Intermediate macroeconomics chapt02

Chapter 2:
The Data of Macroeconomics


Stock vs. Flow
Stock: quantity measured at a given point in time
– Wealth
– Debt
– Budget

Flow: quantity measured per unit of time
– Income
– Employment
– Price


The Circular Flow on Income and Product
Households:
– sell labor resources to earn income
– spend income to buy products

Firms:
– buy labor resources to produce products
– sell products to earn income


The Circular Flow on Income and Product
Income Payment
Labor Resources
Labor Market

Firms

Households
Product Market
Products

Consumption Expenditure


Gross Domestic Product
Market value of all final goods and
services an economy produces in a
current time period (year or quarter)
Total income = Total expenditure
Total value-added (value of output minus
value of inputs at each production stage)


GDP Adjustments
The GDP excludes the following items:
– Intermediate goods: avoid double counting
– Used goods: already counted
– Illegal goods and services: not to be produced
– Self-produced goods and services: non-market transactions


GDP Adjustments
Treatment of inventories:
– Accumulation is treated as “expenditure,” thus reducing GDP
– Reduction is treated as a purchase (+) and a disinvestment (-),

hence offsetting each other


GDP Adjustments
Imputation: estimation of the value of services
– Market rent for owner-occupied homes
– Cost of provision for government services

Note: Imputation is not applied to other services
such as private transportation


GDP Adjustments
Seasonal adjustment:
– GDP increases throughout the year, reaching a peak in the
fourth quarter and then falling in the first quarter
– We use a statistical technique to “smooth” seasonal variations


GDP Calculations
Nominal GDP = Current year prices * Current
year quantities
Real GDP = Base year prices * Current Year
quantities
GDP Deflator = Nominal GDP / Real GDP,
representing the general price level


Base Year Determination
Real GDP:

– Base year changes every five years

Chain-Weighted Real GDP:
– Base year changes continuously over time


Components of GDP
Nominal GDP
= Consumption
+ Investment
+ Government purchases
+ Net Exports: exports less imports

Y = C + I + G + NX
(1997 data in %: 100 = 68 + 15 + 18 –1)


Data


National Income Accounting
GNP: Gross National Product
= GDP
+ Factor payments from abroad
- Factor payments to abroad


National Income Accounting
NNP: Net National Products
= GNP

- Depreciation or Consumption of Fixed Capital
(about 10%)


National Income Accounting
NI: National Income
= NNP
Indirect Business Taxes (e.g., sales tax; about 10%)


National Income Accounting
PI: Personal Income
= NI
- Corporate Profits
- Social Insurance Contributions
- Net Interest
+ Dividends
+ Gov’t Transfer Payments to Individuals
+ personal Interest Income


National Income Accounting
DPI: Disposable Personal Income
= PI
- Personal Income Taxes


Measuring Cost of Living
Consumer Price Index:
– Average weighted prices of some 400 consumer products sold

in urban areas around the nation
– CPI = (current year market basket / base year market
basket)*100


GDP Deflator vs. CPI
Variable weights vs. Fixed weights
All products vs. Selected products
Domestic products vs. Domestic and imported
products


GDP Deflator vs. CPI


Does CPI Overstates Inflation?
CPI tends to overstate inflation because
– Substitution for less expensive goods is not considered in the
fixed market basket
– New goods are continuously introduced in the market
– Improvement in the quality of goods is not considered


Population vs. Labor Force
Population = Labor force + + Not in labor force
In 1997, 203.1 million
Labor force = Employed + Unemployed
In 1997, 129.6 + 6.7 = 136.3 million

Population vs. Labor Force
6.7

Unemployed

Not in the labor
force
66.8

129.6
Employed


Labor Market Data
Unemployment rate = unemployed as % of labor
force
In 1997, (6.7/136.3)*100 = 4.9%
Labor force participation rate = labor force as %
of adult population
In 1997, (136.3/203.1)*100 = 67.1%