1. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #1 Chapter Topics Aggregate Output The Other Major Macroeconomic Variables A Road Map

2. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #2 Aggregate 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)

3. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #3 Aggregate Output 1) Final good 2) Value added 3) Income Defining GDP: Three Approaches

4. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #4 Aggregate Output Firm 1: Steel Company Revenues from sales$100 Expenses (wages)$80 Profit$20 Firm 2: Car Company Revenues from sales$210 Expenses $170 Wages$70 Steel purchases$100 Profit$40 What is GDP? $310 or $210 GDP: The final goods approach

5. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #5 Aggregate 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 GDP

6. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #6 Aggregate Output What would GDP be if the firms merged? Question for Discussion

7. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #7 Aggregate Output 2) Value Added Approach Value added = value of production - value of intermediate goods Defining GDP: Three Approaches

8. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #8 Aggregate Output Steel  No intermediate goods  Value added = $100 Two Firm Example

9. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #9 Aggregate Output Cars  Intermediate goods (steel) = $100  Value added = $210 - $100 = $110 Two Firm Example

10. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #10 Aggregate Output Two Firm Example

11. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #11 Aggregate Output Would a merger change the total value added? Question for Discussion

12. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #12 Aggregate Output Defining GDP

13. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #13 Aggregate Output Defining GDP  Approach 1 & 2 define GDP from the production side

14. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #14 Aggregate Output Defining GDP 3) GDP from the income side

15. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #15 Aggregate Output Revenues after payment for intermediate goods  Some pay indirect taxes (sales taxes)  Some pay workers (labor income)  Remainder to the firm (capital income) Consider

16. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #16 Aggregate Output GDP from the income side Defining GDP

17. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #17 Aggregate Output Firm 1: Steel Company Revenues from sales$100 Expenses (wages)$80 Profit$20 Firm 2: Car Company Revenues from sales$210 Expenses $170 Wages$70 Steel purchases$100 Profit$40 GDP: Income Approach

18. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #18 Income (steel)  Labor = $80  Capital = $20 $100 Income (car)  Labor = $70  Capital = $40 $110 Aggregate Output Compared to:

19. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #19 The Composition of GDP by Type of Income, 1960 and 1998 Labor income66%65% Capital income26%27% Indirect taxes8%8% In Percent 19601998 Question for Discussion  How do these compare to the two firm example

20. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #20 Aggregate Output Output Approach = Income Approach  Final goods & value added = sum of indirect taxes + labor income + capital income Defining GDP – A Summary

21. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #21 Aggregate Output Recall  GDP = the value of final goods and services produced  Value is the price of the final good Nominal & Real GDP

22. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #22 Aggregate Output Therefore,  GDP = Price x Quantity of final goods produced Nominal & Real GDP

23. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #23 Aggregate Output Nominal & Real GDP (correcting for inflation)  One good economy YearQuantity of CarsPrice of CarsNominal GDP 199110$10,000$100,000 199212$12,000$144,000 199313$13,000$169,000

24. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #24 Aggregate 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 $s Note: Nominal 1992 GDP = Real 1992 GDP Car Production x 1992 Prices

25. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #25 Nominal and Real U.S. GDP, 1960-1998

26. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #26 Aggregate Output GDP -- refers to real GDP Y t -- real GDP in year t $GDP -- nominal GDP $Y t = nominal GDP in year t Technical Notes: For the Course

27. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #27 The Other Major Macroeconomic Variables The Unemployment Rate

28. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #28 Die Arbeitslosenrate lt. Mikrozensus bzw. lt. AMS für Österreich

29. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #29 Unemployed and Discouraged Workers The Other Major Macroeconomic Variables Macro Terms

30. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #30 Can the unemployment rate rise when the number of employed increases? The Other Major Macroeconomic Variables What Do You Think?

31. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #31 The Other Major Macroeconomic Variables Okun’s Law  High output growth -- reduces unemployment  Low output growth -- increases unemployment Unemployment and Economic Activity

32. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #32 Change in the U.S. Unemployment Rate versus U.S. GDP Growth 1960 - 1998

33. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #33 The Other Major Macroeconomic 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 Implications of Okun’s Law

34. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #34 The Other Major Macroeconomic Variables Unemployment rates and duration vary by population groups Certain groups incur a disproportionate share of the unemployed when unemployment increases Social Implications of Unemployment

35. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #35 The Other Major Macroeconomic Variables  Average price of final goods produced  GDP deflator in year t = P t The GDP Deflator

36. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #36 The Other Major Macroeconomic Variables  P t is an index number P 1993 = 102.6 (1992 = 100)  Index numbers are used to measure rate of change over time The GDP Deflator

37. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #37 The Other Major Macroeconomic 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)

38. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #38 The Other Major Macroeconomic 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 CPI

39. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #39 Inflation Rate, Using the CPI and the GDP Deflator, 1960, 1998

40. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #40 Change in the U.S. Inflation Rate versus the U.S. Unemployment Rate, 1970-1998

41. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #41 The Other Major Macroeconomic Variables Prices and wages do not rise proportionately  Inflation creates market distortions due to:  Regulation (regulierte Preise v. “freie” Preise)  Taxation (stille Steuerprogression)  Verteilungsaspekte: fixe Transfers und Pensionen, steigende Preise  Uncertainty for business investment Why Do Economists Care About Inflation?

42. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #42 A Road Map 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 Macroeconomics

43. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #43 The Organization of the Book

44. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #44 Aufgaben:  Okun’s Law (Fig.2-2)  BIP- und VPI-Index (Fig.2-3)  Phillips-Kurve (Fig.2-4) Zeichnen Sie für Österreich (1988-2001; falls möglich) die Graphiken (vgl. Blanchard):