Introduction GDP Unemployment Inflation Correlation

ECON2123 Tutorial 1:GDP, Unemployment and Inflation

Ding Dong

Department of EconomicsHKUST

September 14, 2018

Ding Dong Department of EconomicsHKUST

ECON2123 Tutorial 1: GDP, Unemployment and Inflation 1 / 21

Introduction GDP Unemployment Inflation Correlation

An Introduction to Macroeconomics

Ding Dong Department of EconomicsHKUST

ECON2123 Tutorial 1: GDP, Unemployment and Inflation 2 / 21

Introduction GDP Unemployment Inflation Correlation

An Introduction to Macroeconomics

Ding Dong Department of EconomicsHKUST

ECON2123 Tutorial 1: GDP, Unemployment and Inflation 3 / 21

Introduction GDP Unemployment Inflation Correlation

An Introduction to Macroeconomics

Reliable Sources for Macroeconomic Data:

FRED Economic Data from St. Louis FED(https://fred.stlouisfed.org)

Bereau of Economic Analysis, BEA (https://www.bea.gov)

OECD (https://data.oecd.org)

World Bank (https://data.worldbank.org)

IMF (https://www.imf.org/en/Data)

CQER from Atlanta FED (https://www.frbatlanta.org/cqer)

Bloomberg etc.

Ding Dong Department of EconomicsHKUST

ECON2123 Tutorial 1: GDP, Unemployment and Inflation 4 / 21

Introduction GDP Unemployment Inflation Correlation

Economic Variables: Stock Variables vs. Flow Variables

Stock variables: are measured at one specific time, and representquantities existing at that point in time (say, December 31, 2004),which may have accumulated in the past.Flow variables: are measured over an interval of time (say a year).How to distinguish b/w stock variables and flow variables:To ask for a value of flow variables, you have to specify some timeperiod, say a year.To ask for stock variables, you have to specify a specific timepoint, say Sept 11th, 2018.

Ding Dong Department of EconomicsHKUST

ECON2123 Tutorial 1: GDP, Unemployment and Inflation 5 / 21

Introduction GDP Unemployment Inflation Correlation

GDP: Gross Domestic Production

GDP:

GDP is the value of the final goods and services produced inthe economy during a given period.(expenditure approach)

GDP is the sum of value added1 in the economy during agiven period.(value-added approach)

GDP is the sum of incomes in the economy during a givenperiod.(income approach)

Three methods must give you the same results.

Is GDP a stock variable or flow variable?

1:’the value of its production minus the value of the intermediate goodsused in production.’

Ding Dong Department of EconomicsHKUST

ECON2123 Tutorial 1: GDP, Unemployment and Inflation 6 / 21

Introduction GDP Unemployment Inflation Correlation

Is GDP a flow or a stock variable?

Flow variable.Becauae the phrase, during a given period, is specified in threedefinitions.

Ding Dong Department of EconomicsHKUST

ECON2123 Tutorial 1: GDP, Unemployment and Inflation 7 / 21

Introduction GDP Unemployment Inflation Correlation

GDP Accounting Approaches

Economy A with one firm, called Tree, that produces applesfrom inputs air and water (at no cost); with three people,called Steven, Jobs and Cook respectively.

The firm Tree is owned by Steven, is managed by Jobs andsells its product to Cook. So the firm gains revenue fromCook, pays wages to Jobs and keeps to profit (revenue-wagecost) to Steven.

At year 2017, Cook spent 1,000 HKD on apples, Jobs gotpaid for 500 HKD, while Steven kept the profit of 500 HKD.

What is the GDP of Economy A at year 2017?Using three approaches to show.

Ding Dong Department of EconomicsHKUST

ECON2123 Tutorial 1: GDP, Unemployment and Inflation 8 / 21

Introduction GDP Unemployment Inflation Correlation

What is the GDP of Economy A at year 2017?

1000 HKD.1. Expenditure Approach: (final)There is only one final good/service: Apple, and its total value atsale is 1000 HKD.2. Income Approach:500 HKD (of Jobs)+ 500 HKD (of Steven)=1000 HKD.3. Value-Added Approach: (final goods-intermediate goods)There is no cost for intermediate good, so the Value-addedApproach coincides with Expenditure Approach in this case.

Ding Dong Department of EconomicsHKUST

ECON2123 Tutorial 1: GDP, Unemployment and Inflation 9 / 21

Introduction GDP Unemployment Inflation Correlation

GDP Accounting Approaches (continued)

At year 2017, Cook spent 1,000 HKD on apples, Jobs gotpaid for 500 HKD, while Steven kept the profit of 500 HKD.

It turns out that Jobs is the son of Steven, and Cook is thehousekeeper for their family. At the end of year 2017, Stevenpays Cook 500 HKD for cooking for their family and Jobspays Cook 500 HKD for his used bicycle.

What is the GDP of Economy A at year 2017?Use three approaches to show.

Ding Dong Department of EconomicsHKUST

ECON2123 Tutorial 1: GDP, Unemployment and Inflation 10 / 21

Introduction GDP Unemployment Inflation Correlation

What is the GDP of Economy A at year 2017?

1500 HKD.1. Expenditure Approach: (goods and service)There are two final good and service now: Apple and Cooking.There total value is 1500 HKD.2. Income Approach:500 HKD (of Jobs)+ 500 HKD (of Steven) + 500 HKD (of Cook)=1500 HKD.3. Value-Added Approach: (final goods-intermediate goods)Again, there is no cost for intermediate good, so the Value-addedApproach coincides with Expenditure Approach in this case.

Ding Dong Department of EconomicsHKUST

ECON2123 Tutorial 1: GDP, Unemployment and Inflation 11 / 21

Introduction GDP Unemployment Inflation Correlation

GDP Accounting Approaches

Economy B with two firms, called Tree and Sunbucks; withthree people, called Steven, Jobs and Cook respectively.

The firm Tree is owned by Steven, is managed by Jobs andsells its product, apple, to Cook. Apple is produced fromwater and air at no cost.

The firm Sunbucks is owned and managed by Cook, whopurchases apple from Steven and sells its product, apple juice,to residents in Economy B.

At year 2017, Cook spent 1,000 HKD on apples as input forapple juice (Jobs got paid for 500 HKD, while Steven kept theprofit of 500 HKD), and sold apple juice for 2000 HKD.

What is the GDP of Economy B at year 2017?Using three approaches to show.

Ding Dong Department of EconomicsHKUST

ECON2123 Tutorial 1: GDP, Unemployment and Inflation 12 / 21

Introduction GDP Unemployment Inflation Correlation

What is the GDP of Economy B at year 2017?

2000 HKD.1. Expenditure Approach: (goods and service)There is only one final good now: Apple Juice. The total value is2000 HKD.2. Income Approach:500 HKD (of Jobs)+ 500 HKD (of Steven) + 1000 HKD (ofCook) =2000 HKD.3. Value-Added Approach: (final goods-intermediate goods)At stage one, there is no intermediate good, so the value added instage one is 1000 HKD;At stage two, the final good sells for 2000 HKD, whileintermediate good costs 1000 HKD, so the value added in stagetwo is 1000 HKD.The value added in two stages is 2000 HKD in total.

Ding Dong Department of EconomicsHKUST

ECON2123 Tutorial 1: GDP, Unemployment and Inflation 13 / 21

Introduction GDP Unemployment Inflation Correlation

GDP: Nominal vs. Real GDP

Nominal GDP = Quantity * Current Price.Real GDP = Quantity * Base-Year Price.

Economy A with one firm, called Tree,that produces applesusing air and water (at no cost); with three people, calledSteven, Jobs and Cook respectively.

At year 2017, Tree sells 100 apples to Cook, at a price of 10each.

At year 2016, Tree sells 200 apples to Cook, at a price of 4each.

What is the nominal and real GDP of year 2017? (suppose 2016 isthe base year)Which year has a higher nominal GDP?Which year has a higher real GDP?

Ding Dong Department of EconomicsHKUST

ECON2123 Tutorial 1: GDP, Unemployment and Inflation 14 / 21

Introduction GDP Unemployment Inflation Correlation

Unemployment: Accounting

Working Age Population (P) = People in the labor force (L)+ People not in the labor force(N).

People in the labour force (L) = employed people (E) +unemployed people (U).

Labour Participation Rate= LP .

Unemployment Rate = UL .

Is unemployment a stock or a flow variable?

Ding Dong Department of EconomicsHKUST

ECON2123 Tutorial 1: GDP, Unemployment and Inflation 15 / 21

Introduction GDP Unemployment Inflation Correlation

Inflation: Definition and Measurement

The inflation rate is the rate at which the (aggregate) price levelincreases.Inflation rate is normally measured by:

The GDP Deflator.

The Consumer Price Index(CPI).

Discussion: Why do we need the GDP Deflator?

Ding Dong Department of EconomicsHKUST

ECON2123 Tutorial 1: GDP, Unemployment and Inflation 16 / 21

Introduction GDP Unemployment Inflation Correlation

Inflation: GDP Deflator

Recall our previous example:

Economy A with one firm, called Tree,that produces applesusing air and water (at no cost); with three people, calledSteven, Jobs and Cook respectively.

At year 2017, Tree sells 100 apples to Cook, at a price of 10each. (Nominal GDP=1,000 HKD; Real GDP=400 HKD)

At year 2016, Tree sells 200 apples to Cook, at a price of 4each. (Nominal GDP= 800 HKD = Real GDP=800 HKD)

GDP Deflator = Nominal GDP/ Real GDPGDP Deflator (2017) = 2.50GDP Deflator (2016) = 1.00Inflation rate= (250-100) /100 = 150%.

Ding Dong Department of EconomicsHKUST

ECON2123 Tutorial 1: GDP, Unemployment and Inflation 17 / 21

Introduction GDP Unemployment Inflation Correlation

Inflation: Consumer Price Index

CPI: Consumer Price Index, the price level of a market basket ofconsumer goods and services purchased by households.

The Basket of U.S.: 7 categories including Housing,FoodBeverage, Transportation, Medical Care, Clothing,Entertainment and others.

The Basket of China: 8 categories including Food, Beverage,Clothing, House Appliance, Medical Care, Transportation,Entertainment and Clothing.

The Basket of HKUSTers: ?

Ding Dong Department of EconomicsHKUST

ECON2123 Tutorial 1: GDP, Unemployment and Inflation 18 / 21

Introduction GDP Unemployment Inflation Correlation

Inflation: Consumer Price Index

Think about one basket of CPI:

Bread of 10 pounds(food); Monthly metro travelpass(transportation); A double room at UniversityHall(housing); Dental Scaling for twice(medical care).

At year 2017, bread cost 200 HKD/pound, Monthly metrotravel pass costs 1,000 HKD; A double room costs 1,000HKD; and dental scaling costs 500 HKD once.

At year 2016, bread cost 100 HKD/pound, Monthly metrotravel pass costs 1,000 HKD; A double room costs 800 HKD;and dental scaling costs 600 HKD once.

CPI(2017) = 10*200+1000+1000+2*500 =5,000CPI(2016) = 10*100+1000+800+2*600 =4,000Inflation rate= (5,000-4,000) /4,000 = 25%.

Ding Dong Department of EconomicsHKUST

ECON2123 Tutorial 1: GDP, Unemployment and Inflation 19 / 21

Introduction GDP Unemployment Inflation Correlation

GDP and Unemployment: Okun’s Law

Output growth and unemployment rate are negatively related(empirically).i.e., Output growth that is lower than usual is associated withan increase in the unemployment rate.

Policy implication: The key to decreasing unemployment is ahigh enough rate of growth. Does it make sense?

Ding Dong Department of EconomicsHKUST

ECON2123 Tutorial 1: GDP, Unemployment and Inflation 20 / 21

Introduction GDP Unemployment Inflation Correlation

Inflation and Unemployment: Phillips Curve

Inflation rate and unemployment rate are negatively related(empirically).i.e, A low unemployment rate leads to an increase in theinflation rate.

Possible Explanations:a. (supply side) lower unemployment rate ⇒ higher wage ⇒higher cost of production ⇒ higher prices;b. (demand side) lower unemployment rate ⇒ higher wage=higher income ⇒ higher demand for goods ⇒ higher prices.

Discussion on ”Policy implication”: ”The key to decreasingunemployment is a high enough inflation rate.” Does it makesense?

Ding Dong Department of EconomicsHKUST

ECON2123 Tutorial 1: GDP, Unemployment and Inflation 21 / 21