CHAPTER 1:

INTRODUCTION TO MACROECONOMICS
AND
MEASURING MACROECONOMICS
VARIABLES
INTRODUCING ME

 MSc Nguyen Minh Thuy

 Faculty of International Economics

 [email protected]

 Email for an appointment or question

INTRODUCING THE COURSE
 Teaching format: 15 lectures
 Assessment:
- Class attendance (10%)
- 30-minute midterm test (30%)
- 60-minute final test (60%)
 Textbook: Principles of Economics – Sixth edition,
George Mankiw with selected chapters
 Exercise book: Bài tập kinh tế vĩ mô cơ bản và
nâng cao – PGS, TS Hoàng Xuân Bình
INTRODUCTION TO MACROECONOMICS
SUGGESTED READINGS: CHAPTER 1, 2, 4
PART I: 10 PRINCIPLES OF ECONOMICS

In this part, look for the answers to these

questions:
 What kinds of questions does economics address?
 What are the principles of how people make
decisions?
 What are the principles of how people interact?
 What are the principles of how the economy as a
whole works?
WHAT ECONOMICS IS ALL ABOUT
 Scarcity refers to the limited nature of
society’s resources.
 Economics is the study of how society
manages its scarce resources, including
 how people decide how much to work, save,
and spend, and what to buy
 how firms decide how much to produce,
how many workers to hire
 how society decides how to divide its resources
between national defense, consumer goods,
protecting the environment, and other needs
HOW PEOPLE MAKE DECISIONS
 Decision making is
at the heart of
economics.
 The first four
principles deal with
how people make
decisions.
HOW PEOPLE MAKE DECISIONS
Principle #1: People Face Tradeoffs

All decisions involve tradeoffs. Examples:

 Going to a party the night before your
midterm leaves less time for studying.
 Having more money to buy stuff requires
working longer hours, which leaves less time
for leisure.
 Protecting the environment requires
resources that might otherwise be used to
produce consumer goods.
HOW PEOPLE MAKE DECISIONS
Principle #1: People Face Tradeoffs
 Society faces an important tradeoff:
efficiency vs. equity
 efficiency: getting the most out of scarce resources
 equity: distributing prosperity fairly among society’s
members
 Tradeoff: To increase equity, can redistribute income
from the well-off to the poor.
But this reduces the incentive to work and produce,
and shrinks the size of the economic “pie.”
HOW PEOPLE MAKE DECISIONS
Principle #2: The Cost of Something Is What You
Give Up to Get It

 Making decisions requires comparing the

costs and benefits of alternative choices.
 The opportunity cost of any item is whatever
must be given up to obtain it.
 It is the relevant cost for decision making.
HOW PEOPLE MAKE DECISIONS
Principle #2: The Cost of Something Is What You
Give Up to Get It

Examples:
The opportunity cost of…
…going to college for a year is not just the tuition,
books, and fees, but also the foregone wages.
…seeing a movie is not just the price of the ticket,
but the value of the time you spend in the theater.
HOW PEOPLE MAKE DECISIONS
Principle #3: Rational People Think at the Margin

 A person is rational if she systematically and

purposefully does the best she can to
achieve her objectives.
 Many decisions are not “all or nothing,”
but involve marginal changes – incremental
adjustments to an existing plan.
 Evaluating the costs and benefits of
marginal changes is an important part of
decision making.
HOW PEOPLE MAKE DECISIONS
Principle #3: Rational People Think at the Margin

Examples:
 A student considers whether to go to college
for an additional year, comparing the fees &
foregone wages to the extra income he could
earn with an extra year of education.
 A firm considers whether to increase output,
comparing the cost of the needed labor and
materials to the extra revenue.
HOW PEOPLE MAKE DECISIONS
Principle #4: People Respond to Incentives
 incentive: something that induces a person
to act, i.e. the prospect of a reward or
punishment.
 Rational people respond to incentives
because they make decisions by comparing
costs and benefits. Examples:
 In response to higher gas prices,
sales of “hybrid” cars (e.g., Toyota Prius) rise.
 In response to higher cigarette taxes,
teen smoking falls.
HOW PEOPLE INTERACT
 An “economy” is just
a group of people
interacting with
each other.
 The next
three principles
deal with how people
interact.
HOW PEOPLE INTERACT
Principle #5: Trade Can Make Everyone Better Off

 Rather than being self-sufficient, people can

specialize in producing one good or service
and exchange it for other goods.
 Countries also benefit from trade &
specialization:
 geta better price abroad for goods they produce
 buy other goods more cheaply from abroad than
could be produced at home
 Absolute advantage/comparative advantage
HOW PEOPLE INTERACT
Principle #6: Markets Are Usually A Good Way to
Organize Economic Activity

 A market is a group of buyers and sellers.

(They need not be in a single location.)
 “Organize economic activity” means determining
 what goods to produce

 how to produce them

 how much of each to produce
 who gets them
HOW PEOPLE INTERACT
Principle #6: Markets Are Usually A Good Way to
Organize Economic Activity
 In a market economy, these decisions result from the
interactions of many households and firms.
 Famous insight by Adam Smith in
The Wealth of Nations (1776):
Each of these households and firms
acts as if “led by an invisible hand”
to promote general economic well-being.
HOW PEOPLE INTERACT
Principle #6: Markets Are Usually A Good Way to
Organize Economic Activity
 The invisible hand works through the price system:
 The interaction of buyers and sellers
determines prices of goods and services.
 Each price reflects the good’s value to buyers and
the cost of producing the good.
 Prices guide self-interested households and firms
to make decisions that, in many cases, maximize
society’s economic well-being.
HOW PEOPLE INTERACT
Principle #7: Governments Can Sometimes Improve
Market Outcomes
 Important role for govt: enforce property rights
(with police, courts)
 People are less inclined to work, produce, invest, or
purchase if large risk of their property being stolen.
 A restaurant won’t serve meals if customers
do not pay before they leave.
 A music company won’t produce CDs if too many
people avoid paying by making illegal copies.
HOW PEOPLE INTERACT
Principle #7: Governments Can Sometimes Improve
Market Outcomes

 Govt may alter market outcome to promote efficiency

 market failure, when the market fails to allocate society’s
resources efficiently. Causes:
 externalities, when the production or consumption
of a good affects bystanders (e.g. pollution)
 market power, a single buyer or seller has substantial
influence on market price (e.g. monopoly)
 In such cases, public policy may increase efficiency.
HOW PEOPLE INTERACT
Principle #7: Governments Can Sometimes Improve
Market Outcomes

 Govt may alter market outcome to promote equity

 If the market’s distribution of economic well-being
is not desirable, tax or welfare policies can change how
the economic “pie” is divided.
HOW THE ECONOMY AS A WHOLE WORKS

 The last three

principles deal with
the economy as a
whole.
HOW THE ECONOMY AS A WHOLE WORKS
Principle #8: A country’s standard of living depends
on its ability to produce goods & services.

 Huge variation in living standards across

countries and over time:
 Average income in rich countries is more than
ten times average income in poor countries.
 The U.S. standard of living today is about eight
times larger than 100 years ago.
HOW THE ECONOMY AS A WHOLE WORKS
Principle #8: A country’s standard of living depends
on its ability to produce goods & services.

 The most important determinant of living standards:

productivity, the amount of goods and services
produced per unit of labor.
 Productivity depends on the equipment, skills, and
technology available to workers.
 Other factors (e.g., labor unions, competition from
abroad) have far less impact on living standards.
HOW THE ECONOMY AS A WHOLE WORKS
Principle #9: Prices rise when the government
prints too much money.
 Inflation: increases in the general level of
prices.
 In the long run, inflation is almost always
caused by excessive growth in the quantity of
money, which causes the value of money to
fall.
 The faster the govt creates money,
the greater the inflation rate.
HOW THE ECONOMY AS A WHOLE WORKS
Principle #10: Society faces a short-run tradeoff
between inflation and unemployment
 In the short-run (1 – 2 years),
many economic policies push inflation and
unemployment in opposite directions.
 Other factors can make this tradeoff more or less
favorable, but the tradeoff is always present.
PART II: THINKING LIKE AN ECONOMIST
The Economist as Scientist

 Economists play two roles:

1. Scientists: try to explain the world
2. Policy advisors: try to improve it

 In the first, economists employ the

scientific method,
the dispassionate development and testing of
theories about how the world works.
ASSUMPTIONS & MODELS
 Assumptions simplify the complex world,
make it easier to understand.
 Example: To study international trade,
assume two countries and two goods.
Unrealistic, but simple to learn and
gives useful insights about the real world.
 Model: a highly simplified representation of
a more complicated reality.
Economists use models to study economic
issues.
SOME FAMILIAR MODELS

A road map
SOME FAMILIAR MODELS

A model of human
anatomy from high
school biology class
SOME FAMILIAR MODELS

A model airplane
SOME FAMILIAR MODELS

The model teeth at the Don’t forget

dentist’s office to floss!
MICROECONOMICS AND MACROECONOMICS
 Microeconomics is the study of how households and
firms make decisions and how they interact in markets.
 Macroeconomics is the study of economy-wide
phenomena, including inflation, unemployment, and
economic growth.
 Macroeconomics answers questions like these:
 Why is average income high in some countries and low in
others?
 Why do prices rise rapidly in some time periods while they are
more stable in others?
 Why do production and employment expand in some years
and contract in others?
 These two branches of economics are closely
intertwined, yet distinct – they address different
questions.
THE ECONOMIST AS POLICY ADVISOR
 As scientists, economists make
positive statements,
which attempt to describe the world as it is.
 As policy advisors, economists make
normative statements,
which attempt to prescribe how the world should be.
 Positive statements can be confirmed or refuted,
normative statements cannot.
 Govt employs many economists for policy advice.
ACTIVE LEARNING
IDENTIFYING POSITIVE VS. NORMATIVE
Which of these statements are “positive” and which are
“normative”? How can you tell the difference?
a. Prices rise when the government increases the
quantity of money.
b. The government should print less money.
c. A tax cut is needed to stimulate the economy.
d. An increase in the price of burritos will cause an
increase in consumer demand for video rentals.
PART III: THE MARKET FORCES OF SUPPLY AND
DEMAND
 Demand comes from the behavior of buyers.
The quantity demanded of any good is the
amount of the good that buyers are willing and
able to purchase.
 Supply comes from the behavior of sellers.

The quantity supplied of any good is the amount

that sellers are willing and able to sell.
SUPPLY AND DEMAND TOGETHER
THREE STEPS TO ANALYZING CHANGES IN EQM

1. Decide whether event shifts S curve,

D curve, or both.
2. Decide in which direction curve shifts.
3. Use supply-demand diagram to see
how the shift changes eq’m P and Q.
SHIFT AND MOVEMENT

 Causes of shift and movement?

 Endogenous and exogenous variables?
MEASURING MACROECONOMIC VARIABLES
SUGGESTED READINGS: CHAPTER 23, 24
MEASURING MACROECONOMICS VARIABLES

 In macroeconomics, data are crucial

1. Data help policy makers see what problems, if
any, need to be addressed
2. Data help macroeconomists identify the
theories that make correct predictions and the
theories that make incorrect predictions
3. Data often reveal interesting puzzles that
macroeconomic theories need to solve
MEASURE THE HEALTH OF AN ECONOMY
 Recall that we need to measure the health of an economy
 When judging whether an economy is doing well or poorly, it is
natural to look at the total income that everyone in the
economy is earning
 We can temporarily enjoy a high standard of living even if total
income is low
 How? By borrowing from others.
 But we can’t keep borrowing forever
 At some point we’ll have to repay—with interest—what we’d
borrowed
 At that point, we will have to repay out of our income
 This is why a nation’s standard of living depends heavily on its
own total income
GROSS DOMESTIC PRODUCT (GDP)

 GDP is the total market value of all final goods

and services produced within a country in a
given period of time.
 GDP is also the total expenditure on all final
goods and services produced within a country
in a given period of time.
 It is also the total income earned from all
productive activity in the domestic economy
EXPLANATION

 “GDP is the market value…” : Market

prices - reflect the value of the goods“… of
all…”
 All items produced in the economy
 And sold legally in markets
 Excludes most items
 Produced and sold illicitly
 Produced and consumed at home
 Final goods are those goods sold to their final
users
 Final goods are those goods that do not
disappear in the process of the production of
some other for-sale good
 Goodsthat disappear in the process of the
production of some other for-sale good are called
intermediate goods
 “… goods and services…”
 Tangible goods & intangible services
 “… produced…”
 Goods and services currently produced
 “… within a country…”
 Goods and services produced
domestically
 Regardless of the nationality of the producer
 “… in a given period of time”
 A year or a quarter
QUESTION 1:
Explain why the value of GDP in 2019 would or would not change
as a result of each transaction described below:
a. In 2019, the Biden family purchases a new house that was
built in 2019
b. In 2019, the Trump family purchases a house that was build
in 2017
c. In 2019, a construction company purchases windows to put in
the Biden family home that was build in 2019
d. In 2019, Mr Jones painted all the rooms of the Jones family
house purchased in 2019, using paint purchased in 2018
e. In 2019, Mrs Lockheart uses a free online service to purchase
shares of stock in an oil company.
THE CIRCULAR FLOW DIAGRAM
 The Circular-Flow Diagram: a visual model of
the economy, shows how dollars flow through
markets among households and firms
 Two types of “actors”:
 households
 firms

 Two markets:
 the market for goods and services
 the market for “factors of production”
FACTORS OF PRODUCTION

 Factors of production: the resources the

economy uses to produce goods & services,
including
 labor

 land

 capital (buildings & machines used in production)

 51 THINKING LIKE AN ECONOMIST
THE CIRCULAR-FLOW DIAGRAM

Households:
 Own the factors of production,
sell/rent them to firms for income
 Buy and consume goods & services

Firms Households

Firms:
 Buy/hire factors of production,
use them to produce goods and
services
 Sell goods & services
FIGURE 1: THE CIRCULAR-FLOW DIAGRAM

Revenue Spending
Markets for
G&S Goods &
G&S
sold Services bought

Firms Households

Factors of Labor, land,

production Markets for capital
Factors of
Wages, rent, Production Income
profit
 GDP = Total output = Total expenditure = Total
income
 Total expenditure on domestically-produced
final goods and services.
 Total income earned by domestically-located
factors of production.
 Expenditure equals income because every
dollar a buyer spends becomes income to the
seller.
THE EXPENDITURE APPROACH
 Adds up all the spending of all participants in
the market
 GDP (Y) = C + I + G + X – M
C: household consumption
I: private investment
G: Government spending
X: export
M: import
C - CONSUMPTION

 Spending by households on goods and services

durable goods last a long time e.g., cars,
home appliances
nondurable goods last a short time e.g.,
food, clothing
services intangible items purchased by
consumers e.g., dry cleaning, air travel
 Biggest components of GDP, about 60-70%
I: INVESTMENT
 Purchases of goods that will be used in the
future to produce more goods and services
 Includes:
- Business fixed investment: spending on plant
and equipment
- Residential fixed investment: spending by
consumers and landlords on housing units
- Inventory investment: the change in the value
of all firms’ inventories
INVESTMENT VS. CAPITAL
Note: Investment is spending on new capital.
Example (assumes no depreciation):
 1/1/2019:
Economy has $10 trillion worth of capital
 during 2019:
Investment = $2 trillion
 1/1/2020:
Economy will have $12 trillion worth of capital
STOCKS VS. FLOWS
Flow Stock
A stock is a
quantity measured
at a point in time.
E.g.,
“The capital stock was
$10 trillion on January
1, 2020.”
A flow is a quantity measured per unit of time.
E.g., “investment was $2 trillion during 2019.”
Stocks vs. Flows - examples

stock flow

a person’s annual
a person’s wealth
saving

# of people with # of new college

college degrees graduates this year

the govt debt the govt budget deficit

GOVERNMENT SPENDING (G)
 G includes all government spending on goods
and services.
 G excludes transfer payments
(e.g., unemployment insurance payments),
because they do not represent spending on
goods and services.
NET EXPORTS (NX)
 NX = exports – imports
 exports: the value of g&s sold to other
countries
 imports: the value of g&s purchased from
other countries
 Hence, NX equals net spending from abroad on
our g&s
WHY OUTPUT = EXPENDITURE

 Unsold output goes into inventory,

and is counted as “inventory investment”…
whether or not the inventory buildup was
intentional.
 In effect, we are assuming that
firms purchase their unsold output.
COMPONENTS OF GDP OF THE US
Unit (m) 2015 2016 2017 2018 2019
Gross Domestic 18,224,780.25 18,715,040.50 19,519,423.50 20,580,223.00 21,427,689.50
Product, Nominal,
Domestic Currency
Household 12,284,281.00 12,748,483.00 13,312,060.00 13,998,666.00 14,562,661.75
Consumption
Expenditure, incl.
NPISHs, Nominal,
Domestic
Currency
Government 2,616,245.50 2,671,423.00 2,757,214.25 2,904,314.25 3,018,444.50
Consumption
Expenditure,
Nominal, Domestic
Currency
Gross Fixed 3,712,229.25 3,786,871.25 3,995,296.00 4,260,733.00 4,410,142.00
Capital Formation,
Nominal, Domestic
Currency
Change in 131,869.50 27,070.25 30,189.50 54,724.00 68,292.75
Inventories,
Nominal, Domestic
Currency
Exports of Goods 2,266,800.50 2,220,608.50 2,356,726.50 2,510,249.75 2,504,292.75
and Services,
Nominal, Domestic
Currency
Imports of Goods 2,786,645.25 2,739,415.00 2,932,062.25 3,148,464.25 3,136,144.25
and Services,
Nominal, Domestic
Currency
 COMPONENTS OF GDP OF VIETNAM
2014 2015 2016 2017 2018
Gross Domestic 3,937,856,000.00 4,192,862,000.00 4,502,733,000.00 5,005,975,000.00 5,542,331,870.00
Product, Nominal,
Domestic Currency
Household 2,591,337,000.00 2,849,540,000.00 3,086,298,000.00 3,405,750,000.00 3,745,063,260.00
Consumption
Expenditure, incl.
NPISHs, Nominal,
Domestic Currency
Government 246,711,000.00 265,545,000.00 293,106,000.00 325,804,000.00 358,592,000.00
Consumption
Expenditure,
Nominal, Domestic
Currency
Gross Fixed Capital 938,452,000.00 1,033,780,000.00 1,066,160,000.00 1,190,474,000.00 1,321,905,900.00
Formation,
Nominal, Domestic
Currency
Change in 118,180,000.00 126,667,000.00 130,579,000.00 140,220,000.00 148,644,000.00
Inventories,
Nominal, Domestic
Currency
Exports of Goods 3,402,495,000.00 3,764,320,000.00 ... ... ...
and Services,
Nominal, Domestic
Currency
Imports of Goods 3,273,530,000.00 3,731,151,000.00 ... ... ...
and Services,
Nominal, Domestic
Currency
Statistical -85,789,000.00 -115,839,000.00 -188,752,000.00 -196,555,000.00 -217,925,000.00
Discrepancy in
GDP, Nominal,
Domestic Currency
QUESTION 2:
 Explain which category of GDP changes and the direction of
the change that results of each transaction described:
a. A domestic business purchases a domestically produced
computer to use in a business office
b. A domestic business produces a computer that is sold to a
foreign company
c. The federal government purchases a domestically produced
computer to use in the court house
d. A domestic household purchases a domestically produced
computer to use in a home
e. A domestic household purchases a computer produced in a
foreign country to use in a home
THE INCOME APPROACH
 GDP = NI+ T + D + F
NI = W + R + i + P
W: wage, R: rental income, i: interest income, P: profit
T: adjusted for sales taxes
Sale taxes: taxes imposed by the government on the sales of g&s, are
usually paid by consumers but collected by retailers and then passed on
to the government (VAT)
D: adjusted for depreciation
Depreciation: the decrease in the value of an asset over time
F: Adjusted for net foreign factor income
Net foreign factor income describes the difference between the total
income that local citizens (and businesses) generate in foreign
countries, versus the total income that foreign citizens (and businesses)
generate in the local country
THE VALUE ADDED APPROACH

Value added:
The value of output minus the value of the
intermediate goods used to produce that output
NOW YOU TRY

 A farmer grows a bushel of wheat

and sells it to a miller for $1.00.
 The miller turns the wheat into flour
and sells it to a baker for $3.00.
 The baker uses the flour to make a loaf of
bread and sells it to an engineer for $6.00.
 The engineer eats the bread.
Compute value added at each stage
of production and GDP
FINAL GOODS, VALUE ADDED, AND GDP

 GDP = value of final goods produced

= sum of value added at all stages
of production.
 The value of the final goods already includes
the value of the intermediate goods,
so including intermediate and final goods in GDP
would be double counting.
GNP VS. GDP
 Gross national product (GNP):
Total income earned by the nation’s factors of
production, regardless of where located

 Gross domestic product (GDP):

Total income earned by domestically-located
factors of production, regardless of nationality

GNP – GDP = factor payments from abroad

minus factor payments to abroad
 Examples of factor payments: wages, profits,
rent, interest & dividends on assets
REAL VS. NOMINAL GDP
 GDP is the value of all final goods and services
produced.
 Nominal GDP measures these values using
current prices.
 Real GDP measure these values using the
prices of a base year.
NOW YOU TRY

2017 2018 2019

P Q P Q P Q

good A $30 900 $31 1,000 $36 1,050

good B $100 192 $102 200 $100 205

 Compute nominal GDP in each year.

 Compute real GDP in each year using 2017 as
the base year.
REAL GDP CONTROLS FOR INFLATION
 Changes in nominal GDP can be due to:
 changes in prices
 changes in quantities of output produced
 Changes in real GDP can only be due to
changes in quantities, because real GDP is
constructed using constant base-year prices.

28
NOW YOU TRY

Nom. GDP Real GDP GDP Inflation

deflator rate

2017 $46,200 $46,200 n.a.

2018 51,400 50,000

2019 58,300 52,000

 Use your previous answers to compute

the GDP deflator in each year.
 Use GDP deflator to compute the inflation rate
from 2017 to 2018, and from 2018 to 2019.
TWO ARITHMETIC TRICKS FOR
WORKING WITH PERCENTAGE CHANGES

1. For any variables X and Y,

percentage change in (X × Y )
≈ percentage change in X
+ percentage change in Y

EX: If your hourly wage rises 5%

and you work 7% more hours,
then your wage income rises
approximately 12%.
32
TWO ARITHMETIC TRICKS FOR
WORKING WITH PERCENTAGE CHANGES

2. percentage change in (X/Y )

≈ percentage change in X
− percentage change in Y

EX: GDP deflator = 100 × NGDP/RGDP.

If NGDP rises 9% and RGDP rises 4%,
then the inflation rate is approximately 5%.

33
CONSUMER PRICE INDEX (CPI)

 A measure of the overall level of prices

 Published by the Bureau of Labor Statistics
(BLS)
 Uses:
 tracks changes in the typical household’s
cost of living
 adjusts many contracts for inflation (“COLAs”)
 allows comparisons of dollar amounts over time

35
HOW THE BLS CONSTRUCTS THE CPI
1. Survey consumers to determine composition of
the typical consumer’s “basket” of goods
2. Every month, collect data on prices of all items
in the basket; compute cost of basket
3. CPI in any month equals

Cost of basket in that month

100 
Cost of basket in base period

36
COMPUTE THE CPI
Pizza CDs
Assume basket: 20 pizzas
and 10 CDs
2016 $10 15
For each year, compute:
- The cost of the basket
2017 11 15
- The CPI (using 2016 as a
base year)
2018 12 16
- The inflation rate from
the precedi
2019 13 15
THE COMPOSITION OF THE CPI’S “BASKET”
7.6%
Food and bev. 5.8%
16.4%
Housing
3.2%
3.8%
Apparel
3.4% 3.4%
Transportation

Medical care
Recreation

Education 14.9%
Communication

Other goods
and services 41.4%
WHY THE CPI MAY OVERSTATE INFLATION
 Substitution bias:
The CPI uses fixed weights, so it cannot reflect
consumers’ ability to substitute toward goods
whose relative prices have fallen.
 Introduction of new goods:
The introduction of new goods makes consumers
better off and, in effect, increases the real value of
the dollar. But it does not reduce the CPI, because
the CPI uses fixed weights.
 Unmeasured changes in quality:
Quality improvements increase the value of the
dollar but are often not fully measured.
39
THE SIZE OF THE CPI’S BIAS
 In 1995, a Senate-appointed panel of experts
estimated that the CPI overstates inflation by
about 1.1% per year.
 So the BLS made adjustments to reduce the
bias.
 Now, the CPI’s bias is probably under 1% per
year.

40
CPI VS. GDP DEFLATOR
Prices of capital goods:
 included in GDP deflator (if produced
domestically)
 excluded from CPI
Prices of imported consumer goods:
 included in CPI
 excluded from GDP deflator
The basket of goods:
 CPI: fixed
 GDP deflator: changes every year
42
 TWO MEASURES OF INFLATION IN THE U.S.
14
CPI
12
from 12 months earlier

10
Percentage change

0
GDP deflator
-2
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
THE ESTABLISHMENT
SURVEY
 The BLS obtains a second measure of
employment by surveying businesses,
asking how many workers are on their payrolls.
 Neither measure is perfect, and they
occasionally diverge due to:
 treatment of self-employed persons
 new firms not counted in establishment survey
 technical issues involving population inferences
from sample data

48
 CHAPTERSUMMARY
 Gross domestic product (GDP) measures both
total income and total expenditure on the
economy’s output of goods & services.
 Nominal GDP values output at current prices;
real GDP values output at constant prices.
Changes in output affect both measures,
but changes in prices only affect nominal GDP.
 GDP is the sum of consumption, investment,
government purchases, and net exports.

50
 CHAPTERSUMMARY
 The overall level of prices can be measured
by either:
 the consumer price index (CPI),
the price of a fixed basket of goods purchased
by the typical consumer, or
 the GDP deflator,
the ratio of nominal to real GDP

51