Economics 302 Lecture 2
TopicsTopics
Aggregate Output (Standard Measure)
GDP vs GPI discussion
The Other Major Macroeconomic Variables (Unemployment and Inflation Rate)
Economics 302 Lecture 2
Aggregate OutputAggregate Output
Gross Domestic Product (GDP) The value of the final goods and services
produced in an economy during a given period
Aggregate Output (national income and product accounts, or NIPA)Aggregate Output (national income and product accounts, or NIPA)
Economics 302 Lecture 2
Aggregate OutputAggregate Output
1) Final good
2) Value added
3) Income
Defining GDP: Three ApproachesDefining GDP: Three Approaches
Economics 302 Lecture 2
Aggregate OutputAggregate Output
Firm 1: Steel Company
Revenues from sales $100Expenses (wages) $80Profit $20
Firm 2: Car CompanyRevenues from sales $210Expenses $170
Wages $70Steel purchases $100
Profit $40
What is GDP?$310 or $210
GDP: The final goods approach
Economics 302 Lecture 2
Aggregate OutputAggregate Output
Answer: $210 If both firms are summed ($100 + $210)
the $100 in steel is counted twice Counting only the final good (cars) includes
the intermediate good (steel)
Defining GDPDefining GDP
Economics 302 Lecture 2
Aggregate OutputAggregate Output
What would GDP be if the firms merged?
Question for DiscussionQuestion for Discussion
Economics 302 Lecture 2
Aggregate OutputAggregate Output
2) Value Added Approach
Value added= value of production - value of intermediate goods
Defining GDP: Three ApproachesDefining GDP: Three Approaches
Economics 302 Lecture 2
Aggregate OutputAggregate Output
Steel No intermediate goods Value added = $100
Two Firm ExampleTwo Firm Example
Economics 302 Lecture 2
Aggregate OutputAggregate Output
Cars Intermediate goods (steel) = $100 Value added = $210 - $100 = $110
Two Firm ExampleTwo Firm Example
Economics 302 Lecture 2
Aggregate OutputAggregate Output
($110) cars added value ($100) steel added Value
($210) GDP
Two Firm ExampleTwo Firm Example
Economics 302 Lecture 2
Aggregate OutputAggregate Output
Defining GDP
approach added Value approach goods Final
chain production
the along added value the of Sum
goods final of value the of Sum
Economics 302 Lecture 2
Aggregate OutputAggregate Output
Defining GDP Approach 1 & 2 define GDP from the
production side
Economics 302 Lecture 2
Aggregate OutputAggregate Output
Defining GDP
3) GDP from the income side
Economics 302 Lecture 2
Aggregate OutputAggregate Output
Revenues after payment for intermediate goods Some pay indirect taxes (sales taxes) Some pay workers (labor income) Remainder to the firm (capital income)
ConsiderConsider
Economics 302 Lecture 2
Aggregate OutputAggregate Output
GDP from the income side
income capital
income labor
taxes indirect (income) GDP
Defining GDPDefining GDP
Economics 302 Lecture 2
Aggregate OutputAggregate Output
Firm 1: Steel Company
Revenues from sales $100Expenses (wages) $80Profit $20
Firm 2: Car CompanyRevenues from sales $210Expenses $170
Wages $70Steel purchases $100
Profit $40
GDP: Income Approach
Economics 302 Lecture 2
Income (steel) Labor = $80 Capital = $20
$100
Income (car) Labor = $70 Capital = $40
$110
$210 $110 $100 (income) GDP
Aggregate OutputAggregate Output
($110) car added value
($100) steel added value -$210)-added (value GDP
Compared to:
Economics 302 Lecture 2
The Composition of GDP byThe Composition of GDP byType of Income, 1960 and 1998Type of Income, 1960 and 1998
Labor income 66% 65%
Capital income 26% 27%
Indirect taxes 8% 8%
In Percent 1960 1998
Economics 302 Lecture 2
Aggregate OutputAggregate Output
Output Approach = Income Approach Final goods & value added = sum of
indirect taxes + labor income + capital income
Defining GDP – A SummaryDefining GDP – A Summary
Economics 302 Lecture 2
Aggregate OutputAggregate Output
Recall GDP = the value of final goods and
services produced Value is the price of the final good
Nominal & Real GDPNominal & Real GDP
Economics 302 Lecture 2
Aggregate OutputAggregate Output
Therefore, GDP = Price x Quantity of final goods
produced
Nominal & Real GDPNominal & Real GDP
Economics 302 Lecture 2
Aggregate OutputAggregate Output
If price increases and quantity remains constant, what happens to the value of final output?
Questions for DiscussionQuestions for Discussion
Economics 302 Lecture 2
Aggregate OutputAggregate Output
Higher prices bias the GDP measurement of production upward over time.
ObservationObservation
Economics 302 Lecture 2
Aggregate OutputAggregate Output
Nominal & Real GDP (correcting for inflation) One good economy
Year Quantity of Cars Price of Cars Nominal GDP
1991 10 $10,000 $100,0001992 12 $12,000 $144,0001993 13 $13,000 $169,000
Economics 302 Lecture 2
Aggregate OutputAggregate Output
Nominal & Real GDP (correcting for inflation) One good economy
Year Quantity of Cars Price of Cars Nominal GDP(% increase)
1991 10 $10,000 $100,000 (--)1992 12 $12,000 $144,000 (44%)1993 13 $13,000 $169,000 (17.4%)
Economics 302 Lecture 2
Aggregate OutputAggregate Output
Nominal GDP = Pcars x Qcars
QuestionQuestion Did the real output of cars increase 44% from 1991 to 1992?
Economics 302 Lecture 2
Aggregate OutputAggregate Output
Real GDP = value of final goods in constant prices
Calculating Real GDPCalculating Real GDP
Economics 302 Lecture 2
Aggregate OutputAggregate Output
1991 -- 10,000
1992 -- 12,000 (20% increase)
1993 -- 13,000 (8.33% increase)
Real GDP in UnitsReal GDP in Units
Production of cars
Economics 302 Lecture 2
Aggregate OutputAggregate Output
1991 -- 10 x $12,000 = $120,000
1992 -- 12 x $12,000 = $144,000 (20% increase)
1993 -- 13 x $12,000 = $156,000 (8% increase)
Real GDP in 1992 $sReal GDP in 1992 $s
Note: Nominal 1992 GDP = Real 1992 GDPNote: Nominal 1992 GDP = Real 1992 GDP
Car Production x 1992 Prices
Economics 302 Lecture 2
Aggregate OutputAggregate Output
Accounting for all final goods Weighted average of the output of final
goods Relative prices serve as weights Must consider the change in relative prices U.S. Real GDP is Real GDP in chained
(1992) dollars
Calculating Real GDP in PracticeCalculating Real GDP in Practice
Economics 302 Lecture 2
Nominal and RealNominal and RealU.S. GDP, 1960-1998U.S. GDP, 1960-1998
Economics 302 Lecture 2
Aggregate OutputAggregate Output
The increase in real GDP is less than nominal GDP
More variation in real GDP than nominal GDP
ObservationsObservations
Economics 302 Lecture 2
Aggregate OutputAggregate Output
Nominal GDP Dollar GDP GDP in current dollars
Synonyms for GDP AccountingSynonyms for GDP Accounting
Economics 302 Lecture 2
Aggregate OutputAggregate Output
Real GDP GDP in terms of goods GDP in constant dollars GDP adjusted for inflation GDP in 1992 dollars
Synonyms for GDP AccountingSynonyms for GDP Accounting
Economics 302 Lecture 2
Aggregate OutputAggregate Output
GDP growth in year t -- rate of change in real GDP in year t
GDP growth = (yt - yt-1)/yt-1
Expansions -- periods of positive growth
Recessions -- periods of negative growth(2 consecutive quarters)
Technical Notes: For the CourseTechnical Notes: For the Course
Economics 302 Lecture 2
The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables
)( force labor
)( unemployed number )( Rate ntUnemployme
L
Uu
)(unemployed )( employed )( Force Labor UNL
The Unemployment RateThe Unemployment Rate
Economics 302 Lecture 2
Current population survey 60,000 households monthly Employed -- job holders Unemployed -- job seekers
The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables
Counting the UnemployedCounting the Unemployed
Economics 302 Lecture 2
1998
)6.2( )( 131.4
)( 6.2 4.5%
6.2
131.4
UN
Uu
U
N
The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables
Counting the UnemployedCounting the Unemployed
Economics 302 Lecture 2
Unemployed and Discouraged Workers
)(16 population adult
)( force labor Rate ionParticipat
L
The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables
Macro TermsMacro Terms
Economics 302 Lecture 2
Can the unemployment rate rise when the number of employed increases?
The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables
What Do You Think?What Do You Think?
Economics 302 Lecture 2
Change in the U.S. Unemployment Rate Change in the U.S. Unemployment Rate versus U.S. GDP Growth 1960 - 1998versus U.S. GDP Growth 1960 - 1998
Economics 302 Lecture 2
The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables
If unemployment is too high -- high growth policy must be pursued to reduce it
If unemployment is too low -- low growth policy is required
Economic Policy ImplicationsEconomic Policy Implications
Economics 302 Lecture 2
The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables
Unemployment rates and duration vary by population groups
Certain groups incur a disproportionate share of the unemployed when unemployment increases
Social Implications of UnemploymentSocial Implications of Unemployment
Economics 302 Lecture 2
The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables
The Inflation Rate A sustained rise in the price level
Two Measures of the Price Level GDP Deflator Consumer Price Index (CPI)
Economics 302 Lecture 2
The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables
Average price of final goods produced
GDP deflator in year t = Pt
t
t
t
tt Y
$YP
GDP Real
GDP nominal
The GDP DeflatorThe GDP Deflator
Economics 302 Lecture 2
The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables
Pt is an index number
• P1993 = 102.6 (1992 = 100)
Index numbers are used to measure rate of change over time
t 1- t
1- t t PP
PP
%
inflation of Rate
The GDP DeflatorThe GDP Deflator
Economics 302 Lecture 2
The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables
t
t t Y
YP
$
ttt YP Y $
The GDP DeflatorThe GDP Deflator
Economics 302 Lecture 2
The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables
Average prices of goods consumed
The CPI is not equal to the GDP deflator Some final goods are sold to business,
government, and foreigners Some consumer goods are imported
The Consumer Price Index (CPI)The Consumer Price Index (CPI)
Economics 302 Lecture 2
The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables
Published monthly
Involves several steps
The Consumer Price Index (CPI)The Consumer Price Index (CPI)
Economics 302 Lecture 2
The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables
1) Consumer expenditure survey to determine a market basket of items
2) Bureau of labor statistics (BLS) field workers price the items monthly (85 cities, 22,000 stores)
3) A base period is chosen, currently 1982-84
Steps in Calculating the CPISteps in Calculating the CPI
Economics 302 Lecture 2
The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables
5) 1998 CPI = 163 (1982-84 = 100)
100 84)-(1982 price Base
period time in Price4) CPI
Steps in Calculating the CPISteps in Calculating the CPI
Economics 302 Lecture 2
Inflation Rate, Using the CPIInflation Rate, Using the CPIand the GDP Deflator, 1960, 1998and the GDP Deflator, 1960, 1998
Economics 302 Lecture 2
Change in the U.S. Inflation Rate versus Change in the U.S. Inflation Rate versus the U.S. Unemployment Rate, 1970-1998the U.S. Unemployment Rate, 1970-1998
Economics 302 Lecture 2
The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables
Low unemployment --inflation rate increases
High unemployment -- inflation rate decreases
The Phillips CurveThe Phillips Curve
Economics 302 Lecture 2
The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables
Prices and wages do not rise proportionately Inflation creates market distortions due to: Regulation Taxation Uncertainty for business investment
Why Do Economists Care About Inflation?Why Do Economists Care About Inflation?
Economics 302 Lecture 2
What Do Macroeconomists What Do Macroeconomists Care About?Care About?
What determines the level of aggregate output? Demand Supply Government, education, and savings
The Central Question of MacroeconomicsThe Central Question of Macroeconomics
Economics 302 Lecture 2
Macroeconomic AnalysisMacroeconomic Analysis
What determines the level of aggregate output? Short-run (a few years) -- demand Medium-run (10+ years) -- supply Long-run (50+ years) -- government,
education, savings
The Central Question of MacroeconomicsThe Central Question of Macroeconomics