standard Measure)
• GDP vs GPI discussion
• The Other Major Macroeconomic Variables
  (Unemployment and Inflation Rate)

2
Aggregate Output
Aggregate Output (national income and product
accounts, or NIPA)

• Gross Domestic Product (GDP)
• The value of the final goods and services
  produced in an economy during a given period

3
Aggregate Output
Defining GDP Three Approaches

• 1) Final good
• 2) Value added
• 3) Income

4
Aggregate Output
GDP The final goods approach
What is GDP? 310 or 210
5
Aggregate Output
Defining GDP

• 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)

6
Aggregate Output
Question for Discussion

• What would GDP be if the firms merged?

7
Aggregate Output
Defining GDP Three Approaches

• 2) Value Added Approach

8
Aggregate Output
Two Firm Example

• Steel
• No intermediate goods
• Value added 100

9
Aggregate Output
Two Firm Example

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

10
Aggregate Output
Two Firm Example
11
Aggregate Output

• Defining GDP

12
Aggregate Output

• Defining GDP
• Approach 1 2 define GDP from the production side

13
Aggregate Output

• Defining GDP
• 3) GDP from the income side

14
Aggregate Output
Consider

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

15
Aggregate Output
Defining GDP

• GDP from the income side

16
Aggregate Output
GDP Income Approach
17
Aggregate Output

• Income (steel)
• Labor 80
• Capital 20
• 100

• Income (car)
• Labor 70
• Capital 40
• 110

18
The Composition of GDP byType of Income, 1960
and 1998

19
Aggregate Output
Defining GDP A Summary

• Output Approach Income Approach
• Final goods value added sum of indirect taxes
  labor income capital income

20
Aggregate Output
Nominal Real GDP

• Recall
• GDP the value of final goods and services
  produced
• Value is the price of the final good

21
Aggregate Output
Nominal Real GDP

• Therefore,
• GDP Price x Quantity of final goods produced

22
Aggregate Output
Questions for Discussion

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

23
Aggregate Output
Observation

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

24
Aggregate Output

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

25
Aggregate Output

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

26
Aggregate Output

• Nominal GDP Pcars x Qcars

27
Aggregate Output
Calculating Real GDP

• Real GDP value of final goods in constant prices

28
Aggregate Output
Real GDP in Units
Production of cars

• 1991 -- 10,000
• 1992 -- 12,000 (20 increase)
• 1993 -- 13,000 (8.33 increase)

29
Aggregate Output
Real GDP in 1992 s
Car Production x 1992 Prices

• 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)

Note Nominal 1992 GDP Real 1992 GDP
30
Aggregate Output
Calculating Real GDP in Practice

• 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

31
Nominal and RealU.S. GDP, 1960-1998
32
Aggregate Output
Observations

• The increase in real GDP is less than nominal GDP
• More variation in real GDP than nominal GDP

33
Aggregate Output
Synonyms for GDP Accounting

• Nominal GDP
• Dollar GDP
• GDP in current dollars

34
Aggregate Output
Synonyms for GDP Accounting

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

35
Aggregate Output
Technical Notes For the Course

• 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)

36
The Other MajorMacroeconomic Variables
The Unemployment Rate
37
The Other MajorMacroeconomic Variables
Counting the Unemployed

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

38
The Other MajorMacroeconomic Variables
Counting the Unemployed

• 1998

39
The Other MajorMacroeconomic Variables
Macro Terms

• Unemployed and Discouraged Workers

40
The Other MajorMacroeconomic Variables
What Do You Think?

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

41
Change in the U.S. Unemployment Rate versus U.S.
GDP Growth 1960 - 1998
42
The Other MajorMacroeconomic Variables
Economic Policy Implications

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

43
The Other MajorMacroeconomic Variables
Social Implications of Unemployment

• Unemployment rates and duration vary by
  population groups
• Certain groups incur a disproportionate share of
  the unemployed when unemployment increases

44
The Other MajorMacroeconomic Variables

• The Inflation Rate
• A sustained rise in the price level
• Two Measures of the Price Level
• GDP Deflator
• Consumer Price Index (CPI)

45
The Other MajorMacroeconomic Variables
The GDP Deflator

• Average price of final goods produced
• GDP deflator in year t Pt

46
The Other MajorMacroeconomic Variables
The GDP Deflator

• Pt is an index number
• P1993 102.6 (1992 100)
• Index numbers are used to measure rate of change
  over time

47
The Other MajorMacroeconomic Variables
The GDP Deflator
48
The Other MajorMacroeconomic Variables
The Consumer Price Index (CPI)

• 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

49
The Other MajorMacroeconomic Variables
The Consumer Price Index (CPI)

• Published monthly
• Involves several steps

50
The Other MajorMacroeconomic Variables
Steps in Calculating the 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

51
The Other MajorMacroeconomic Variables
Steps in Calculating the CPI

• 5) 1998 CPI 163 (1982-84 100)

52
Inflation Rate, Using the CPIand the GDP
Deflator, 1960, 1998
53
Change in the U.S. Inflation Rate versus the U.S.
Unemployment Rate, 1970-1998
54
The Other MajorMacroeconomic Variables
The Phillips Curve

• Low unemployment --inflation rate increases
• High unemployment -- inflation rate decreases

55
The Other MajorMacroeconomic Variables
Why Do Economists Care About Inflation?

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

56
What Do Macroeconomists Care About?
The Central Question of Macroeconomics

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

57
Macroeconomic Analysis
The Central Question of Macroeconomics

• 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