Instructors Resourcesfor use with

MACROECONOMICSE I G H T H E D I T I O N

N. GREGORY MANKIW

Robert G. MurphyBoston College

WORTH PUBLISHERS

Instructors Resourcesby Robert G. Murphyfor use with Mankiw: Macroeconomics, Eighth Edition

2013, 2010, 2007, 2003, 2000, 1997, 1994 by Worth Publishers

All rights reserved.

The contents, or parts thereof, may be reproduced for use with Macroeconomics, Eighth Edition, by N. Gregory Mankiw as described in the Preface to the Instructors Resources, but may not be reproduced in any form for any other purpose without prior written permission of the publisher.

ISBN 13: 978-1-4641-2314-6ISBN 10: 1-4641-2314-4

First Printing 2012

Printed in the United States of America

Worth Publishers41 Madison AvenueNew York, NY 10010wortheconomics.com

Preface vChapter Supplements vii

CHAPTER 1 The Science of Macroeconomics 1Notes to the Instructor 1Lecture Notes 3Chapter Supplements 7

CHAPTER 2 The Data of Macroeconomics 15Notes to the Instructor 15Lecture Notes 17Chapter Supplements 24

CHAPTER 3 National Income: Where It ComesFrom and Where It Goes 51Notes to the Instructor 51Lecture Notes 53Chapter Supplements 61

CHAPTER 4 The Monetary System: What It Isand How It Works 75Notes to the Instructor 75Lecture Notes 76Chapter Supplements 83

CHAPTER 5 Inflation: Its Causes, Effects, andSocial Costs 89Notes to the Instructor 89Lecture Notes 91Chapter Supplements 101

CHAPTER 6 The Open Economy 129Notes to the Instructor 129Lecture Notes 131Chapter Supplements 139

CHAPTER 7 Unemployment 153Notes to the Instructor 153Lecture Notes 155Chapter Supplements 162

CHAPTER 8 Economic Growth I: CapitalAccumulation and PopulationGrowth 187Notes to the Instructor 187Lecture Notes 190Chapter Supplements 196

CHAPTER 9 Economic Growth II: Technology,Empirics, and Policy 215Notes to the Instructor 215Lecture Notes 217Chapter Supplements 226

CHAPTER 10 Introduction to Economic Fluctuations 241Notes to the Instructor 241Lecture Notes 243Chapter Supplements 249

CHAPTER 11 Aggregate Demand I: Buildingthe ISLM Model 265Notes to the Instructor 265Lecture Notes 266Chapter Supplements 271

CHAPTER 12 Aggregate Demand II: Applyingthe ISLM Model 277Notes to the Instructor 277Lecture Notes 279Chapter Supplements 285

CHAPTER 13 The Open Economy Revisited:The MundellFleming Model andthe Exchange-Rate Regime 297Notes to the Instructor 297Lecture Notes 299Chapter Supplements 306

CHAPTER 14 Aggregate Supply and the Short-Run Tradeoff Between Inflationand Unemployment 325Notes to the Instructor 325Lecture Notes 327Chapter Supplements 335

CHAPTER 15 A Dynamic Model of AggregateDemand and Aggregate Supply 355Notes to the Instructor 355Lecture Notes 357Chapter Supplements 400

CHAPTER 16 Understanding ConsumerBehavior 389Notes to the Instructor 389Lecture Notes 391Chapter Supplements 400

CHAPTER 17 The Theory of Investment 409Notes to the Instructor 409Lecture Notes 411Chapter Supplements 417

Contents

iii

CHAPTER 18 Alternative Perspectives onStabilization Policy 441Notes to the Instructor 441Lecture Notes 443Chapter Supplements 450

CHAPTER 19 Government Debt and BudgetDeficits 473Notes to the Instructor 473Lecture Notes 475Chapter Supplements 482

CHAPTER 20 The Financial System:Opportunities and Dangers xxxNotes to the Instructor xxxLecture Notes xxxChapter Supplements xxx

vThese Instructors Resources provide instructional and enrichment materialsfor Macroeconomics, Eighth Edition, by N. Gregory Mankiw. Each chaptercor responds to a textbook chapter and is made up of three sections: Notes tothe Instructor, Lecture Notes, and Chapter Supplements.

The Notes to the Instructor contains a brief summary and explanation of thepurpose of the textbook chapter, suggestions for presenting the material, and alist of Chapter Supplements. Where appropriate, I provide suggestions for howfeatures of the companion Web site (www.worthpublishers.com/mankiw) mightbe incorporated into the teaching of the course. The Lecture Notes section pre-sents a comprehensive outline of the chapter. The Chapter Supplements are brief, largely self-contained pieces that you can use either as additional lecture material or reproduce as handouts for students. I have classified the sup-plements under five headings.

Case Study Extensions provide additional information for many of the casestudies in the textbook, usually offering more data and/or more details.

Additional Case Studies discuss points not covered in the textbook casestudies.

Lecture Supplements delve more deeply into topics covered in thetextbook, providing more detail than appears in the Lecture Notes.

Advanced Topics go substantially beyond the main lessons of the textchapter; a few of them are relatively technical. Often, they presentclassic articles or recent research.

Additional Readings are included for many chapters. These are listingsof relatively accessible supplementary readings that could provide abasis for student papers or projects.

Use of the ResourcesThese Instructors Resources will enhance and facilitate your teaching of macro-economics as your students study from Macroeconomics, Eighth Edition. Thebrief Notes to the Instructor will familiarize you with the topics covered in eachchapter. The detailed Lecture Notes, which form the foundation of the Instruc-tors Resources, are not simply summaries of the textbook; they often differ inemphasis and take special care to describe how the models of different chaptersfit together. Instructors who base their lectures on these notes will be accusedof neither straying too far from the text nor slavishly following it. The LectureNotes refer to the figures in the textbook. To accompany your lectures, full-pagereproductions of these figures are available from Worth Publishers. These fig-ures also are downloadable from the textbooks Web site. In addition, the Pow-erPoint presentations developed by Ron Cronovich have been updated and areavailable on the Web site. These presentations feature animated graphs withexplanations for each chapter and include additional case studies and data. De-signed to be customized or used as is, these presentations include instructionsfor professors who have little or no experience with PowerPoint. A Dismal Sci-entist data activity (www.dismalscientist.com) is provided for each chapter foruse by those instructors choosing access for their class to Moody's Dismal Sci-entist Web site. These activities challenge students to further explore theirknowledge of the chapter material by using a comprehensive economic data-base and analysis service offering up-to-date monitoring of the global economy.

Preface

vi Preface

The Chapter Supplements are the most versatile part of the Instructors Re-sources. They are referenced in the Lecture Notes to facilitate their incorporationinto your lecture material. The supplements are largely self-contained, making themsuitable for use as handouts to students, but they also reference relevant sections ofthe textbook and occasionally other supplements. By selecting from these ChapterSupplements, you can design your own distinctive course yet stay within the frame-work provided by the textbook.

The textbooks case studies are often sufficiently compelling to warrant class-room discussion. Should that occur, the Case Study Extensions will allow you to aug-ment the textbooks treatment. The case study in Chapter 7, Henry Fords $5Workday, for instance, explains Henry Fords $5 day as an example of efficiencywages, and a case study extension, Supplement 7-13, adds further anecdotal detailsto enrich your lecture. Some of the extensions are essentially case studies in theirown right: for example, Supplement 14-4, Anticipated and Unanticipated Money,and Supplement 14-8, Did the NAIRU Decline in the 1990s?

The Additional Case Studies and the Lecture Supplements can be treated as ad-ditions to the textbook and so are particularly well-suited for use as handouts, eitherwith or without discussion in lecture. Alternatively, you can simply use them asextra lecture material.

Instructors wishing to cover the Advanced Topics in class will usually have to de-vote lecture time to them rather than simply hand them out to students. In somecases, the mathematics and/or the economics in these supplements is more difficultthan in the textbook (for example, Supplement 14-7, Policy Ineffectiveness). Inother cases, you may want to provide additional motivation, as in the discussion ofPrice Stickiness and Pareto Efficiency in Supplement 10-5.

Like the Lecture Notes, the Chapter Supplements emphasize connectionsamong the models in the textbook. Some examples of topics appearing in a numberof different supplements are automatic stabilizers, the welfare cost of inflation, theLucas critique, Ricardian equivalence, and rational expectations. Instructors canthus make use of the supplements to help students weave the various models into amore or less coherent view of the world. A complete list of Chapter Supplements ap-pears starting on page ix.

I know that the resources in this manual will be of help to you, and I welcomeany suggestions for future editions.

AcknowledgmentsI would like to thank Andrew John and Patricia Pollard for their work on earlier ver-sions of these resources. Some of the material from their previous editions remains inthis version, and I hope that my contributions are equally clear and insightful. I alsothank the staff at Worth Publishers, especially Lukia Kliossis, Edgar Bonilla, andStacey Alexander, for their efforts in helping bring this volume to completion.

Many other people have assisted in the preparation of previous editions. I espe-cially thank Greg Mankiw for suggesting some of the topics covered in the chaptersupplements and for providing notes originally used in preparing the chapter sum-maries. The chapter discussions of the Internet-based software draw on input fromDavid Weil, who originally developed the software package. In addition, the com-ments and suggestions from individuals too numerous to list are incorporated inthese resources. I thank them all.

Finally, I am particularly indebted to my students at Boston College, from whomI have learned a great deal about teaching macroeconomics. They have providedhelpful feedback on many of the supplements.

Robert G. MurphyMay 2012

Chapter Supplements

The following abbreviations stand for the types of supplements.

ACS = Additional Case StudyCSE = Case Study ExtensionLS = Lecture Supplement or Additional ReadingsAT = Advanced Topic

CHAPTER 11-1 CSE The Recent Behavior of U.S. Economy: A Guide to the Case Studies 1-2 ACS Presidential Elections and the Economy 1-3 ACS When Is the Economy in a Recession?1-4 LS Economy Rhetoric 1-5 LS Additional Readings

CHAPTER 22-1 LS Measuring Output2-2 LS Pitfalls in National Income Accounting2-3 LS Nominal and Real GDP Since 19292-4 LS Chain-Weight Real GDP2-5 ACS The Increasing Role of Services2-6 CSE The Components of GDP (Case Study)2-7 LS Defining National Income2-8 ACS Seasonal Adjustment and the Seasonal Cycle 2-9 LS Measuring the Price of Light2-10 LS Improving the CPI2-11 LS CPI Improvements and the Decline in Inflation During the 1990s2-12 LS Alternative Measures of Unemployment2-13 ACS Improving the National Accounts

CHAPTER 33-1 LS How Long is the Long Run? Part One3-2 LS What is Capital?3-3 ACS The Consumption Function3-4 LS Economists Terminology3-5 ACS Public and Private Saving3-6 CSE Wars and Interest Rates: Other Explanations (Case Study)3-7 LS A First Look at Nominal and Real Interest Rates3-8 LS Labors Share of Output in the United Kingdom

CHAPTER 44-1 LS Money as a Medium of Exchange: The Search Model4-2 CSE If You Think the Island of Yap Has Problems (Case Study)4-3 LS More on Credit Cards4-4 LS Financial Innovation and the Demise of Monetary Aggregates4-5 ACS Checks Without Banks: The Irish Banking Strike4-6 LS Additional Readings

vii

CHAPTER 55-1 LS The Velocity of Money in Poetry and Song5-2 CSE Data on Money Growth and Inflation (Case Study)5-3 LS Seigniorage as an Inflation Tax5-4 LS Seigniorage: How to Create Your OwnPart I5-5 LS Seigniorage: How to Create Your OwnPart II5-6 LS Deriving the Fisher Equation5-7 CSE Using Interest Rates to Forecast Inflation (Case Study)5-8 LS Transaction Models of Money Demand5-9 LS Inflation and Economic Growth5-10 AT The Welfare Costs of Inflation and the Optimum Quantity of Money5-11 ACS The Welfare Costs of Inflation Revisited5-12 ACS Indexation5-13 LS U.S. Treasury Issues Indexed Bonds5-14 CSE A Guide to Oz (Case Study)5-15 CSE Are Monetary Allegories in the Eye of the Beholder? The Case of Mary Poppins (Case Study)5-16 LS How to Stop a Hyperinflation5-17 ACS The Israeli Hyperinflation5-18 LS Additional Readings

CHAPTER 66-1 LS The Terminology of Trade6-2 ACS Saving and Investment in Open Economies6-3 LS The Open Economy in the Very Long Run6-4 ACS Benefits of a Trade Deficit6-5 ACS How Businesses Respond to the Exchange Rate6-6 ACS Tourism and the Exchange Rate6-7 CSE The Exchange Rate and the Inflation Rate (Case Study)6-8 AT Covered Interest Parity6-9 ACS Purchasing-Power Parity and Real Exchange Rates6-10 CSE More on the Big Mac and PPP (Case Study)

CHAPTER 77-1 ACS Social Costs of Unemployment7-2 ACS Job Finding and Job Separation7-3 LS A More General Theory of the Natural Rate of Unemployment7-4 CSE Dutch Male Unemployment and Unemployment Benefits (Case Study)7-5 LS Robert Lucas and $500 Bills7-6 LS More on the Minimum Wage7-7 CSE Minimum Wages and Efficiency Wages (Case Study)7-8 AT Implicit Contracts7-9 ACS The Two Views of Unions7-10 AT Efficiency Wages I: The Solow Condition7-11 AT Efficiency Wages II: The ShapiroStiglitz Model7-12 ACS Efficiency Wages and Wage Differentials7-13 CSE More on Henry Ford (Case Study)7-14 LS More on the Duration of Unemployment7-15 LS Trends in Unemployment7-16 LS Additional Readings

CHAPTER 88-1 LS How Long Is the Long Run? Part Two8-2 ACS Growth Facts8-3 CSE Does the Solow Model Really Explain Japanese Growth? (Case Study)8-4 ACS The Decline in the U.S. Saving Rate8-5 AT Growth Rates, Logarithms, and Elasticities

viii Chapter Supplements

Chapter Supplements ix

8-6 ACS Labor-Force Participation8-7 ACS Bridge Jobs and the Transition to Retirement8-8 CSE How Much Variation in Per-Capita Output Is Explained by s and n? (Case Study)8-9 LS The Solow Model: An Intuitive Approach. Part One8-10 LS Additional Readings

CHAPTER 99-1 ACS More on the Convergence Hypothesis9-2 ACS Convergence of Income Across the United States9-3 CSE More on the Productivity Slowdown (Case Study)9-4 CSE More on the New Economy (Case Study)9-5 LS The Economics of Ideas9-6 LS Green Growth9-7 ACS Corruption and Growth9-8 LS Income Inequality and Growth9-9 LS The Solow Growth Model: An Intuitive ApproachPart Two9-10 LS Additional Readings

CHAPTER 1010-1 ACS The Dating of Business Cycles10-2 ACS Understanding Business Cycles I: The Stylized Facts10-3 CSE Are Prices Sticky? I: Evidence from Individual Transactions (Case Study)10-4 CSE Are Prices Sticky? II: Mail-Order Evidence (Case Study)10-5 AT Price Stickiness and Pareto Efficiency10-6 ACS Velocity and the 1982 Recession10-7 LS Understanding Business Cycles II: Modeling Cycles10-8 LS The Economy in the Long Run and the Very Long Run: Summary of Parts II and III

and Introduction to Part IV10-9 ACS The Cost of Business Cycles10-10 LS Additional Readings

CHAPTER 1111-1 LS The Key Features of the ISLM Model11-2 ACS Mr. Keynes and the Classics: The Art of Modeling11-3 AT The ISLM Model: A Critical Evaluation11-4 LS Additional Readings

CHAPTER 1212-1 ACS Do High Deficits Cause High Interest Rates?12-2 CSE The Fair Model (Case Study)12-3 ACS Credit Rationing and the Great Depression12-4 LS Japan and the Liquidity Trap12-5 LS The Simple Algebra of the ISLM Model and Aggregate Demand Curve12-6 LS Proportional Income Taxes and the IS Curve12-7 LS Additional Readings

CHAPTER 1313-1 LS The Dependence of Net Exports on GDP13-2 ACS The Rise in the Dollar, 1979198213-3 LS Can World Financial Markets Usurp the Power of the Federal Reserve?13-4 ACS Bretton Woods13-5 ACS Finland in the 1990s13-6 LS The MundellFleming Model in Yr Space13-7 AT Uncovered Interest Parity13-8 ACS Interest-Rate Differentials in the European Monetary System13-9 AT The Dornbusch Overshooting Model

x Chapter Supplements

13-10 CSE Mexicos Foreign Exchange Reserves (Case Study)13-11 ACS Exchange-Rate Volatility13-12 CSE The Federal Reserve and the European Central Bank (Case Study)13-13 CSE Differing Effects of a Common Monetary Policy in Europe (Case Study)13-14 LS Additional Readings

CHAPTER 1414-1 LS The Sticky-Wage Model14-2 LS Real Wages over the Business Cycle14-3 LS The Worker-Misperception Model14-4 CSE Anticipated and Unanticipated Money (Case Study)14-5 AT Is Price Flexibility Stabilizing?14-6 LS How Long Is the Long Run? Part Three14-7 AT Policy Ineffectiveness14-8 CSE Did the NAIRU Decline in the 1990s? (Case Study)14-9 CSE Costs of Disinflation (Case Study)14-10 CSE The Unequal Costs of Disinflation (Case Study)14-11 ACS The Poincar Miracle14-12 LS Hysteresis and the Long-Run Phillips Curve13-13 ACS Unemployment in the United Kingdom in the 1980s13-14 LS Additional Readings

CHAPTER 1515-1 LS How a Real Business Cycle Model Is Constructed15-2 LS The Microeconomics of Labor Supply15-3 LS Quits and Layoffs15-4 LS Involuntary Unemployment and Overqualification15-5 AT Why Technology Shocks Are So Important in Real Business Cycle Models15-6 AT Real Business Cycles and Random Walks15-7 LS Inflation Inertia15-8 ACS Volatility and Growth15-9 LS How Long Is the Long Run? Part Four15-10 LS Additional Readings

CHAPTER 1616-1 ACS The Components of Consumption16-2 LS The Stock Market and Consumer Spending16-3 ACS Saving and the Fear of Nuclear War16-4 CSE The 1975 Tax Cut (Case Study)16-5 CSE Do Consumers Anticipate Changes in Social Security Benefits? (Case Study)16-6 ACS Is Unemployment Insurance Really an Automatic Stabilizer?16-7 LS Additional Readings

CHAPTER 1717-1 LS The Short Run and the Long Run: Investment and the Capital Stock17-2 LS A Different View of the Stock Exchange17-3 AT Asset Pricing I: Why Do We Care?17-4 AT Asset Pricing II: Stock Prices and Efficient Markets17-5 AT Asset Pricing III: Bond Prices and the Term Structure of Interest Rates17-6 AT Asset Pricing IV: Bubbles, Excess Volatility, and Fads17-7 AT Asset Pricing V: The Capital-Asset Pricing Model17-8 AT Asset Pricing VI: Animal Spirits17-9 ACS Financing Constraints in Japanese Firms17-10 ACS Taxes, Babies, and Housing17-11 LS The Tax Treatment of Housing17-12 LS The Importance of Inventories17-13 ACS Inventories and Production Smoothing

Chapter Supplements xi

17-14 ACS Production Smoothing and Coordination Failure17-15 AT The Multiplier-Accelerator Model17-16 LS Additional Readings

CHAPTER 1818-1 AT Menu Costs, Imperfect Competition, and the Welfare-Improving Effects of Policy18-2 ACS Profit Sharing as an Automatic Stabilizer18-3 ACS The Labor Market in the 1990 Recession18-4 ACS Leading Indicators in Action18-5 LS Different Leading Indicator18-6 CSE The Pitfalls of Forecasting (Case Study)18-7 CSE Are Forecasters Rational? (Case Study)18-8 LS Microfoundations and Aggregation18-9 CSE Spare a Thought for the Empirical Macroeconomist (Case Study)18-10 CSE The Response to Romer (Case Study)18-11 ACS Distrust of Policymakers18-12 ACS The Political Business Cycle18-13 ACS The Political Business Cycle at Its Worst18-14 ACS The Economy Under Democratic and Republican Presidents18-15 LS Price Level Versus Inflation Targeting18-16 CSE Inflation Targeting (Case Study)18-17 CSE Central-Bank Independence and Growth (Case Study)18-18 CSE Measuring Central-Bank Independence (Case Study)18-19 LS Additional Readings

CHAPTER 1919-1 ACS Debt and Deficits: The Data19-2 CSE How Important Is Crowding Out? (Case Study)19-3 ACS Structural and Cyclical Deficits19-4 LS Generational Accounting19-5 LS The Government Budget Constraint19-6 LS Borrowing Constraints Using the Fisher Diagram19-7 ACS Social Security Benefits and Ricardian Equivalence19-8 AT Is Everything Neutral?19-9 CSE Does Altruism Matter? (Case Study)19-10 LS Unpleasant Monetarist Arithmetic19-11 CSE Inflation Indexed Bonds and Expected Inflation (Case Study)19-12 LS Additional Readings

CHAPTER 2020-1 ACS The Perils of Employee Stock Ownership20-2 LS How Does Financial Development Affect Growth? 20-3 LS Does Financial Development Cause Growth? 20-4 LS Financial Development and Industrial Structure 20-5 ACS Unit Banking and Economic Growth20-6 LS The Money Multiplier During the Financial Crisis of 2008200920-7 LS Banks Hoard Reserves During the Financial Crisis20-8 ACS The Fed's Senior Loan Officer Survey20-9 LS The Tax Treatment of Housing20-10 LS More on the Fed's Rescue Programs20-11 LS Exit Strategies for the Fed20-12 ACS Greenspan Warns About Government Budget Surpluses20-13 LS The Squam Lake Report20-14 LS Additional Readings

C H A P T E R

T h e S c i e n c e o f M a c r o e c o n o m i c s

Notes to the Instructor

Chapter SummaryChapter 1 presents a brief introduction to macroeconomics. The chapter explains the type ofquestions macroeconomists address, introduces the concept of an economic model, anddiscusses the role of price flexibility and price stickiness in macroeconomic models.

CommentsThe amount of introduction required naturally depends upon the students previousexposure to macroeconomics in principles or in other courses. I try to stress the relevance ofmacroeconomics (a good way to do this is to bring in copies of that days newspapers andshow how they contain stories related to the course) and the importance of basic macro-economic literacy. I emphasize that macroeconomics teaches a way of thinking about andunderstanding the economy rather than a set of facts. I highlight how models help us focuson essentials and avoid unnecessary distractions that can lead us astray. (One way to do thisis to show how common sense can sometimes give incorrect answersan example from thetextbook is that protectionist policies dont improve the trade balance.)

The supply and demand model presented in Chapter 1 provides a vehicle to explain therole of microeconomics in macroeconomics, and to show how macroeconomics uses manytools and ideas from microeconomics. The lecture notes emphasize this and also explain howmacroeconomics differs from microeconomics in its level of aggregation and in that it hasmore of a general-equilibrium focus. The textbook works, as do economists, by usingdifferent models to answer different questions, but I reassure students that we alsoemphasize how different models fit together.

The Web site has been updated for use with the eighth edition of Macroeconomics(www.worthpublishers.com/mankiw). The site offers a superb set of software-based featuresand a PowerPoint tutorial for students. In addition, the PowerPoint slides for instructorshave been updated and include animated graphics and other innovative pedagogicalfeatures.

Students will find the website both helpful and fun to use. The website includes Self-Tests that provide immediate feedback to students; a Data Plotter that allows students tograph and compare macroeconomic data; a feature titled 2016: A Game for Macroeconomiststhat allows students to make policy choices as President of the United States, and a MacroModels component that provides students with the hands-on opportunity to manipulate themodels of the textbook. These software components can be used simply as a source ofadditional exercises for students to do on their own, or they can be incorporated directly intoclassroom discussions. For example, to integrate the software into a class, students might begiven an assignment to develop a policy memo for the President that requires the use of boththe Macro Models feature and the Data Plotter. The instructor might then run a mockcabinet meeting and have students present their findings and policy recommendations. Thesoftware also can be used to design advanced essay questions for students. Some possibilitiesand suggestions for using the software are provided in the Notes to Instructors section ofsubsequent chapters.

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1

The student resource titled Mankiws Macroeconomic Modules: A PowerPoint Tutorialpresents students with an animated set of slides that will help reinforce the material fromthe text and lectures. This tutorial uses superb graphics and a dose of humor to enlivenmacroeconomics. A good way of incorporating this feature is to suggest that students viewthe slides after reading each chapter to help deepen their understanding.

For enhancing your classroom lectures, I strongly recommend the use of thePowerPoint slides for instructors available on the Web site. This resource is now fullyanimated, and includes explanations of the texts models and case studies, along with notesto instructors. The presentations are organized by chapter and are easily augmented byinserting your own slides.

Use of the Dismal Scientist Web SiteThe Dismal Scientist Web site provides a rich source of data for supplementing lectures anddesigning class projects. A good use of this resource for Chapter 1 is to create graphs of realGDP growth, CPI inflation, and the unemployment rate over the past few years to providethe latest picture of the economys main economic indicators. Locate the data on the Websites data page and choose the appropriate settings to create a graph.

Chapter SupplementsThis chapter includes the following supplements:

1-1 The Recent Behavior of the U.S. Economy: A Guide to the Case Studies

1-2 Presidential Elections and the Economy

1-3 When Is the Economy in a Recession?

1-4 Economic Rhetoric

1-5 Additional Readings

2 CHAPTER 1 The Science of Macroeconomics

Lecture Notes

1-1 What Macroeconomists StudyEconomics is the study of the economy and the behavior of people in the economy.Traditionally, economics is divided into microeconomics, which studies the behaviorof individuals and organizations (consumers, firms, and the like) at a disaggregatedlevel, and macroeconomics, which studies the overall or aggregate behavior of theeconomy. Since this book studies macroeconomics, we seek to explain phenomenasuch as inflation, unemployment, and economic growth and we are not concernedwith, say, the demand for or supply of peanuts.

In macroeconomics, we do two things. First, we seek to understand theeconomic functioning of the world we live in; and second, we ask whether we can doanything to improve the performance of the economy. That is, we are concernedwith both explanation and policy prescriptions.

Explanation involves an attempt to understand the behavior of economicvariables, both at a moment in time and as time passes. Modern macroeconomicsrecognizes that it is important to focus on more than just short periods of time, andso has an explicitly dynamic focus. We thus try to explain the behavior of economicvariables over time. This means that we wish to explain the behavior of theeconomy both in the long run and in the short run.

Case Study: The Historical Performance of the U.S. EconomyPerhaps the three most important indicators of the macroeconomic performance ofan economy are real gross domestic product (GDP), the inflation rate, and theunemployment rate. Real GDP is a measure of the quantity of goods and servicesproduced in the economy in a given year. The historical record shows that real GDPhas risen substantially over time, although this growth is irregular, and there areperiods when output actually falls. The inflation rate is a measure of how prices arechanging, on average. The inflation rate has usually been positive but low in theUnited States, indicating that prices have tended to go up on average, but not at aparticularly rapid pace. There are periods in U.S. history when prices have tendedto fall. The unemployment rate measures the fraction of those who are seekingwork but do not have jobs. There is always some unemployment in the U.S.economy, although the level fluctuates substantially. The unemployment rate hasgenerally been less than 10 percent but rose to 25 percent during the GreatDepression.

1-2 How Economists Think

Theory as Model BuildingA key element of economic analysisboth microeconomic and macroeconomicisthe study of markets and prices. In an economy, goods are traded and exchanged.We think about this as taking place in markets. The economists idea of a marketis an abstract representation of a real market, where, for example, farmers mightbring their produce for sale. Economists analyze markets by thinking aboutsuppliers and demanders of goods. As an example, consider the market for pizza.Thinking first about the supply of pizza, an economist might posit that the amountof pizza that pizzerias will put up for sale depends on the price of pizzathehigher the price, the more pizza supplied. Also, an economist might think that thesupply of pizza depends on the cost of the materials, such as tomatoes and cheese.The higher the cost of cheese, the fewer pizzas will be supplied. Turning to the

Lecture Notes 3

! Supplement 1-1, The Recent Behavior of the U.S. Economy

! Figure 1-1! Figure 1-2

! Figure 1-3! Supplement 1-2,

Presidential Elections and the Economy

! Supplement 1-3,When Is the Econ -omy in a Recession?

4 CHAPTER 1 The Science of Macroeconomics

demand for pizza, an economist might think that the amount of pizza thatconsumers will want to buy will depend on the price of pizza and on consumersaggregate income.

If we suppose that the price of pizza adjusts so that demand equals supply, weadd an equilibrium condition to our representation of the pizza market:

Qs = Qd.

In terms of the graph, this is equivalent to looking for the point where the supplyand demand curves meet. We return to this example shortly.

The economy is a complicated system. Every day, millions of people makeeconomic decisions. They buy their morning coffee, they buy lunch, they withdrawmoney from their checking accounts, they go to movies, they buy clothes, and they sellold textbooks. All of these are economic decisions with implications for the economy. Inmacroeconomics, we are trying to understand the way that the whole economy works.But obviously, we cannot consider every individual transaction in every market in theeconomy. Instead, we have to simplify; we have to abstract from reality; we have tofocus on what is important and discard what is unimportant.

To try to understand the economy and focus on what is important, we do acouple of things. First, we aggregate. Instead of worrying about individual goodspizza, bread, automobiles, peanuts, and the likewe think about some aggregate ofthem all. We call this good real GDP, and denote it by the symbol Y. GDP stands forgross domestic product. It is a measure of the total production in the economy; indeed,explaining the behavior of the economy is largely a matter of explaining the behaviorof real GDP over time. We consider the definition of GDP more carefully later.

The second thing we do is to build models. Models are abstractions fromreality that serve as frameworks of analysis. Just as aerospace engineers buildmodel planes to put in a wind tunnel and judge that these models need not beequipped with fasten seat belt signs, but should be equipped with wings, soeconomists construct representations of the economy that include importantvariables and exclude unimportant variables. Many different sciences, such asmeteorology, physics, and biology, use models. In economics, as in many othersciences, the models with which we work are usually mathematical. We developmathematical explanations of the economy and use algebra and graphs to help usunderstand how the economy works. The aim of macroeconomics and this textbookis not so much to provide facts about macroeconomics as to give a framework ofanalysis for coherent thinking about macroeconomic issues.

The previous analysis of the pizza market is an example of a model. Thismodel represents the determination of the equilibrium price and quantity traded ina simple setting. In constructing that model, we judged that the price of pizza, theprice of cheese, and aggregate income are all important in understanding thedemand for and supply of pizza; we implicitly decided that all other variables wereless important and could be left out. Knowing what to include and what not toinclude in a model is the art of the economist; it requires judgment and skill.

We can use the model of the pizza market to answer certain questions. Forexample, we might wonder what effect an increase in consumers incomes mighthave on the price of pizza. An increase in income would imply that at any given P,consumers would demand more pizza. The demand curve would shift to the right.Thus, we see that price and quantity both rise. Similarly, an increase in the price ofmaterials would cause the supply curve to shift in, raising the equilibrium price ofpizza and lowering the quantity traded.

This experiment is typical of the way economists use a model. They changeone variable, taken as given, and look at the effect on other variables that themodel explains. Variables taken as given from outside the model are known asexogenous variables; variables explained within the model are known as endo g-enous variables. A typical experiment with an economic model thus involveschanging an exogenous variable and looking at the effect on endogenous variables.

! Figure 1-5

! Figure 1-6

This is known as a comparative static experiment.

FYI: Using Functions to Express Relationships Among VariablesEconomists use mathematicsparticularly graphs and algebrato help under -stand the economy. For example, we have thus far said two things:

1. The supply of pizza depends on the price of pizza and the price of materials.2. The demand for pizza depends on the price of pizza and aggregate income.

A mathematician uses symbols to express concepts such as these more compactly:1. Qs = S(P, Pm);2. Qd = D(P, Y).

Here S( ) and D( ) are functions: they indicate relationships among variables. Qs,Qd, P, Pm, and Y are variables, denoting the quantity of pizza supplied, the quantityof pizza demanded, the price of pizza, the price of materials, and aggregate income,respectively. An example of a supply function is

Qs = 15P 2Pm.Another example is

Qs = 13(P/Pm).Very often in economics, we do not know very much about the exact nature of therelationships among variables, and so we prefer the general functional notationused earlier.

We can illustrate these relationships on a diagram. This diagram shows thatthe supply of pizza increases with the price of pizza, and the demand for pizzadecreases with the price of pizza. To remind us that the quantity of pizza suppliedalso depends on the price of materials, Pm is sometimes put in parentheses when welabel the supply curve. Similarly, we sometimes put Y in parentheses when welabel the demand curve to remind us that demand also depends on income.

A Multitude of ModelsMacroeconomists use a multitude of models because different models areappropriate for different questions. If we want to understand the effects ofgovernment deficits on interest rates, for example, we would not want to use amodel that included the price of cheese. An important aim of the textbook is todemonstrate economists methods of analysis and use of models, and so thetextbook works as economists do, by using different models to answer differentquestions. Part of the skill of being an economist is learning how to integrate thesedifferent models into a coherent view of the economy.

Prices: Flexible Versus StickyWe noted earlier that macroeconomics is concerned with both explanation andpolicy recommendations. Not surprisingly, much of the debate among macro -economists has to do with their different views on policy. Essentially, these debatesoften come down to whether or not the economy, left on its own, does a good job ofallocating resources, or whether government intervention can improve upon theperformance of the economy. This theme recurs throughout our analysis.

In trying to understand the role of policy in macroeconomics, our conclusionsdepend crucially on what we believe about the behavior of prices. In our example ofthe pizza market, we supposed that the price of pizza adjusted to equate supply anddemandwe supposed that the market cleared. In this case, the market does agood job of matching up suppliers and demanders, and all mutually beneficialtrades are carried out. In some markets, prices are indeed very flexible, but in othermarkets, we have much less confidence that market clearing occurs at all times.Instead, we think that some prices are stickyslow to adjust. For example, laborcontracts often set wages for a number of years in advance, and mail-order catalogs

Lecture Notes 5

! Figure 1-4

! Figure 1-5

! Supplement 1-4,Economic Rhetoric

post prices that are set for a number of months.Economists thus usually think that, for macroeconomics, it is reasonable to

suppose that prices are completely flexible in the long run only. In the short run,we often make an assumption of price stickiness to help us explain the behavior ofthe economy.

One other difference between microeconomics and macroeconomics is worthmentioning. In microeconomics, we usually focus on a single market. In macroeco-nomics, we pay attention to how outcomes in one market affect what goes on inanother market. For example, we often think about both the market for goodsrealGDPand the market for labor. Firms hire workers in order to produce goods. Themore goods firms want to produce, the more workers they will want to hire. So anincrease in the demand for goods may translate into an increased demand for work-ers. Similarly, the wages that workers are paid are used to buy goods, so outcomesin the labor market can affect the demand for goods. All of these things are going onat once, so we need to be able to think about a lot of markets at once.Macroeconomics develops a way of putting markets together. In economists termi-nology, much of macroeconomics has a general-equilibrium focus, in contrast tomicroeconomics, which tends to have a partial-equilibrium focus.

Microeconomic Thinking and Macroeconomic ModelsAlthough microeconomics and macroeconomics are separate aspects of economicinquiry, they make use of many of the same tools. Indeed, the distinction betweenmacroeconomics and microeconomics, though sometimes useful, is also somewhatartificial. Modern macroeconomics recognizes that good macroeconomic analysis isusually based on sound microeconomics and thus emphasizes the microfoundationsof macroeconomic behavior. At times in the textbook, the use of microeconomic toolsis explicit; at other times, it is implicit. For example, we often suppose thatindividuals consumption depends on their income (as in the pizza example) withoutgoing into details about the microeconomics behind the choices they make.

FYI: Nobel MacroeconomistsThe Nobel Prize in economics is awarded annually. A number of winners have beenmacroeconomists whose work we discuss in this book. These include: Milton Friedman(1976), James Tobin (1981), Franco Modigliani (1985), Robert Solow (1987), RobertLucas (1995), George Akerlof (2001), Edward Prescott (2004), and Edmund Phelps(2006).

1-3 How This Book ProceedsMacroeconomists face difficulties as scientists because they cannot conduct experi -ments. (They have this in common with some other scientists, such as paleon tologistsor astronomers.) But our aim as macroeconomists is to understand the behavior of theeconomy, which means understanding the behavior of economic data. We makeprogress in macroeconomics by looking at the data, observing certain patterns,building models that may help explain those patterns, and then seeing if those modelsare consistent with other aspects of the data or new data when they come in. A firsttask, therefore, is to examine the data of macro economics. We then proceed to developmodels that explain the behavior of the economy in the long run, when prices areflexible so that markets clear. Here, we initially study the classical model in which thecapital stock, labor force, and technology are taken as given. We next extend theclassical model to include growth in the capital stock, labor force, and technologicalknowledge in order to explain economic growth in the very long run. Following this, weconsider models of the economy in the short run, when prices may be sticky. Next wediscuss some advanced theoretical topics, including macroeconomic dynamics, modelsof consumer behavior, and models of investment by firms. Finally, the last section ofthe book considers policy debates over the stabilization of the economy, governmentdebt, and financial crises.

6 CHAPTER 1 The Science of Macroeconomics

C A S E S T U D Y E X T E N S I O N

1-1 The Recent Behavior of the U.S. Economy: A Guide to the Case Studies

Many of the case studies in the textbook address the recent history of the U.S. economy.Taken together, the case studies provide a picture of the U.S. economic experience duringthis century, and particularly the last 15 years. The following is an overview:

For a basic picture of U.S. economic performance, the Chapter 1 case study TheHistorical Performance of the U.S. Economy shows the behavior of real GDP, inflation, andunemployment since 1900. The long-run picture shows that GDP grows through time,although this growth is often interrupted by recessions, most recently in 2007 to 2009. TheChapter 9 case study The Worldwide Slowdown in Economic Growth notes the slowdown inthe long-run growth rate experienced by the United States and other countries from theearly 1970s through the mid-1990s. Another Chapter 9 case study highlights the apparentpick-up in long-run growth for the United States since the mid-1990s. The Chapter 14 casestudy Inflation and Unemployment in the United States shows unem ployment andinflation over the past four decades and illustrates the stagflation (high unemployment andinflation) of the 1970s; this contrasts with the relatively stable growth of the 1950s and1960s.

The Chapter 10 case study How OPEC Helped Cause Stagflation in the 1970s andEuphoria in the 1980s explains how the experience of the 1970s was in large measure theresult of supply shocks associated with increases in the price of oil. The United States thusentered the 1980s with very high inflation rates by historical standards. Eliminating thisinflation was a top priority for Federal Reserve chairman Paul Volcker, who pursued a tightmonetary policy. Nominal interest rates rose in the short run but fell in the longer run asthe inflation rate fell, as discussed in the Chapter 11 case study Does a MonetaryTightening Raise or Lower Interest Rates? As a result of these policies, the U.S. economyalso entered its (what was at the time) most severe contraction since the 1930s.

Although monetary policy was contractionary, fiscal policy in the 1980s wasexpansionary. Taxes were cut and spending rose. The fall in government saving (rise in thegovernment deficit) caused the debt to reach a level unprecedented in peacetime (see theChapter 19 case study The Troubling Outlook for Fiscal Policy for a long-run perspectiveon the debt).

Ultimately, the tight monetary policies did succeed in decreasing inflation and inflationexpectations, and the economy gradually returned to the natural rate. This recovery wasaided by a fall in oil prices in the mid-1980s (the Chapter 10 case study cited above). By theend of the decade, output was close to the natural rate and inflation was low. The stableeconomic performance of the Modern Economy is discussed in the Chapter 18 case studyThe Remarkable Stability of the Modern Economy and the onset of recession is analyzed inthe Chapter 12 case study The U.S. Recession of 2001.

Following several years of expansion, the economy headed back into recession during2008, as discussed in the Chapter 12 case study The Financial Crisis and EconomicDownturn of 2008.

7

A D D I T I O N A L C A S E S T U D Y

1-2 Presidential Elections and the EconomyThe influence of economic events on politics is apparent during presidential elections.Economic policy provides a primary topic of debate for the candidates, and the state of theeconomy has a powerful influence on the outcome of the election. In fact, according toeconomist Ray Fair, one can forecast the outcome of a presidential election with remarkableaccuracy by looking at how well the economy is doing. History shows that the incumbentparty is helped by growing incomes and is hurt by rising prices.

Fair has used the historical evidence to produce an equation that forecasts the winnerof the popular vote (but not that of the electoral college!) using the following information:

which party is currently in power, whether an incumbent is running for reelection, the number of terms the incumbent party has been in power, the growth in income per person in the first three quarters of the election year, the rate at which prices have been rising in the two years prior to the election, and the number of quarters during the current administration (prior to the election) in

which the growth rate of real income per person was greater than 3.2 percent.Fairs equation would have correctly predicted the winner of the popular vote in 19 of the 24presidential elections from 1916 to 2008.1 The elections it would have missed were Wilson-Hughes in 1916, KennedyNixon in 1960, HumphreyNixon in 1968, BushClinton in 1992,and BushGore in 2000. Predicting the BushClinton election was complicated by the strongshowing of the third-party candidate, Ross Perot. Fairs model assumes that Perot drewvotes away equally from Bush and Clinton. Interestingly, the equation predicted that AlGore would lose the popular vote in the 2000 election, when in fact he won a majority butlost in the electoral-college tally.

Fairs analysis indicates that voters apparently have a short time horizon with regardto economic events. This provides support for the view that administrations can manipulatethe economy in an attempt to improve their reelection chances.2

Even though the state of the economy is apparently very important in determiningpresidential election outcomes, this need not mean that voters look only to their owneconomic well-being. Research by social psychologists and political scientists on themotivations of individual voters suggests that they in fact take a broader view. DonaldKinder and David Sears summarize this research as follows:

With respect to economic performance, voters may simply examine their own circum-stances, supporting candidates and parties that best advance their own economic interests.Yet such pocketbook voters are hard to find. Although the economic predicaments ofpersonal life do occasionally influence political choice, the effects are never very strong andusually they are utterly trivial. Declining financial condition, job loss, preoccupation withpersonal problemsnone of these seems generally to motivate presidential voting. . . .

Whereas pocketbook voters might ask the political system and its officials, What have youdone for me lately?, sociotropic voters would ask, What have you done for the country lately?The political preferences of sociotropic voters are shaped by the countrys economic predicament,not their own; they support candidates and parties that appear to best advance the nationswell-being. And indeed, presidential voting seems to reflect more the assessment of nationaleconomic conditions than the economic circumstances of private life. Moreover, people clearlydistinguish between their own economic circumstances and those of the nation.3

1R. Fair, Presidential and Congressional Vote-Share Equations, American Journal of Political Science, January 2009, 5572. Available atfairmodel.econ.yale.edu/.

2See the discussion of the political business cycle in Chapter 14, and also Supplements 14-10, Distrust of Policymakers, and 14-11, The PoliticalBusiness Cycle.

3D. R. Kinder and D. O. Sears, Public Opinion and Political Action, in G. Lindzey and E. Aronson, eds., The Handbook of Social Psychology, vol. 2,3rd ed. (New York: Random House, 1985), 68990. This quotation omits the references in the text.

8

A D D I T I O N A L C A S E S T U D Y

1-3 When Is the Economy in a Recession?On November 26, 2001, the Business Cycle Dating Committee of the National Bureau ofEconomic Research reported that the U.S. economy had entered a recession during March2001. The committee, which is composed of leading macroeconomists, made its decision eventhough data on real GDP showed a small increase in the April through June quarter of theyear, and began to decline only during the July to September quarter. A popular rule ofthumb used by the media (and economists) is that a recession occurs when a decline in realGDP lasts for at least two consecutive quarters. At the time that the Business Cycle DatingCommittee issued its report, real GDP had declined for only one quarter. Why then did thecommittee make the call that a recession had begun?

The committee defines a recession as a significant decline in activity spread across theeconomy, lasting more than a few months, [and] visible in industrial production, employ -ment, real income, and wholesale-retail trade.1 Unlike the popular rule of thumb, thecommittee gives relatively little weight to real GDP because it is only measured quarterlyand it is subject to continuing, large revisions.2 The data that the committee emphasize areavailable monthly, with at most only a couple of weeks lag between the end of the month andthe time when the data are released. This feature of the data allows the committee to daterecessions on a monthly basis. Although the monthly data are subject to revisions, thesetend to occur sooner and are often smaller than those for GDP.

In their report, the committee noted that real manufacturing and trade sales hadpeaked in August 2000, industrial production (the output of factories, mines, and utilities)had peaked in September 2000, and employment had peaked in March 2001. In addition, allthree of these indicators had shown persistent declines into the fall of 2001. Real personalincome (net of transfer payments), however, had not reached a peak and was still growing.The committee concluded that the decline in industrial output and employment wassubstantial enough and sufficiently spread across sectors of the economy to warrant thedating of a recession. In choosing the peak-employment month of March as the turningpoint, the committee emphasized total employment as the broadest measure of economicactivity on a monthly basis.

Nearly 20 months after reporting on the start of the recession, the committee met againon July 17, 2003 and determined that the recession had ended in November 2001. Therelatively long delay in dating the trough of the recession was the result of mixed signalsfrom the data. Even though real GDP, sales, and income all grew strongly during 2002,employment had not yet begun to recover and industrial production remained well below itsprevious peak. As a result, the committee waited to make the determination of the troughdate until it was confident that any future downturn in the economy would be considered anew recession and not a continuation of the recession that began in March 2001.3

Again in late 2008, as signs intensified that economic performance had deteriorated,the committee met on November 28 and determined that the economic expansion had endednearly a year earlier, in December 2007. In arriving at its decision, the committeeemphasized payroll employment, which it described as the most reliable comprehensiveestimate of employment.4 The committee noted that employment peaked in December 2007and had declined every month since then.

9

1Business Cycle Dating Committee, The Business-Cycle Peak of March 2001, National Bureau of Economic Research, November 26, 2001, p. 1. Forfurther details on business cycle dating, see the committees Web page at www.nber.com/cycles.

2Ibid., p. 1. The recent move to a chain-weight measure of real GDP, however, eliminated one reason for revisions that occurred in the past when base-year weights were updated. Even so, GDP continues to be subject to major revisions as new source data become available, sometimes with a lag ofseveral years.

3Business Cycle Dating Committee, July 17, 2003 Announcement, National Bureau of Economic Research, July 17, 2003, p. 1.

4Business Cycle Dating Committee, Determination of the December 2007 Peak in Economic Activity, National Bureau of Economic Research,December 11, 2008, p. 1.

10

Almost two years later, on September 20, 2010, the committee determined thateconomic conditions had bottomed out in June 2009, making the recession, at 18 months, thelongest since the Great Depression. Once again, the committee had waited to make itsdecision to ensure that any future downturn would be a new recession and not acontinuation of the recession that began in December 2007.5 In arriving at its decision, thecommittee emphasized accelerating growth in GDP during the last half of 2009, even asemployment continued to decline, noting that in previous business cycles, aggregate hoursand employment have frequently reached their troughs later than the NBERs trough date.6

5Business Cycle Dating Committee, Announcement of June 2009 Business Cycle Trough/End of Last Recession, National Bureau of EconomicResearch, September 20, 2010, p. 1.

6Ibid, p. 2.

11

L E C T U R E S U P P L E M E N T

1-4 Economic RhetoricThe textbook proceeds, as do economists, by applying different models to different questions.Judging whether or not a given model is appropriate is difficult; any model, by definition,leaves things out, and there is no simple way to know whether we have included or excludedthe right features of the world. Progress is made in macroeconomics by building modelsthat help to explain existing data and then by comparing those models to other data.Economists agree about much of this progress. But it would be dishonest not to recognizethat disputes do exist about the appropriate model for a given problem, or, for that matter, toargue that such disputes are resolved in a neat and orderly way by careful statistical tests oftheory.

The data inform our inquiry, but are simply not good enough or abundant enough tosettle many of the important questions beyond dispute.1 The important questions,meanwhile, often turn in part on issues of policy and politics. Throughout the history ofmacroeconomics, there has been disagreement between economists who believe that theeconomy functions well without government intervention and those who believe that thegovernment can improve economic performance. This basic disagreement has survivednumerous refinements of our macroeconomic models and numerous confrontations of thosemodels with the data.

The economist and economic historian D. McCloskey argues that economists claim toadopt a particular scientific methodology to settle such disputes, whereas in practicelikeother scientiststhey proceed by persuasion, rhetoric, and metaphor.2 The modernistmethodology to which economists nominally subscribe is, according to McCloskey and manyothers, rigid and outdated; McCloskey believes that economics would benefit if economistsacknowledged how their research is really carried out.3

Economists . . . would resent the suggestion that their talk is rhetoric. That they clingto a somber modernist faith does not mean, of course, that in their actual scholarlypractices they follow it. One sign of the tension between rhetorical practice andmethodological faith is their joking. A memorandum circulated in May 1983 among thestaff at the Council of Economic Advisors, for instance, included these pieces ofencapsulated unease: Mankiws Maxim: No issue in economics has ever been decidedon the basis of the facts. Nihilistic Corollary I: No issue has ever been decided on thebasis of theory, either. . . .4

McCloskeys argument is not at all that economics is unscientific or useless, but simplythat the conventions of economic discourse impede fruitful communication.

In the flight of rockets the layman can see the marvel of physics, and in the applause ofaudiences the marvel of music. No one understands the marvel of economics well whohas not studied it with care. This leaves its reputation in the hands of politicians andjournalists, who have other things on their minds. The result is much mistaken

1See Supplement 14-8, Spare a Thought for the Empirical Macroeconomist.

2See D. McCloskey, The Rhetoric of Economics (Madison: University of Wisconsin Press, 1985).

3While McCloskey accuses economists of adopting an outdated methodology, McCloskey has been accused in turn of utilizing outdated modes ofliterary criticism: McCloskey turns to the prominent works of criticism of the 1950s and 1960s. But this work has been eclipsed by more recent workin semiotics and post-structuralism. . . . By asserting that admitting to our rhetoric would solve the problem in economic theory, McCloskey implieswe are able to do so, that the individual creates language and, unambiguously, its meaning. But the meaning of language is socialcreated,established only through social interaction. McCloskeys failure to recognize this status of language is precisely the weakness of his analysis. (W.Milberg, The Language of Economics: Deconstructing the Neoclassical Text, Social Concept (1988): 3536.) McCloskeys ideas are also articulated,discussed, and criticized by a number of authors in A. Klamer, D. McCloskey, and R. Solow, The Consequences of Economic Rhetoric (Cambridge:Cambridge University Press, 1988).

4McCloskey, The Rhetoric of Economics, 3031.

12 CHAPTER 1 The Science of Macroeconomics

criticism of economics as being too mathematical or as not being realistic enough or asnot saving the world from its folly. The misinformation is a pity, really, and worthtrying to offset. Yet these outside observers of economics cannot be blamed formisunderstanding it. Economics does not very well understand itself. If it understoodits own way of conversingits rhetoricmaybe some of its neurotic behavior wouldstop. . . .5

The extent of real disagreement among economists, as we have argued several times, isin fact exaggerated. The extent of their agreement, however, makes the more puzzlingthe venom they bring to minor disputes. The assaults on Milton Friedman or on J. K.Galbraith have a bitterness beyond reason. The unreason, though, has its reason. If onecannot reason about values, and if what matters most is placed in the value half of thefact-value split, then it follows that one will embrace unreason when talking aboutthings that matter. The claims of an overblown methodology of science serve merely tospoil the conversation.

Economists, without thinking much, have metaphors about the economy; and theyhave also, without thinking much, metaphors for their scholarly conversation. It wouldbe good for them to become aware of their metaphors and improve them in shareddiscourse.6

Mastery of the models and ideas explained in the textbook will not provide answers toall of the questions or disputes that concern macroeconomists. It will help the reader to bean informed participant in the macroeconomic conversation.

5Ibid., xix.

6Ibid., 184.

13

L E C T U R E S U P P L E M E N T

1-5 Additional ReadingsSupplements to various chapters suggest additional readings that may be useful for studentswho are writing papers, doing projects, or simply wishing to know more about the topicscovered in the textbook. The sources listed are relatively accessible to students. Some of thereadings cited in the supplements are from these sources.

The Journal of Economic Perspectives includes symposia and review articles designed toexplain economic ideas to nonspecialists. Although the mathematical sophistication of thesearticles varies, students should usually be able at least to grasp the basic ideas discussed.

The American Economic Review Papers and Proceedings, published in May of each year,includes papers from the American Economic Associations annual conference. Each issueincludes about three or four short papers on each of about two dozen topics of currentinterest to researchers. These papers are usually nontechnical discussions of recent researchby the author(s).

The Journal of Economic Literature is an important source of references. It includeslistings of academic journal publications, indexed by author, and thus is the place to look forreferences to work by a particular individual as well as to check the contents of recentacademic journals. It also includes many book reviews, grouped by subject area, andoccasional detailed survey articles.

The New Palgrave is a four-volume encyclopedia of economics.1 The articles published init vary greatly in terms of length, technical sophistication, and breadth and idiosyncrasy ofcoverage. Nevertheless, with a bit of persistence, students researching a topic are more likelythan not to find helpful information in these volumes.

The Brookings Papers on Economic Activity contain articles on current macroeconomictopics and a summary of discussions of those articles by leading macroeconomists. TheNational Bureau of Economic Research Macroeconomics Annuals (Cambridge, Mass.: MITPress) adopts a similar format.

The publications of the various Federal Reserve Banks often include articles that areboth useful and accessible. These are available on the Internet.

The Economist newsmagazine generally has good coverage of world economic andpolitical events informed by sensible economic reasoning.

The Economic Report of the President is an excellent source for basic macroeconomicdata.

Whereas economics journals generally contain articles that are technicallysophisticated, in terms of the mathematics and the statistics they employ, it is often possiblefor the discerning student to grasp the main point of many articles without getting tooembroiled in the mathematics and econometrics. Good general journals to consult areAmerican Economic Review, Economic Journal, Journal of Political Economy, and QuarterlyJournal of Economics. Some of these journals occasionally include survey articles or reviewarticles.

Finally, daily newspapers such as the New York Times or the Wall Street Journal arealways worth reading in order to keep up to date on current economic news.

1P. Newman, J. Eatwell, and M. Milgate, eds., The New Palgrave: A Dictionary of Economics: 2nd ed. (London: Palgrave Macmillan, 2008).

Notes to the Instructor

Chapter SummaryChapter 2 is a straightforward chapter on economic data that emphasizes real GDP, theconsumer price index, and the unemployment rate. This chapter contains a standarddiscussion of GDP and its components, explains the different measures of inflation, and dis-cusses how the population is divided among the employed, the unemployed, and those not inthe labor force. This chapter also introduces the circular flow and the relationship betweenstocks and flows.

CommentsStudents may have seen this material in principles classes, so it can often be coveredquickly. I prefer not to get involved in the details of national income accounting; my aim is toget students to understand the sort of issues that arise in looking at economic data and toknow where to look if and when they need more information. From the point of view of therest of the course, the most important things for students to learn are the identity of incomeand output, the distinction between real and nominal variables, and the relationshipbetween stocks and flows.

Use of the Web SiteThe discussion of economic data can be made more interesting by encouraging students touse the data plotter and look at the series being discussed. In using the software, thestudents should be encouraged to look at the data early, in order to try to familiarize themwith the basic stylized facts. The transform data option on the plotter can be used to help thestudents gain an understanding of growth rates and percentage changes, show them thedistinction between real and nominal GDP.

Use of the Dismal Scientist Web SiteUse the Dismal Scientist Web site to download data for the past 40 years on nominal GDPand the components of spending (consumption, investment, government purchases, exports,and imports). Compute the shares of spending accounted for by each component. Discusshow the shares have changed over time.

Chapter SupplementsThis chapter includes the following supplements:

2-1 Measuring Output

2-2 Pitfalls in National Income Accounting

2-3 Nominal and Real GDP Since 1929

2-4 Chain-Weight Real GDP

2-5 The Increasing Role of Services

2-6 The Components of GDP (Case Study)

15

C H A P T E R

T h e D a t a o f M a c r o e c o n o m i c s2

2-7 Defining National Income

2-8 Seasonal Adjustment and the Seasonal Cycle

2-9 Measuring the Price of Light

2-10 Improving the CPI

2-11 CPI Improvements and the Decline in Inflation During the 1990s

2-12 Alternative Measures of Unemployment

2-13 Improving the National Accounts

16 CHAPTER 2 The Data of Macroeconomics

Lecture Notes

IntroductionAn immense amount of economic data is gathered on a regular basis. Every day,newspapers, radio, and television inform us about some economic statistic or other.Although we cannot discuss all these data here, it is important to be familiar withsome of the most important measures of economic performance.

2-1 Measuring the Value of Economic Activity: Gross Domestic Product

The single most important measure of overall economic performance is GrossDomestic Product (GDP). The GDP is an attempt to summarize all economicactivity over a period of time in terms of a single number; it is a measure of theeconomys total output and of total income. Macroeconomists use the termsoutput and income interchangeably, which seems somewhat mysterious. Thereason is that, for the economy as a whole, total production equals total income.Our first task is to explain why.

Income, Expenditure, and the Circular FlowSuppose that the economy produces just one goodbreadusing labor only. (Noticewhat we are doing here: we are making simplifying assumptions that are obviouslynot literally true in order to gain insight into the working of the economy.) Weassume that there are two sorts of economic actorshouseholds and firms(bakeries). Firms hire workers from the households in order to produce bread, andpay wages to those households. Workers take those wages and purchase bread fromthe firms. These transactions take place in two marketsthe goods market and thelabor market.

GDP is measured by looking at the flow of dollars in this economy. Thecircular flow of income indicates that we can think of two ways of measuring thisflowby adding up all incomes or by adding up all expenditures. The two will haveto be equal simply by the rules of accounting. Every dollar that a firm receives forbread either goes to pay expenses or else increases profit. In our example, expensessimply consist of wages. Total expenditure thus equals the sum of wages and profit.

FYI: Stocks and FlowsGoods are not produced instantaneouslyproduction takes time. Therefore, wemust have a period of time in mind when we think about GDP. For example, it doesnot make sense to say a bakery produces 2,000 loaves of bread. If it produces thatmany in a day, then it produces 4,000 in 2 days, 10,000 in a (5-day) week, and about130,000 in a quarter. Because we always have to keep a time dimension in mind, wesay that GDP is a flow. If we measured GDP at any tiny instant of time, it would bealmost zero.

Other variables can be measured independent of timewe refer to these asstocks. For example, economists pay a lot of attention to the factories and machinesthat firms use to produce goods. This is known as the capital stock. In principle, youcould measure this at any instant of time. Over time this capital stock will changebecause firms purchase new factories and machines. This change in the stock iscalled investment; it is a flow. Flows are changes in stocks; stocks change as a resultof flows. In understanding the macroeconomy, it is often crucial to keep thedistinction between stocks and flows in mind. A classic example of the stockflowrelationship is that of water flowing into a bathtub.

Lecture Notes 17

! Figure 2-1

! Supplement 2-1,Measuring Output

! Figure 2-2

Rules for Computing GDPNaturally, the measurement of GDP in the economy is much more complicated inpractice than our simple bread example suggests. There are any number oftechnical details of GDP measurement, which we ignore, but a few important pointsshould be mentioned.

First, what happens if a firm produces a good but does not sell it? What doesthis mean for GDP? If the good is thrown out, it is as if it were never produced. Ifone fewer loaf of bread is sold, then both expenditure and profits are lower. This isappropriate, since we would not want GDP to measure wasted goods. Alternatively,the bread may be put into inventory to be sold later. Then the rules of accountingspecify that it is as if the firm purchases the bread from itself. Both expenditureand profit are the same as if the bread were sold immediately.

Second, what about the obvious fact that there is more than one good in theeconomy? We add up different commodities by valuing them at their market price.For each commodity, we take the number produced and multiply by the price perunit. Adding this over all commodities gives us total GDP.

Many goods are intermediate goodsthey are not consumed for their own sakebut are used in the production of other goods. Sheet metal is used in the productionof cars; beef is used in the production of hamburgers. The GDP statistics includeonly final goods. If a miller produces flour and sells that flour to a baker, then onlythe final sale of bread is included in GDP. An alternative but equivalent way ofmeasuring GDP is to add up the value added at all stages of production. The valueadded of the miller is the difference between the value of output (flour) and thevalue of intermediate goods (wheat). The sum of the value added at each stage ofproduction equals the value of the final output.

Finally, we need to take account of the fact that not all goods and services aresold in the marketplace. To include such goods it is necessary to calculate animputed value. An important example is owner-occupied housing. Since rentpayments to landlords are included in GDP, it would be inconsistent not to includethe equivalent housing services that homeowners enjoy. It is thus necessary toimpute a value of housing services, which is simply like supposing that homeownerspay rent to themselves. Imputed values are also calculated for the services of publicservants; they are simply valued by the wages that they are paid.

Real GDP versus Nominal GDPValuing goods at their market price allows us to add different goods into acomposite measure, but also means we might be misled into thinking we areproducing more if prices are rising. Thus, it is important to correct for changes inprices. To do this, economists value goods at the prices at which they sold at insome given year. For example, we might measure GDP at 1998 prices (oftenreferred to as measuring GDP in 1998 dollars). This is then known as real GDP.GDP measured at current prices (in current dollars) is known as nominal GDP.The distinction between real and nominal variables arises time and again inmacroeconomics.

The GDP DeflatorThe GDP deflator is the ratio of nominal to real GDP:

GDP Deflator =

The GDP deflator measures the price of output relative to prices in the base year,which we denote by P. Hence, nominal GDP equals PY.

Nominal GDPReal GDP

18 CHAPTER 2 The Data of Macroeconomics

! Supplement 2-2,Pitfalls in NationalIncome Accounting

! Supplement 2-3,Nominal and RealGDP Since 1929

Chain-Weighted Measures of Real GDPIn 1996, the Bureau of Economic Analysis changed its approach to indexing GDP.Instead of using a fixed base year for prices, the Bureau began using a movingbase year. Previously, the Bureau used prices in a given yearsay, 1990tomeasure the value of goods produced in all years. Now, to measure the change inreal GDP from, say, 1995 to 1996, the Bureau uses the prices in both 1995 and1996. To measure the change in real GDP from 1996 to 1997, prices in 1996 and1997 are used.

FYI: Two Arithmetic Tricks for Working With PercentageChangesThe percentage change of a product in two variables equals (approximately) thesum of the percentage changes in the individual variables. The percentage changeof the ratio of two variables equals (approximately) the difference between the per -centage change in the numerator and the percentage change in the denominator.

The Components of ExpenditureAlthough GDP is the most general measure of output, we also care about what thisoutput is used for. National income accounts thus divide total expenditure into fourcategories, corresponding approximately to who does the spending, in an equationknown as the national income identity,

Y = C + I + G + NX,

where C is consumption, I is investment, G is government purchases, and NX is netexports, or exports minus imports. Consumption is expenditure on goods andservices by households; it is thus the spending that individuals carry out every dayon food, clothes, movies, VCRs, automobiles, and the like. Food, clothing, and othergoods that last for short periods of time are classified as nondurable goods, whereasautomobiles, VCRs, and similar goods are classified as durable goods. (Thedistinction is somewhat arbitrary: A good pair of hiking boots might last for manyyears while the latest laptop computer might be out of date in a matter of months!)There is also a third category of consumption, known as services; this is thepurchase of the time of individuals, such as doctors, lawyers, and brokers.

Investment is for the most part expenditure by firms on factories andmachinery; this is known as business fixed investment. We noted earlier that goodsput into inventory by firms are counted as part of expenditure; they are classified asinventory investment. This can be negative if firms are running down their stocks ofinventory rather than increasing them. A third component of investment spendingis actually carried out by households and landlordsresidential fixed investment.This is the purchase of new housing.

The third category of expenditure corresponds to purchases by government (atall levelsfederal, state, and local). It includes, most notably, defense expendi tures,as well as spending on highways, bridges, and so forth. It is important to realizethat it includes only spending on goods and services that make up GDP. This meansthat it excludes unemployment insurance payments, Social Security payments, andother transfer payments. When the government pays transfers to individuals, thereis an indirect effect on GDP only, to the extent that individuals take those transferpayments and use them for consumption.

Finally, some of the goods that we produce are purchased by foreigners.These purchases represent another component of spendingexportsthat mustbe added in. But, conversely, expenditures on goods produced in other countriesdo not repre sent purchases of goods that we produce. Since the idea of GDP is tomea sure total production in our country, imports must be subtracted. Netexports simply equal exports minus imports.

Lecture Notes 19

! Supplement 2-4,Chain-Weight Real GDP

! Supplement 7-5,Growth Rates,Logarithms, andElasticities

! Supplement 2-5,The IncreasingRole of Services

FYI: What Is Investment?Economists use the term investment in a very precise sense. To the economist,investment means the purchase of newly created goods and services to add to thecapital stock. It does not apply to the purchase of already existing assets, since thissimply changes the ownership of the capital stock.

Case Study: GDP and Its ComponentsFor the year 2010, U.S. GDP equaled about $14.5 trillion, or about $47,000 perperson. Approximately 70 percent of GDP was spent on consumption (about $10.2trillion). Private investment was about 12 percent of GDP ($1.8 trillion), whilegovernment purchases were nearly 21 percent of GDP ($3 trillion). Importsexceeded exports by $517 billion.

Other Measures of IncomeThere are other measures of income apart from GDP. The most important are as fol-lows: gross national product (GNP) equals GDP minus income earned domestically byforeign nationals plus income earned by U.S. nationals in other countries; net nationalproduct (NNP) equals GNP minus a correction for the depreciation or wear and tear ofthe capital stock (capital consumption allowance). The capital consumption allowanceequaled about 13 percent of GNP in 2010. Net national product is approximately equalto national income. The two measures differ by a small amount known as the statisti-cal discrepancy, which reflects differences in data sources that are not completely con-sistent. By adding dividends, transfer payments, and personal interest income andsubtracting indirect business taxes, corporate profits, social insurance contributions,and net interest, we move from national income to personal income. Finally, if we sub-tract income taxes and nontax payments, we obtain disposable personal income. This isa measure of the after-tax income of consumers. Most of the differences among thesemeasures of income are not important for our theoretical models, but we do make useof the distinction between GDP and disposable income.

Seasonal AdjustmentMany economic variables exhibit a seasonal patternfor example, GDP is lowest inthe first quarter of the year and highest in the last quarter. Such fluctuations arenot surprising since some sectors of the economy, such as construction, agriculture,and tourism, are influenced by the weather and the seasons. For this reason,economists often correct for such seasonal variation and look at data that areseasonally adjusted.

2-2 Measuring the Cost of Living: The Consumer Price IndexWe noted earlier the difference between real and nominal GDP: Real GDP takes GDPmeasured in dollarsnominal GDPand adjusts for inflation. There are two basicmeasures of the inflation rate: the GDP deflator and the consumer price index (CPI).

The Price of a Basket of GoodsThe consumer price index is a good measure of inflation as it affects the typicalhousehold. It is calculated on the basis of a typical basket of goods, based on asurvey of consumers purchases. The point of having a basket of goods is that pricechanges are weighted according to how important the good is for a typicalconsumer. If the price of bread doubles, that will have a bigger effect on consumersthan if the price of matches doubles because consumers spend more of their incomeon bread than they do on matches. The CPI is defined as

20 CHAPTER 2 The Data of Macroeconomics

Supplement 3-4,EconomistsTerminology

Table 2-1

!

!

Supplement 2-6,The Components ofGDP

Supplement 2-7,Defining NationalIncome

!

!

! Supplement 2-8,Seasonal Adjust-ment and theSeasonal Cycle

! Figure 2-3

CPI = .

Like the GDP deflator, the CPI is a measure of the price level P. Again, thisinterpretation means that we are letting Pbase year = 1.

The CPI versus the GDP DeflatorThe GDP deflator is a measure of the price of all goods produced in the UnitedStates that go into GDP. In particular, the GDP deflator accounts for changes in theprice of investment goods and goods purchased by the government, which are notincluded in the CPI. It is, thus, a good measure of the price of a unit of GDP. TheCPI is a poorer measure of the price of GDP, but provides a better measure of theprice level as it affects the average consumer. Since the CPI measures the cost of atypical set of consumer purchases, it does not include the prices of, say,earthmoving equipment or Stealth bombers. It does include the prices of importedgoods that consumers purchase, such as Japanese televisions. Both of these factorsmake the CPI differ from the GDP deflator.

A final difference between these two measures of inflation is more subtle. TheCPI is calculated on the basis of a fixed basket of goods, whereas the GDP deflatoris based on a changing basket of goods. For example, when the price of apples risesand consumers purchase more oranges and fewer apples, the CPI does not take intoaccount the change in quantities purchased and continues to weight the prices ofapples and oranges by the quantities that were purchased during the base year.The GDP deflator, by contrast, weights the prices of apples and oranges by thequantities purchased in the current year. Thus, the CPI overweights productswhose prices are rising rapidly and underweights products whose prices are risingslowly, thereby overstating the rate of inflation. By using quantity weights basedon purchases in the current year, the GDP deflator captures the tendency ofconsumers to substitute away from more expensive goods and toward cheapergoods. The GDP deflator, however, may actually understate the rate of inflationbecause people may be worse off when they substitute away from goods that theyreally enjoysomeone who likes apples much better than oranges may be unhappyeating fewer apples and more oranges when the price of apples rises.

Does the CPI Overstate Inflation?Many economists believe that changes in the CPI are an overestimate of the trueinflation rate. We already noted that the CPI overstates inflation becauseconsumers substitute away from more expensive goods. There are two otherconsiderations.

New Goods When producers introduce a new good, consumers have morechoices, and can make better use of their dollars to satisfy their wants. Eachdollar will, in effect, buy more for an individual, so the introduction of newgoods is like a decrease in the price level. This value of greater variety is notmeasured by the CPI.

Quality Improvements Likewise, an improvement in the quality of goods meansthat each dollar effectively buys more for the consumer. An increase in the priceof a product thus may reflect an improvement in quality and not simply a rise incost of the same product. The Bureau of Labor Statistics makes adjustmentsfor quality in measuring price increases for some products, including autos, butmany changes in quality are hard to measure. Accordingly, if over time thequality of products and services tends to improve rather than deteriorate, thenthe CPI probably overstates inflation.

A panel of economists recently studied the problem and concluded the CPIoverstates inflation by about 1.1 percentage points per year. The BLS has sincemade further changes in the way the CPI is calculated so that the bias is nowbelieved to be less than 1 percentage point.

Current Price of Base-Year Basket of Goods

Base-Year Price of Base-Year Basket of Goods

Lecture Notes 21

! Figure 2-3

! Supplement 2-9,Measuring thePrice of Light

! Supplement 2-10,Improving the CPI

! Supplement 2-11,CPI Improvementsand the Decline inInflation During the1990s

Case Study: The Billion Prices ProjectThe CPI is based on thousands of prices for individual goods and services that arecollected each month by workers for the BLS who visit retail stores. Tworesearchers recently proposed another way to gather price data. MIT economistsAlberto Cavallo and Roberto Rigobon use the Internet to track prices for about 5million items sold in 70 different countries charged by 300 online retailers. Theythen use these data to compute overall price indices for the 70 countries. Oneproblem with this approach is that it only includes goods and not services. Onebenefit is that the data collection is done automatically and quickly by computerand thus can be performed daily, unlike the CPI, which is produced only monthly.The researchers find that the daily price index for the United States tracks the CPIrelatively closely. But this is not the case for all countries. For example, inArgentina the new data have shown inflation to be considerably higher than theofficial statistics. Some have argued this is evidence that the Argentine governmentmanipulates inflation statistics so it will pay less on inflation-indexed governmentbonds.

2-3 Measuring Joblessness: The Unemployment RateFinally, we consider the measurement of unemployment. Employment andunemployment statistics are among the most watched of all economic data, for acouple of reasons. First, a well-functioning economy will use all its resources.Unemployment may signal wasted resources and, hence, problems in thefunctioning of the economy. Second, unemployment is often felt to be of concernsince its costs are very unevenly distributed across the population.

The Household SurveyThe U.S. Bureau of Labor Statistics calculates the unemployment rate and otherstatistics that economists and policymakers use to gauge the state of the labormarket. These statistics are based on results from the Current Population Survey ofabout 60,000 households that the Bureau performs each month. The surveyprovides estimates of the number of people in the adult population (16 years andolder) who are classified as either employed, unemployed, or not in the labor force:

POP = E + U + NL,

where POP is the population, E is the employed, U is the unemployed, and NL isthose not in the labor force. Thus, we have

L = E + U,

where L is the labor force. The labor-force participation rate is the fraction of thepopulation in the labor force:

Labor-Force Participation Rate = L/POP.

The employment rate (e) and unemployment rate (u) are given by

e = E/Lu = U/L = 1 e.

Case Study: Trends in Labor-Force ParticipationOver the past half century, labor-force participation among women has risensharply, from 33 percent to 59 percent, while among men it has declined from 87percent to 71 percent. Many factors have contributed to the increase in womensparticipation, including new technologies such as clothes-washing machines,dishwashers, refrigerators, etc., which reduced the time needed for householdchores, fewer children per family, and changing social and political attitudes toward

22 CHAPTER 2 The Data of Macroeconomics

! Figure 2-4

! Supplement 2-12,AlternativeMeasures ofUnemployment

! Supplement 7-6,Labor ForceParticipation

! Figure 2-5

women in the work force. For men, the decline has been due to earlier and longerperiods of retirement, more time spent in school (and out of the labor force) foryounger men, and greater prevalence of stay-at-home fathers. Some economistspredict that labor force participation will decline over coming decades as the elderlyshare of the population rises.

The Establishment SurveyIn addition to asking households about their employment status, the Bureau ofLabor Statistics also separately asks business establishments about the number ofworkers on their payroll each month. This establishment survey covers 160,000businesses that employ over 40 million workers. The survey collects data onemployment, hours worked, and wages, and provides breakdowns by industry andjob categories. Employment as measured by the establishment survey differs fromemployment as measured by the household survey for several reasons. First, a self-employed person is reported as working in the household survey but does not showup on the payroll of a business establishment and so is not counted in theestablishment survey. Second, the household survey does not count separate jo