2

The Data of Macroeconomics

MACROECONOMICS
N. Gregory Mankiw
® Fall 2014
PowerPoint Slides by Ron Cronovich
update
© 2015 Worth Publishers, all rights reserved
 IN THIS CHAPTER, YOU WILL LEARN:

…the meaning and measurement of the

most important macroeconomic statistics:
 Gross domestic product (GDP)
 The consumer price index (CPI)
 The unemployment rate
What do the following macroeconomic
variables represent? How are they
measured?
1
GROSS DOMESTIC PRODUCT (GDP)

AND

ITS COMPONENTS

CHAPTER 2 The Data of Macroeconomics 2

 Gross Domestic Product:
Expenditure and Income
Two definitions of GDP:
 Total expenditure on domestically-produced
final goods and services (Households).
 Total income earned by domestically-located
factors of production (firms).

Expenditure equals income because

every dollar a buyer spends
becomes income to the seller.

CHAPTER 2 The Data of Macroeconomics 3

 GDP is both …

 Total expenditure on the economy’s output

of goods and services.
 Total income of everyone in the economy .

GDP measures something

people care about — their
incomes

CHAPTER 2 The Data of Macroeconomics 4

 The Circular Flow
of Income and Expenditure

 Imagine now , an economy that produces a

single good, bread, from a single input, labor.

 Next Figure illustrates all the economic

transactions that occur between households
and firms in this economy.

CHAPTER 2 The Data of Macroeconomics 5

 The Circular Flow
Income ($)

Labor

Households Firms

Goods

Expenditure ($)

CHAPTER 2 The Data of Macroeconomics 6

 The Circular Flow
of Income and Expenditure
 The inner loop (blue line) represents the flows of labor and
bread:
 households sell their labor to firms, and the firms
sell the bread they produce to households.
 The outer loop (green line) represents the corresponding
flows of dollars:
 households pay the firms for the bread, and the
firms pay wages and profit to the households.

In this economy, GDP is both the total

expenditure on bread and the total
income from the production of bread.

CHAPTER 2 The Data of Macroeconomics 7

GDP measures the flow of dollars in this
economy. We can compute it in two ways…

 GDP is the total income from the production of

bread, which equals the sum of wages and profit
 GDP is also the total expenditure on purchases of
bread

To compute GDP, we can look at

either the flow of dollars from firms to
households or the flow of dollars from
households to firms.

CHAPTER 2 The Data of Macroeconomics 8

 These two ways of computing GDP
must be equal because…
 by the rules of accounting, the
expenditure of buyers on products, is
income to the sellers of those products.
 Every transaction that affects expenditure
must affect income,
 and every transaction that affects income
must affect expenditure

CHAPTER 2 The Data of Macroeconomics 9

 For example : suppose that a firm produces and
sells one more loaf of bread to a household.

 Clearly this transaction raises total expenditure on

bread, but it also has an equal effect on total income.
 If the firm produces the extra loaf without hiring
anymore labor, then profit increases.
 If the firm produces the extra loaf by hiring more
labor, then wages increase.

In both cases, expenditure and income

increase equally.

CHAPTER 2 The Data of Macroeconomics 10

 Note, also, that GDP is both …

 Total expenditure on domestically-produced final

goods and services within an economy in a given
year.
 Total income earned by domestically-located
productive resources.

Expenditure equals income

because
every dollar spent by a buyer
becomes income to the seller.

CHAPTER 2 The Data of Macroeconomics 11

 Final Goods and Intermediate Goods
 GDP counts the value of only final goods, not
intermediate goods
 Intermediate goods are those goods that disappear
inside other goods that are produced for sale.
 Final goods are goods that are not intermediate
goods.
 This way, the value of intermediate goods is counted
only once, not twice or thrice.

Intermediate goods :
Goods used in the production process
that are not final goods and services.

CHAPTER 2 The Data of Macroeconomics 12

 Intermediate Goods
 Intermediate goods : are those goods which are used in the
production of final goods.
 Examples :
 Salt: Salt is an intermediate good because companies
include it in the final product of many food and nonfood
items.
 Wheat: wheat is an intermediate good because
companies process it as part of another product, usually
food or food-related goods.
 Many goods are produced in stages: raw materials are
processed into intermediate goods by one firm and then sold to
another firm for final processing. How should we treat such
products when computing GDP?

CHAPTER 2 The Data of Macroeconomics 13

 NOW YOU TRY
Identifying Intermediate Goods

 Suppose a cattle rancher sells one-

quarter pound of meat to McDonald’s for
$1, and then McDonald’s sells you a
hamburger for $3.
 Should GDP include both the meat and
the hamburger (a total of$4) or just the
hamburger ($3)?

CHAPTER 2 The Data of Macroeconomics 14

 ANSWER
Identifying Intermediate Goods
 The answer is that GDP includes only the value of
final goods. Thus, the hamburger is included in GDP,
but the meat is not: GDP increases by $3, not by $4.
 The reason is that the value of intermediate goods is
already included as part of the market price of the
final goods in which they are used.
 To add the intermediate goods to the final goods
would be double counting — that is, the meat would
be counted twice.

CHAPTER 2 The Data of Macroeconomics 15

 ANSWER
Identifying Intermediate Goods

 Hence, GDP is the total value of final goods and

services produced.
 One way to compute the value of all final goods
and services is to sum the value added at each
stage of production.
 The value added of a firm equals the value of
the firm’s output less the value of the
intermediate goods that the firm purchases.

CHAPTER 2 The Data of Macroeconomics 16

 Intermediate Goods
 In the case of the hamburger, the value added of
the rancher is $1 (assuming that the rancher bought
no intermediate goods), and the value added of
McDonald’s is $3−$1, or $2.
 Total value added is $1+$2, which equals $3.
 For the economy as a whole, the sum of all value
added must equal the value of all final goods and
services.
Hence, GDP is also the total value
added of all firms in the economy.

CHAPTER 2 The Data of Macroeconomics 17

 A Firm’s Value Added
Value added is :

The value of output

minus
The value of the intermediate goods
used to produce that output

Remind you that: “intermediate goods” are those goods

used in the production process to make other goods
(Example: wheat, crude oil, steel, sugar etc.)

CHAPTER 2 The Data of Macroeconomics 18

 NOW YOU TRY
Identifying value added
• 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 ?
19
 ANSWER
Identifying value added
• Each person’s value-added (VA) equals the value of
what he/she produced minus the value of the
intermediate inputs he/she started with.
• Farmer’s VA = $1
• Miller’s VA = ($ 3 – $1) = $2
• Baker’s VA = ($ 6 – $3) = $3
• GDP = $6 Note that : GDP = value of final
good = sum of value-added at all
stages of production.
CHAPTER 2 The Data of Macroeconomics
 ANSWER
Identifying value added
Activity Value Added
A farmer grows a bushel of wheat and sells it to a miller for $1.00. $1.00
The miller turns the wheat into flour and sells it to a baker for $2.00
$3.00.
The baker uses the flour to make a loaf of bread and sells it to an $3.00
engineer for $6.00.
The engineer eats the bread. $0.00
Total Value Added $6.00
Value of Final Good (bread) $6.00
Contribution of above activity to GDP $6.00

GDP is the market value of all final goods produced. This is also total
expenditure on final goods. GDP is also the total value added by all producers.
The value added is also income. Thus, GDP is total expenditure and total income.

CHAPTER 2 The Data of Macroeconomics

 Lessons of this problem:
Final goods, value added, and GDP

GDP = Value of final goods produced

= Sum of value added at all stages of production

We don’t include the value of intermediate goods in

GDP because their value is already embodied in the
value of the final goods.
So, including intermediate and final goods in GDP
would be double counting.

CHAPTER 2 The Data of Macroeconomics 22

 The expenditure components of GDP
Economists divide GDP into four broad categories, each
corresponding to different types of purchases represented in
GDP :

1. Consumption expenditures: purchases by consumers

2. Private investment expenditures : purchases by firms
3. Government spending : purchases by federal, state, and
local governments
4. Net exports : net purchases by the foreign sector
(domestic exports minus domestic imports)

CHAPTER 2 The Data of Macroeconomics 23

 The expenditure components of GDP
 consumption, C
 investment, I
 government spending, G
 net exports, NX
The National Income Identity:
Y = C + I + G + NX

value total Sum of all components

expenditure (GDP) of expenditure
CHAPTER 2 The Data of Macroeconomics 24
 1. Consumption (C)
Definition : The value of all  durable goods
goods and services bought last a long time
by households. Includes: 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
CHAPTER 2 The Data of Macroeconomics 25
 Example : U.S. consumption, 2014

$ billions % of GDP

Consumption 11,868 68.6

Durables 1,301 7.5

Nondurables 2,668 15.4

Services 7,899 45.7

CHAPTER 2 The Data of Macroeconomics 26

 2. Investment (I)
 Spending on capital, a physical asset used in
future production
 Includes:
 Business fixed investment :
Spending on plant and equipment (e.g. computers and
machines)
 Residential fixed investment :
Spending by consumers and landlords on housing units
(e.g. of course a house)
 Inventory investment :
The change in the value of all firms’ inventories (e.g.
Manufacturing firms keep inventories of spare parts to reduce the time that
the assembly line is shut down when a machine breaks).

CHAPTER 2 The Data of Macroeconomics 27

 Example : U.S. Investment, 2014

$ billions % of GDP

Investment 2,829 16.4

Business fixed 2,170 12.5

Residential 550 3.2

Inventory 110 0.6

CHAPTER 2 The Data of Macroeconomics 28

 Economists distinguish between
two types of quantity variables: …

 Investment and Capital

 Stocks and Flows

CHAPTER 2 The Data of Macroeconomics 29

 Investment vs. Capital
• Investment, as macroeconomists use the
term, creates a new physical asset, called
capital, which can be used in future
production.

• Capital is a source of finances, whereas

investment is the use of funds..

(Therefore, the use of this capital can be defined as an investment)

CHAPTER 2 The Data of Macroeconomics 30

 Investment vs. Capital
Note: Investment is spending on new capital.

Example:
 01/1/2014:
Economy has $10 trillion worth of capital
 during 2014:
Investment = $2 trillion
 01/1/2015:
Economy will have $12 trillion worth of capital

CHAPTER 2 The Data of Macroeconomics 31

 Stocks vs. Flows
Flow Stock
 A stock is a
quantity measured
at a point in time.
E.g.,
“The U.S. capital stock
was $10 trillion on
January 01, 2014.”

 A flow is a quantity measured per unit of time.

E.g., “U.S. investment was $2 trillion during 2014.”
CHAPTER 2 The Data of Macroeconomics 32
 Examples : Stocks vs. Flows

stock flow

a person’s
a person’s wealth
annual saving

# of people with # of new college

college degrees graduates this year

the govt. debt the govt budget deficit

CHAPTER 2 The Data of Macroeconomics 33

 NOW YOU TRY
Stock or Flow?

 The balance on your credit card statement

 How much time you spend studying
 The size of your MP3/iTunes collection
 The inflation rate
 The unemployment rate

34
 ANSWERS, AND EXPLANATIONS:
Stock or Flow?
 The balance on your credit card statement is a stock. (A corresponding
flow would be the amount of new purchases on your credit card
statement.)

 How much you study is a flow. The statement “I study 10 hours” is only
meaningful if we know the time period (whether 10 hours per day, per
week, per month, etc).

 The size of your compact disc collection is a stock. (A corresponding

flow would be how many CDs you buy per month.)

 The inflation rate is a flow: we say “prices are increasing by 3.2% per
year” or “by 0.4% per month.”

 the unemployment rate is a stock: It’s the number of unemployed people

divided by the number of people in the workforce. (In contrast, the
number of newly unemployed people per month would be a flow.)

CHAPTER 2 The Data of Macroeconomics 35

 3. Government Purchases (G )
 G includes all government spending on g & s
o (e.g. road and infrastructure repairs,
national defense, schools, healthcare, and
government workers' salaries).

 G excludes transfer payments because they

do not represent spending on goods and
services
o (e.g., unemployment insurance payments).

CHAPTER 2 The Data of Macroeconomics 36

 Example : U.S. Government Spending, 2014

$ billions % of GDP

Govt spending 3,162 18.3

- Federal 1,210 7.0

Non-defense 456 2.6

Defense 755 4.4

- State & local 1,951 11.3

CHAPTER 2 The Data of Macroeconomics 37

 4. Net exports (NX)
 NX = exports – imports
 Exports: the value of g&s produced in the home
country and sold to other countries
 Imports: the value of g&s produced in a foreign
country and purchased by residents of the home
country
 Hence, NX equals net spending from abroad on
our g&s

CHAPTER 2 The Data of Macroeconomics 38

 Example : U.S. Net Exports, 2014

$ billions % of GDP
Net exports of g & s –564 –3.3
Exports 2,335 13.5
Goods 1,617 9.4
Services 718 4.1

Imports 2,899 16.8

Goods 2,413 13.9
Services 486 2.8
CHAPTER 2 The Data of Macroeconomics 39
 GDP:
An important and versatile concept

We have now seen that GDP measures:

 Total income
 Total output
 Total expenditure
 The sum of value-added at all stages in the
production of final goods
(This is why economists often use the terms income, output, expenditure, and GDP
interchangeably)

CHAPTER 2 The Data of Macroeconomics 40

 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
CHAPTER 2 The Data of Macroeconomics 41
NOW YOU TRY
Discussion Question

In your country,
which would you
want to be bigger,
GDP or GNP?

Why?

42
 Answer to the Question

 It’s better to have GNP > GDP, because it

means our nation’s income is greater than
the value of what we are producing
domestically.
 If, instead, GDP > GNP, then a portion of the
income generated in our country is going to
people in other countries, so there’s less
income left over for us to enjoy.

CHAPTER 2 The Data of Macroeconomics 43

Examples : GNP vs. GDP in select countries, 2012
GNP – GDP
Country GNP GDP
(% of GDP)
Bangladesh 127,672 116,355 9.7
Japan 6,150,132 5,961,066 3.2
China 8,184,963 8,227,103 -0.5
United States 16,514,500 16,244,600 1.7
India 1,837,279 1,858,740 -1.2
Canada 1,821,424 1,779,635 2.3
Greece 250,167 248,939 0.5
Iraq 216,453 215,838 0.3
Ireland 171,996 210,636 -18.3

GNP and GDP in millions of current U.S. dollars

 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.

CHAPTER 2 The Data of Macroeconomics 45

NOW YOU TRY
Real and Nominal GDP

2010 2011 2012

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 2010 as
the base year.
46
NOW YOU TRY
Answers

Nominal GDP multiply Ps & Qs from same year

2010: $46,200 = ($30 × 900) + ($100 × 192)
2011: $51,400 = ($31 × 1000) + ($102 × 200)
2012: $58,300 = ($36 × 1050) + ($100 × 205)

Real GDP multiply each year’s Qs by 2010 Ps

2010: $46,200 = ($30 × 900) + ($100 × 192)
2011: $50,000 = ($30 × 1000) + ($100 × 200)
2012: $52,000 = ($30 × 1050) + ($100 × 205)
47
 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.

CHAPTER 2 The Data of Macroeconomics 48

 GDP Deflator
From Nominal GDP and Real GDP, we can compute a
third statistic: the GDP deflator.
 The GDP deflator : is one measure of the price level. It
measures the impact of inflation on the GDP of an
economy during one year.

Nominal GDP
GDP deflator = 100 
Real GDP

 The Inflation rate: the percentage increase in the overall

level of prices
CHAPTER 2 The Data of Macroeconomics 49
 NOW YOU TRY
GDP deflator and inflation rate

GDP Inflation
Nom. GDP Real GDP
deflator rate

2010 $46,200 $46,200 n.a.

2011 51,400 50,000

2012 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
2010 to 2011, and from 2011 to 2012.
CHAPTER 2 The Data of Macroeconomics 50
 NOW YOU TRY
Answers

GDP Inflation
Nom. GDP Real GDP
deflator rate

2010 $46,200 $46,200 100.0 n.a.

2011 51,400 50,000 102.8 2.8%

2012 58,300 52,000 112.1 9.1%

CHAPTER 2 The Data of Macroeconomics 51

 Growth Rate : Definition
 An economic growth rate : is the percentage change in the value of all
of the g&s produced in a nation during a specific period of time, as
compared to an earlier period.
 The economic growth rate is used to measure the comparative health of
an economy over time:
o A positive economic growth rate : signifies that the economy has
expanded during the measured period. This often means the country
had increased economic activity and output (This growth often leads to
higher employment rates, improved living standards, and greater
opportunities for businesses and individuals).
o A negative economic growth rate : suggests economic contraction
which can lead to job losses, reduced income, and overall economic
hardship.

CHAPTER 2 The Data of Macroeconomics 52

 Growth Rate: Computation
 Gross Domestic Product (GDP) is the most
common and widely used measure of economic
growth.
 In general, Growth Rate formula is :
Value for the year  value for previous year
Growth Rate  100
value for previous year

 For next example, we'll look at GDP though this

formula can be used for other types of measurements
mentioned above.

CHAPTER 2 The Data of Macroeconomics 53

 2010 2011 2012 NOW YOU TRY:
Real and Nominal
Nominal GDP
$46,200 $51,400 $58,300
GDP
Growth
Rate %
Real
$46,200 $50,000 $52,000
GDP
Growth
Rate %

Value for the year  value for previous year

Growth Rate  100
value for previous year

CHAPTER 2 The Data of Macroeconomics 54

 2010 2011 2012 NOW YOU TRY:
Real and Nominal GDP
Nominal
$46,200 $51,400 $58,300
GDP
Growth
11.26 13.42
Rate % [(51,400 – 46,200) / 46,200]
× 100 = 11.26
Real
$46,200 $50,000 $52,000
GDP
Growth
8.23 4.00
Rate %

Value for the year  value for previous year

Growth Rate  100
value for previous year

CHAPTER 2 The Data of Macroeconomics 55

 2010 2011 2012 NOW YOU TRY:
Real and Nominal GDP
Nominal
$46,200 $51,400 $58,300
GDP
Growth
11.26 13.42 GDP Deflator = Nominal GDP / Real GDP

Rate %
Real It is a measure of the overall price level
$46,200 $50,000 $52,000
GDP
Its growth rate is a measure of the rate of
Growth inflation
8.23 4.00
Rate %
GDP As an approximation, the GDP Deflator’s
1.00 1.028 1.121 growth rate = growth rate of Nominal GDP –
Deflator growth rate of Real GDP

Growth
2.80 9.06
Rate %
CHAPTER 2 The Data of Macroeconomics 56
 CONSUMER PRICE INDEX (CPI)

AND

MEASURING THE LEVEL OF PRICES

CHAPTER 2 The Data of Macroeconomics 57

 Consumer Price Index (CPI)

 The Consumer Price Index (CPI): is a

measure of the overall level of prices

 (Recall that the GDP deflator is also a

measure of the overall level of prices).

 The CPI is computed and published by the

Bureau of Labor Statistics (BLS).

CHAPTER 2 The Data of Macroeconomics 58

 Measuring the Cost of Living: The CPI

 Just as GDP turns the quantities of many goods

and services into a single number measuring the
value of production,
 the CPI turns the prices of many goods and
services into a single index measuring the
overall level of prices.
 How should economists aggregate the many
prices in the economy into a single index that
reliably measures the price level?
CHAPTER 2 The Data of Macroeconomics 59
 How the economists aggregate the many
prices in the economy into a single index??

 They could simply compute an average of all prices. But

this approach would treat all goods and services equally.
 Because people buy more chicken than caviar, the price
of chicken should have a greater weight in the CPI than
the price of caviar.
 The BLS weights different items by computing the price of
a basket of goods and services purchased by a typical
consumer.
 The CPI is the price of this basket of goods and services
relative to the price of the same basket in some base
year.
CHAPTER 2 The Data of Macroeconomics 60
 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

CHAPTER 2 The Data of Macroeconomics 61

 FYI : 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%
CHAPTER 2 The Data of Macroeconomics 62
NOW YOU TRY
Compute the CPI

Typical consumer’s Basket : 20 pizzas, 10 compact discs

prices: For each year, compute :

pizza CDs  the cost of the basket
2012 $10 $15  the CPI (use 2012 as
2013 $11 $15 the base year)
2014 $12 $16  the inflation rate from
2015 $13 $15 the preceding year

63
ANSWER:
Compute the CPI and Inflation Rate
Typical consumer’s basket: 20 pizzas, 10 compact discs

pizza CDs cost CPI inflation

2012 $10 $15
2013 $11 $15
2014 $12 $16
2015 $13 $15

Cost of typical consumer's basket in current period

CPI  100
Cost of typical consumer's basket in base period

CHAPTER 2 The Data of Macroeconomics 64

ANSWER:
Compute the CPI and Inflation Rate
Typical consumer’s basket: 20 pizzas, 10 compact discs

pizza CDs cost CPI inflation

2012 $10 $15 $350
2013 $11 $15 $370
2014 $12 $16 $400
2015 $13 $15 $410
Cost of typical consumer's basket in current period
CPI  100
Cost of typical consumer's basket in base period

CHAPTER 2 The Data of Macroeconomics 65

ANSWER:
Compute the CPI and Inflation Rate
Typical consumer’s basket: 20 pizzas, 10 compact discs

pizza CDs cost CPI inflation

2012 $10 $15 $350 100
2013 $11 $15 $370 105.71
2014 $12 $16 $400 114.29
2015 $13 $15 $410 117.14

Cost of typical consumer's basket in current period

CPI  100
Cost of typical consumer's basket in base period

CHAPTER 2 The Data of Macroeconomics 66

ANSWER:
Compute the CPI and Inflation Rate
Typical consumer’s basket: 20 pizzas, 10 compact discs
pizza CDs cost CPI inflation
2012 $10 $15 $350 100 n.a.
2013 $11 $15 $370 105.71 5.71
2014 $12 $16 $400 114.29 8.11
2015 $13 $15 $410 117.14 2.50

Cost of typical consumer's basket in current period

CPI  100
Cost of typical consumer's basket in base period
CPI in current period  CPI in preceding period
Inflation  100
CPI in preceding period
CHAPTER 2 The Data of Macroeconomics 67
NOW YOU TRY
Answers

Cost of Inflation
basket CPI rate
2012 $350 100.0 n.a.
2013 370 105.7 5.7%
2014 400 114.3 8.1%
2015 410 117.1 2.5%

68
 Why the CPI may overstate inflation ?
…Many economists believe that, for a number of reasons,
the CPI tends to 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.

CHAPTER 2 The Data of Macroeconomics 69

 CPI vs. GDP Deflator
There are three key differences between The GDP deflator and
the CPI:
1) The GDP deflator measures the prices of all goods and services
produced, whereas the CPI measures the prices of only the goods
and services bought by consumers. Thus, an increase in the price of
goods bought only by firms or the government will show up in the
GDP deflator but not in the CPI.
2) The GDP deflator includes only those goods produced domestically.
Imported goods are not part of GDP and do not show up in the GDP
deflator. Hence, an increase in the price of Toyotas made in Japan
and sold in this country affects the CPI because the Toyotas are
bought by consumers, but it does not affect the GDP deflator.
3) The CPI is computed using a fixed basket of goods, whereas the GDP
deflator allows the basket of goods to change over time as the
composition of GDP changes.

CHAPTER 2 The Data of Macroeconomics 70

 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

CHAPTER 2 The Data of Macroeconomics 71

 THE UNEMPLOYMENT RATE

AND

MEASURING JOBLESSNESS

CHAPTER 2 The Data of Macroeconomics 72

 The Current Population Survey
 The unemployment rate is the statistic that measures
the percentage of those people wanting to work who
do not have jobs.
 The Bureau of Labor Statistics (BLS) of the U.S.
Department of Labor computes the unemployment
rate every month.
 The data comes from a monthly survey of U.S.
households called the Current Population Survey
 See http://bls.gov/cps/
 This survey classifies each adult into one of three
categories: employed, unemployed, and not in the
labor force.

CHAPTER 2 The Data of Macroeconomics 73

 Three 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 (Labor force = employed + unemployed)
 not in the labor force
not employed, not looking for work
CHAPTER 2 The Data of Macroeconomics 74
 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, i.e. is working or
looking for work

CHAPTER 2 The Data of Macroeconomics 75

 NOW YOU TRY
Computing labor statistics
U.S. adult population by group, June 2014
Number employed = 146.2 million
Number unemployed = 9.5 million
Adult population = 247.8 million

Calculate
 the labor force
 the unemployment rate
 the labor force participation rate
 the number of people not in the labor force
76
NOW YOU TRY
Answers

data: E = 146.2, U = 9.5, POP = 247.8

 labor force
L = E + U = 146.2 + 9.5 = 155.7
 unemployment rate
U/L x 100% = (9.5/155.7) x 100% = 6.1%
 labor force participation rate
L/POP x 100% = (155.7/247.8) x 100% = 62.8%
 not in labor force
NILF = POP – L = 247.8 – 155.7 = 92.1
77
 Unemployment and Labor Force
Participation : Example
 Suppose the one unemployed person in Situation A gets
discouraged and drops out of the labor force
 The result is Situation B
Population Labor Force Unemployed Unemployment Labor Force Participation
Rate Rate
Situation A 10 10 1 10% 100%

Situation B 10 9 0 0% 90%

 The unemployment rate is lower in Situation B. But that does

not mean it is an improvement over Situation A.
 Lesson: We need to watch both the unemployment rate and
the labor force participation rate. A fall in the former is good
news only when it is not accompanied by a fall in the latter.

CHAPTER 2 The Data of Macroeconomics 78

 CHAPTER SUMMARY

 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.

79
 CHAPTER SUMMARY

 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
 The unemployment rate is the fraction of the labor
force that is not employed.

80