Measuring Macroeconomics

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Measuring Macroeconomics
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Aggregate Output

• National income accounts An accounting system
  used to measure aggregate economic activity.
• The typical measure of aggregate output in the
  national income accounts is gross domestic
  product, or GDP.

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GDP Production and Income

• There are three ways of defining GDP
• The value of the final goods and services
  produced in the economy.
• The sum of value added in the economy.
• The sum of the incomes in the economy.

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Nominal and Real GDP

• Nominal GDP is the sum of the quantities of final
  goods produced times their current price.
• Nominal GDP usually increases over time because
• production increases
• prices increase...
• Real GDP is constructed as the sum of the
  quantities of final goods times constant (rather
  than current) prices.

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Nominal and Real GDP
Year Quantity of Cars Price of cars (in ,000) Price of cars (in ,000) Nominal GDP Nominal GDP
1995 10 20 200
1996 12 24 288
1997 13 26 338

• Using 1996 dollars to compute real GDP, then

Year Quantity of Cars Price of cars (in ,000) Price of cars (in ,000) Nominal GDP Nominal GDP
1995 10 24 240
1996 12 24 288
1997 13 24 312
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Nominal and Real GDP

• Nominal GDP is also called
• dollar GDP
• GDP in current dollars
• Real GDP is also called
• GDP in constant dollars
• GDP adjusted for inflation
• GDP in 1996 dollars

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Nominal and Real GDP
Nominal and Real GDP U.S. GDP, 1960-2000

• From 1960 to 2000, nominal GDP increased by a
  factor of 19. Real GDP increased by a factor of
  4.

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• GDP is obviously the most important
  macroeconomic variable. (?)
• Two other variables that inform us on other
  important aspects of how an economy is
  performing
• Unemployment
• Inflation

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The Unemployment Rate

• labor force employed unemployed L
  N U
• Unemployment rate

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The Inflation Rate

• The inflation rate is the rate at which the price
  level changes (typically increases).
• Two ways to measure inflation
• GDP Deflator
• CPI

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The GDP Deflator

• The rate of change in the GDP deflator equals the
  rate of inflation

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The Consumer Price Index

• The GDP deflator measures the average price of
  domestic output, while the consumer price index
  (CPI) measures the average price of consumption
  (the cost of living).

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The composition of the CPIs basket
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Measurement Issues - CPI

• The average (?) consumption basket.
• Accounting for quality of products.
• Updating the consumption basket over time.
• Substitution of cheaper goods for more expensive
  ones (or vice versa).

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The CPI and the GDP Deflator
The inflation rates, computed using either the
CPI or the GDP deflator, are largely similar.
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Effects of Inflation

• Inflation makes buyers poorer.
• Inflation makes sellers richer.
• Since most people are both buyers (as consumers)
  and sellers (as owners of factors of production),
  the average persons income and wealth should not
  change because of inflation.

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Inflation Redistributes Income

• Inflation redistributes income from those who
  cannot raise their prices to those who can.
• People do not raise prices if inflation is
  unanticipated.
• People can not raise their prices if they are
  fixed by a contract.
• Inflation redistributes income from lenders to
  borrowers

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Dead-Weight Costs of Inflation

• Informational Costs
• Uncertainty Costs
• Menu Costs
• Shoe-leather Costs

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A Road-Map for the course

• Output is determined by
• demand in the short run, say, a few years,
• the level of technology, the capital stock, and
  the labor force in the medium run, say, a decade
  or so.
• factors such as education, research, saving, and
  the quality of government in the long run, say, a
  half century or more.