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• Macroeconomic data consist mainly of the aggregate

values of economic flows either at the level
of the total economy, such as GDP and National
Income, or at lower levels of aggregation such
as the income, expenditure, and saving of the
household or government sectors.

Learning objectives
In this chapter, you will learn about:
• Gross Domestic Product (GDP)
• the Consumer Price Index (CPI)
• the Unemployment Rate

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What Is Gross Domestic Product (GDP)?

Gross domestic product (GDP) is the total monetary or
market value of all the final goods and services produced
within a country’s borders in a specific time period.
As a broad measure of overall domestic production, it
functions as a comprehensive scorecard of a given
country’s economic health.

What Is Gross Domestic Product (GDP)?

GDP provides an economic snapshot of a country, used to estimate
the size of an economy and growth rate.
GDP can be calculated in three ways, using expenditures,
production, or incomes. It can be adjusted for inflation and
population to provide deeper insights.
Though it has limitations, GDP is a key tool to guide policy-makers,
investors, and businesses in strategic decision-making.

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GDP as Income
• 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
• GDP

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The expenditure components of GDP

• consumption
• investment
• government spending on goods and services
• net exports

Y = C + I + G + NX

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Investment (I)
def1: spending on [the factor of production] capital.
def2: spending on goods bought for future use.
Includes:
§ business fixed investment
spending on plant and equipment that firms will use to produce
other goods & services
§ residential fixed investment
spending on housing units by consumers and landlords
§ inventory investment
the change in the value of all firms’ inventories

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Government spending
• Government spending refers to money spent by the
public sector on the acquisition of goods and provision
of services such as education, healthcare, social
protection, defense, public consumption and public
investment.
• Transfer payments consisting of income transfers.

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Government spending on Goods and Services

(G)
• Federal expenditures fall into five main categories:
• Health insurance (Medicaid and Medicare)
• Retirement benefits (Social Security).
• National defense.
• Interest on the debt.
• Other spending (a broad category that covers spending on education,
housing, transportation, agriculture,…)

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Transfer payments (Tr)

• Transfer payments include welfare, financial aid, social security, and
government subsidies for certain businesses.

These include, but are not limited to:

• Unemployment compensations.
• Old age insurance.
• Civil service pensions.
• State and local government pensions.
• Survivors benefits.
• Supplemental Security Income.

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Government spending (G)

• Government spending includes all

government spending on goods and services.
• Government spending excludes transfer
payments
(e.g. unemployment insurance payments),
because they do not represent spending on
goods and services.

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Output = Expenditures
Suppose a firm
• produces $10 million worth of final goods
• but only sells $9 million worth.

Does this violate the

expenditure = output identity?

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What Is Gross National Product (GNP)?

• Gross national product (GNP) is an estimate of the total value of all the final
products and services turned out in a given period by the means of
production owned by a country's residents.
• GNP is commonly calculated by taking the sum of personal consumption
expenditures, private domestic investment, government expenditure, net
exports, and any income earned by residents from overseas investments,
minus income earned within the domestic economy by foreign residents.
• Net exports represent the difference between what a country exports minus
any imports of goods and services.

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What Is Gross National Product (GNP)?

• GNP is related to gross domestic product (GDP), which takes into account all
output produced within a country's borders regardless of who owns the
means of production.
• GNP starts with GDP, adds residents' investment income from overseas
investments, and subtracts foreign residents' investment income earned
within a country.

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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) – (factor payments to

abroad)

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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.

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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.

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A base year is the first of a series of years in an economic or

financial index.

New, up-to-date base years are periodically introduced to

keep data current in a particular index.

Any year can serve as a base year, but analysts typically

choose recent years.

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Consumer Price Index (CPI)

• A measure of the overall level of prices
• Published by the Bureau of Labor Statistics
(BLS)
• Used to
• track changes in the
typical household’s cost of living
• adjust many contracts for inflation
(i.e. “COLAs”)
• allow comparisons of dollar figures from different
years

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How the Bureau of Labor Statistics BLS (US) and General

Statistics Office (Vietnam) and
Central Bureau of. Statistics (Indonesia) construct 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

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Exercise: Compute the CPI

The basket contains 20 pizzas and

10 i-Tunes.
For each year, compute
prices:
§ the cost of the basket
pizza iTunes
§ the CPI (use 2009 as
2009 $10 $15 the base year)
2010 $11 $15 § the inflation rate from
2011 $12 $16 the preceding year
2012 $13 $15

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Example
cost of inflation
basket CPI rate
2009 $350 100.0 n.a.
2010 370 105.7 5.7%
2011 400 114.3 8.1%
2012 410 117.1 2.5%

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Reasons 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.

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The CPI’s bias

• The Boskin Panel’s “best estimate”:
The CPI overstates the true increase in the cost of living by 1.1%
per year.
• Result: the BLS has refined the way it calculates the CPI to
reduce the bias.
• It is now believed that the CPI’s bias is slightly less than 1% per
year.

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Categories of the population

• employed
working at a paid job
• unemployed
not employed but looking for a job
• labor force
the amount of labor available for producing
goods and services; all employed plus
unemployed persons
• not in the labor force
not employed, not looking for work.

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Two important labor force concepts

• unemployment rate
percentage of the labor force that is
unemployed
• labor force participation rate
the fraction of the adult population
that ‘participates’ in the labor force

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Potential output
• Potential output is the maximum amount of goods and
services an economy can turn out when it is most
efficient—that is, at full capacity.

• Often, potential output is referred to as the production capacity

of the economy. Just as GDP can rise or fall, the output gap can
go in two directions: positive and negative.

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