The Data of Macroeconomics

slide 1
 Learning objectives
In this chapter, you will learn about:
• Gross Domestic Product (GDP)
• the Consumer Price Index (CPI)
• the Unemployment Rate

slide 2
 GDP as Income - Example
• 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

slide 3
The expenditure components of
GDP
• consumption
• investment
• government spending
• net exports

Y = C + I + G + NX
slide 4
 Consumption (C)
def: the value of all goods • durable goods
and services bought by last a long time
households. Includes: ex: cars, home
appliances
• non-durable goods
last a short time
ex: food, clothing
• services
work done for
consumers
ex: dry cleaning,
air travel.

slide 5
 U.S. Consumption - 2003
%% of
of
$$billions
billions GDP
GDP
Consumption
Consumption $7,757.4
$7,757.4 70.6%
70.6%
Durables
Durables 941.6
941.6 8.6
8.6
Nondurables
Nondurables 2,209.7
2,209.7 20.1
20.1
Services
Services 4,606.2
4,606.2 41.9
41.9

slide 6
 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
slide 7
 U.S. Investment, 2003
%
% of
of
$$billions
billions GDP
GDP
Investment
Investment $1,670.6
$1,670.6 15.2%
15.2%
Business
Businessfixed
fixed 1,110.6
1,110.6 10.1
10.1
Residential
Residentialfixed
fixed 562.4
562.4 5.1
5.1
Inventory
Inventory -2.4
-2.4 -0.02
-0.02

slide 8
 Investment vs. Capital
• Capital is one of the factors of production (a
stock).

At any given moment, the economy has a

certain overall stock of capital.

• Investment is spending on new capital (a flow).

slide 9
 Investment vs. Capital
Example (assumes no depreciation):
 1/1/2004:
economy has $500b worth of capital
 during 2004:
investment = $37b
 1/1/2005:
economy will have $537b worth of capital

slide 10
 You Try:

Stock or flow?
The balance on your credit card statement.
How much you study economics outside of
class.
The size of your compact disc collection.
The inflation rate.
The unemployment rate.

slide 11
 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.

slide 12
Government spending, 2003
%% of
of
$$billions
billions GDP
GDP
Gov
Govspending
spending $2,054.8
$2,054.8 18.7%
18.7%
Federal
Federal 757.2
757.2 6.9
6.9
Non-defense
Non-defense 259.9
259.9 2.4
2.4
Defense
Defense 497.3
497.3 4.5
4.5
State
State&&local
local 1,297.6
1,297.6 11.8
11.8

slide 13
 Net exports (NX = EX - IM)
def: the value of total exports (EX)
minus the value of total imports (IM)
U.S.
U.S.Net
NetExports,
Exports,1970-2003
1970-2003
100
100
00

-100
-100
billions
$$billions

-200
-200
-300
-300
-400
-400
-500
-500
1970
1970 1975
1975 1980
1980 1985
1985 1990
1990 1995
1995 2000
2000

slide 14
 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?

slide 15
 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)
slide 16
 Here’s a Question:

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

slide 17
 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.

slide 18
 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.

slide 19
 Practice Problem
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.

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U.S. Real & Nominal GDP,
1970-2004
12,000

10,000

8,000

6,000

4,000

2,000

0
1970 1975 1980 1985 1990 1995 2000

Nominal GDP (billions of dollars)

Real GDP (billions of chained 2000 dollars)

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 GDP Deflator
• The inflation rate is the percentage increase in
the overall level of prices.

• One measure of the price level is

the GDP Deflator, defined as

Nominal GDP
GDP deflator = 100 
Real GDP

slide 22
 Example
Nom. Real GDP inflation
GDP 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%

slide 23
 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

slide 24
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
slide 25
 Exercise: Compute the CPI

The basket contains 20 pizzas and

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

slide 26
 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%

slide 27
The composition of the CPI’s
“basket”
Food and bev.
5.8% 5.9%
Housing 17.6%
2.8%
Apparel 2.5%
4.5% 4.8%
Transportation

Medical care

Recreation
16.2%
Education

Communication
40.0%
Other goods and
services

slide 28
 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.

slide 29
 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.

slide 30
 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

slide 31
 Two measures of inflation
16
Percentage
change 14
12
10

8
6
4
2

0
-2
-4
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

GDP deflator Consumer Price Index

slide 32
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.
slide 33
 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

slide 34