1. Measuring Output and The Price Level zClose look at the measures of the “big two” goal variables -- real GDP and the price level (to compute the inflation rate). zData complied at the National Income and Product Accounts (NIPA)

2. Measuring Output -- Gross Domestic Product (GDP) zGross Domestic Product -- The total market value of all currently produced final goods and services over a period of time. zNominal GDP -- GDP in current dollars zReal GDP -- GDP in constant dollars (of a base year).

3. Aspects of GDP Definition z“Over a Period of Time”  GDP is a flow measure. z“Currently Produced”  GDP excludes the following -- sales of used items -- transfer payments -- purchases of stocks, bonds, or land

4. z“Market Value” -- the transaction must be recorded and have a specific dollar figure attached  GDP excludes -- illegal purchases -- household production (example – fixing your own car)

5. Final Goods and Services and Measuring GDP zExample -- Production of a pair of shoes.

6. GDP and Making Shoes Step Value Value Added Farmer 3 3 Packing Plant 7 4 Tannery 13 6 Shoe Manufacturer 25 12 Wholesaler 40 15 Retailer 75 35 Total 163 75

7. What Real GDP (Y) Signifies zTotal Production or Output of final goods and services zTotal Sales on Final Goods and Services (Approximately) zTotal Income (Approximately) zCorrelated With Total Employment

8. Computing GDP (Y) -- The Expenditure Approach Operative Equation: Y = C + I + G + X - M

9. Consumption (C) zDefined as consumer purchases of final goods and services zcomponents of consumption -- nondurable goods -- durable goods -- services zlargest component of GDP

10. Investment (I) zBusiness Purchases of New Plant and Equipment zNew Residential Housing zChanges In Inventories

11. Output Versus Sales -- The Approximation  Example -- $18,000 car, produced in 2000, sold in 2001 Year  C  I  G  (X-M)  Y 2000 $0 $18 $0 $0 $18 2001 $18 -$18 $0 $0 $0  Bottom Line – The car is counted in the year it was produced (as a change in inventory), not the year it was sold.

12. Investment Goods Versus Intermediate Goods zThe Similarity -- Transactions between businesses. zThe Conceptual Difference -- Producing Final Goods (Investment) Versus Being Part of a Final Good (Intermediate Good). zThe Operational Difference – Investment goods (e.g. shoe machines) are used repeated times; intermediate goods (e.g. leather) are used just once.

13. Government Purchases of Goods and Services (G) zNot the same as government expenditure (does not include transfer payments) zIn the US, the government is a purchaser, not a producer.

14. Net Exports (X-M) zNet Exports = Exports (X) - Imports (M) zExports are, by definition, all final goods and services (last sale in US). zGross National Product (GNP) versus Gross Domestic Product (GDP) – different accounting of multinational firms (firms operating in a country other than their origin – e.g. a Honda plant in Ohio).

15. Real GDP and the Quality of Life zReal GDP does not account for the following changes: -- leisure time -- quality differences -- crime -- environmental impacts

16. More Quality of Life Variables Not in Real GDP -- nonmarket production activities (I) household production (II) underground economy -- income distribution

17. Disposable Income and (Personal) Saving zDisposable Income (YD) -- total consumer income after taxes. z(Personal) Saving (S) S = YD - C zThe Saving Rate -- (S)/(YD)

18. Measuring The Price Level zMeasures of the Price Level (P) -- Consumer Price Index (CPI) -- GDP Deflator

19. Common Features: Price Level Measures zThey are indexes -- compare current prices with those of a given base year. zThey consist of a ratio of weighted expenditure of prices of selected goods and services (market basket) in current year to a weighted average of prices in the base year.

20. zWeights are based upon quantities of goods and services in the market basket. zInflation Rate = Percentage Change in the Index. zExample: Inflation Rate for 2000 Inflation Rate 2000 = P 2000 - P 1999 P 1999

21. Distinctions in Price Level Measures zWhat’s in the market basket? zMethod of computation -- fixed weight index versus chain weight index.

22. Measure #1 -- The Consumer Price Index (CPI) zMarket Basket: Set of goods and services purchases by consumers. zFixed Weight Index

23. Computing a CPI Example -- Compute the CPI for 2000 with 1992 as the base year. CPI 2000 = (Cost of 1992 Market Basket Purchased in 2000) (Cost of Actual Consumer Purchases in 1992)

24. Biases in CPI (as a Fixed Weight Index) zEntry Bias -- goods leaving and entering the market basket. zQuality Bias -- different quality of the same goods. zOutlet Bias -- retail vs outlet prices? zSubstitution Bias -- changing quantities over time due to demand response to goods that have become relatively expensive.

25. Implications -- CPI Bias zCPI inflation overstates the true inflation rate. zImplication -- reforming Social Security.

26. Measure #2 -- The GDP Deflator zMarket Basket -- set of final goods and services that are used to compute GDP (macro measure of price level). zChain Weight Index -- reduces biases associated with fixed weight index.

27. Converting Nominal GDP to Real GDP zExample -- find Real GDP 2000 Real GDP 2000 = Nominal GDP 2000 GDP Deflator 2000 zReal GDP for other years is computed the same way. zReal GDP Growth = Percentage Change in Real GDP.

28. Sources to Obtain Macroeconomic Data zThe Economic Report of the President (Historical Data) zEconomic Indicators (Recent)

29. Some Websites for Macro Data and Information zwww.federalreserve.gov (Federal Reserve) zwww.stls.frb.org/fred (Federal Reserve Economic Data) zwww.bea.doc.gov (Bureau of Economic Analysis) zwww.dismal.com (neat macro stuff)