1. Measuring Macroeconomic Data
Chapter 2
Measuring Macroeconomic Data

2. Preview
To examine the different approaches to measuring gross domestic product
To understand real versus nominal GDP
To understand how to measure inflation
To understand how to measure unemployment
To understand different interest rates

3. Measuring Economic Activity: National Income Accounting
Gross domestic product (GDP) is the total value of goods and services produced in an economy
the broadest measure of economic activity

4. Fundamental identity of national income accounting:
Measuring Economic Activity: National Income Accounting (cont’d)
National income accounting is an accounting system that measures economic activity and its components
Fundamental identity of national income accounting:
Total Production = Total Expenditure = Total Income

5. Measuring GDP: The Production Approach
GDP is the current market value of all final goods and services newly produced in the economy during a fixed period of time
In the case of apples and oranges, we multiply the their prices and quantities, and then add them up:
GDP = (price of apples ✕ quantity of apples)
+ (price of oranges ✕ quantity of oranges)

6. Not all goods and services are counted in GDP because they are:
Market Value
Not all goods and services are counted in GDP because they are:
Nonmarket goods and services, which do not have a market price (e.g., household services produced within a family), or
Produced in the underground economy
Many nonmarket goods and services are counted in GDP by their imputed values 6

7. Newly Produced Goods and Services
GDP includes only goods and services that are newly produced in the current period
If you buy a 3-year-old car from a car dealership
The cost of the used car is not included in GDP
The value of the services provided by the car dealership is included in GDP 7

8. Valued-Added Technique
Value added is the value of a firm’s output minus the cost of the intermediate goods purchased by the firm
By adding up the value added from each firm, we get the final value of the goods and services produced 8

9. Capital Goods
A capital good (e.g., a robot) is used in the production of other goods that is not used up in the stages of production
New capital goods are classified as final goods because they are not included in spending on other final goods and yet their production is part of economic activity 9

10. Inventory Investment
Inventory investment is the change in inventories (firms’ holdings of raw materials, unfinished goods and unsold finished goods) over a given period of time
Inventory investment is included in GDP for the same reason that we include capital goods 10

11. GDP is a flow, which is an amount per a given unit of time
Fixed Period of Time
We calculate GDP over a fixed period of time, such as a quarter or a year
GDP is a flow, which is an amount per a given unit of time
By contrast, a stock is a quantity at a given point in time 11

12. Policy and Practice: Can GDP Buy Happiness?
Is GDP the best measurement of national well-being?
In 1972, the king of Bhutan proposed the replacement of GDP by “gross national happiness” that incorporates factors such as spirituality and culture
In 1990, the United Nations began to rank countries on a so-called human development index, which is a combination of life expectancy, education, literacy, educational participation, and GDP
In 2008, a French economic commission led by Nobel Prize winner Joseph Stiglitz called for modifications to GDP with factors such as political freedom, physical safety, and work-life balance 12

13. Box: Stocks Versus Flows
A stock is often an accumulation of flows over time
Examples:
Inventory investment is a flow, which accumulates into the stock of inventories
Saving is a flow, which accumulates into a person’s wealth 13

14. FIGURE 2.1 Stocks Versus Flows14

15. Measuring GDP: The Expenditure Approach
GDP is the total spending on currently produced final goods and services in the economy
National income identity:
Y = C + I + G + NX
where
  Y = GDP = total production (output)
C = consumption expenditure
I = investment
G = gov’t purchases of goods & services
NX = net exports = exports - imports 15

16. TABLE 2.1 GDP and Its Components, 200916

17. Consumption Expenditure
Total spending for currently produced consumer goods and services
Consumption was 70.8% of GDP in 2009
Basic categories:
Consumer durables
Nondurable goods
Services 17

18. Investment was 11.4% of GDP in 2009 Basic categories:
Spending on currently produced capital goods that are used to produce goods and services over an extended period of time
Investment was 11.4% of GDP in 2009
Basic categories:
Fixed investment
Inventory investment
Residential investment 18

19. Box: Meaning of the Word Investment
For non-economists, an investment normally refers to the purchase of common stocks or bonds
For economists, investment spending refers to the purchase of physical assets, such as new machines or new houses—purchases that add to GDP 19

20. Government Purchases
Spending by the government on currently produced goods and services
Government purchases were 20.6% of GDP in 2009
Government consumption includes government purchases for short-lived goods and services like health care and police
Government investment includes spending for capital goods like buildings and computers represents
Pure government transfers (e.g., Social Security and Medicare) are excluded from G 20

21. Net exports (or trade balance) are exports minus imports
Why subtract imports from GDP?
Answer: Spending on imports is included in consumption expenditure, investment, and government purchases, but is not produced in this country 21

22. FIGURE 2.2 Expenditure Components of U.S. GDP, 1950-201022

23. Changes in the Spending Components of GDP Over Time
Consumption grew steadily as a share of GDP from 1970 to 2008
Investment is much more volatile than other components of GDP
Government purchases have actually remained quite stable at around 20% of GDP
Net exports have been negative 23

24. Box: An International Comparison of Expenditure Components
The United States differ from other countries by having the highest share of GDP going to consumption, the lowest share of investment, and net exports have been negative
By contrast, China has the lowest share of consumption, the highest share of investment, and the largest share of net exports 24

25. FIGURE 2.3 Shares of Expenditure Components for Different Countries25

26. Measuring GDP: The Income Approach
Compensation of employees – wages and salaries of employees, and employee benefits
Corporate profits – profits after taxes of corporations
Other income – income of the self-employed, royalty income and net interest earned by individuals, etc.
Depreciation – the loss of value of capital from wear and tear
net domestic product = GDP – depreciation
Net factor income – wages, profits, and rent paid to U.S. residents by foreigners minus factor income paid by U.S. residents to foreigners 26

27. TABLE 2.2 Income Approach to GDP, 200927

28. Gross national product (GNP) = national income + depreciation
Income Measures
National income = Compensation of employees + other income + corporate profits
Gross national product (GNP) = national income + depreciation
total income earned by U.S. residents
Gross domestic product (GDP) = GNP + net factor income
domestically produced measure of gross product 28

29. Income Measures (cont’d)
Private Disposable Income =
GDP + net factor income + transfer payments received from the government + interest payments on government debt – taxes 29

30. Income Measures (cont’d)
Net Government Income =
taxes – transfers – interest payments on government debt 30

31. Real Versus Nominal GDP
A nominal variable is a measure at current market (nominal) prices (e.g., nominal GDP)
A real variable is a measure in terms of quantities of actual goods and services (e.g., real GDP) 31

32. Real Versus Nominal GDP (cont’d)or
Nominal GDP = Price Level ✕ Real GDP 32

33. Real Versus Nominal GDP (cont’d)
If 2005 is the base year, then real GDP for the year 2010 is:
Real GDP in 2012 =
(price of apples in 2005 ✕ quantity of apples in 2012)
+ (price of oranges in 2005 ✕ quantity of oranges in 2012) 33

34. Real Versus Nominal GDP (cont’d)
Raw data on GDP tends to fall in cold and snowy months
Therefore, economic statistics like GDP data are seasonally adjusted to account for regular seasonal fluctuations within a year 34

35. Chain-Weighted Measures of Real GDP
If prices of some important goods changed dramatically relative to other goods, using a fixed base-year for prices when calculating real GDP can produce misleading results
Chain-weighted measures of GDP allow the base year to change continuously 35

36. Measuring Inflation Price indexes are measures of the price level
Examples:
GDP deflator (or implicit price deflator)
Personal consumption expenditure deflator
Consumer price index 36

37. GDP Deflator 37

38. PCE Deflator 38

39. Consumer Price Index
A measure of the average prices of consumer goods and services, i.e., a cost of living index
Calculated monthly by the Bureau of Labor Statistics using a basket of thousands of consumer goods and services 39

40. Consumer Price Index
If the basket consists of 2 apples and 1 orange, then the CPI for 2010 with a base year of 2005 is: 40

41. Policy and Practice: Policy and Overstatements of the Cost of Living
The CPI is used in determining labor contracts and government payments such as Social Security benefits
A study led by Michael Boskin of Stanford University found that increases in the CPI overstate increases in the cost of living by 1% point
Measurements errors in the CPI could have important implications 41

42. Inflation Rate
The inflation rate is the % rate of change of the price level over a particular period:
where 42

43. FIGURE 2.4 U.S. Inflation Rates with Different Price Indexes, 1950-201043

44. Percentage Change Method and the Inflation Rate
Because:
We know that: 44

45. Percentage Change Method and the Inflation Rate (cont’d)
Because the % change in the price level is the inflation rate, while the % changes in nominal and real GDP are the growth rate: 45

46. Measuring Unemployment
The unemployment rate is the percentage of people in the civilian population who want to work but who do not have jobs
The Bureau of Labor Statistics classifies each adult over age 16 into:
Employed
Unemployed
Not in the labor force
Discouraged workers (those who would live to work but have given up looking, and those who have voluntarily left the labor force) 46

47. Measuring Unemployment (cont’d)47

48. Measuring Unemployment (cont’d)48

49. FIGURE 2.5 Unemployment in the Adult Civilian Population, 201049

50. Macroeconomics In The News: Unemployment and Employment
The Bureau of Labor Statistics reports employment and unemployment data using two alternative surveys: the household survey and the survey of business establishments
The two surveys sometimes give a different picture of labor market conditions due to:
The household survey counts workers, while the establishment survey counts jobs
The household survey counts the self-employed as working, while the establishment does not
The establishment survey covers more workers 50

51. Measuring Interest Rates
An interest rate is the cost of borrowing, or the price paid for the rental of funds
Interest rates are returns for holding debt securities, such as bonds 51

52. Macroeconomics In The News: Interest Rates
Interest rates that receive media attention are:
Prime rate
Federal funds rate
London Inter-Bank Offered Rate (LIBOR)
Treasury bill rate.
Ten-year Treasury bond rate
Federal Home Loan Mortgage Corporation rate 52

53. Real Versus Nominal Interest Rates
A nominal interest rate makes no allowance for inflation
The real interest rate is the amount of extra purchasing power a lender must be paid for the rental of his/her money
The ex ante real interest rate is adjusted for expected changes in the price level
The ex post real interest rate is adjusted for actual changes in the price level 53

54. Real Versus Nominal Interest Rates (cont’d)
The Fisher equation: 54

55. Real Versus Nominal Interest Rates (cont’d)
Example: For a one-year loan with a 4% nominal interest rate (i=4%) and you expect the inflation to be 6% in a year ( =6%), then:
When the real interest rate is low, there are greater incentives to borrow and invest, but fewer incentives to lend. 55

56. The Important Distinction Between Real and Nominal Interest Rates
Credit markets are where households and businesses get funds (credit) from each other
Because the real interest rate reflects the real cost of borrowing, it is likely to be a better indicator of the incentives to borrow, invest, and lend in credit markets than nominal interest rates 56

57. FIGURE 2.6 Real and Nominal Interest Rates (Three-Month Treasury Bill), 1955-201057