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INTRODUCTION
Chapter 2
The Data of Macroeconomics
September 11, 2012
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Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
THERE ARE THREE KEY AGGREGATES
1. Measures of economic activity or income:
GDP and GNP
2.
Price level
3. Unemployment
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Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
1. MEASURES OF ECONOMIC ACTIVITY OR INCOME: GDP AND GNP
Gross Domestic Product (GDP) – measures what is
produced domestically (irrespective of ownership);
domestic economic activity
Gross National Product (GNP) — measures total
income earned by nationals domestically or abroad;
relates to a country’s standard of living (but ignores
inequality; quality of life)
GNP = GDP - Net Income of Foreigners
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Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
Nominal vs. Real GDP
 Nominal GDP — in current dollars; changes due to
changes in real production/income and price levels.
Nominal
where, is a final good or service produced
domestically and is its price. All at time t.
 Real GDP — in constant dollars; should only reflect
changes in real production.
Real
Base year 0
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Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
Exercise
Calculating Real and Nominal GDP
2007
Good A
Good B
P
$30
$100
Q
900
192
2008
P
$31
$102
2009
Q
P
Q
1000 $36
1050
200 $100
205
a) Calculate nominal GDP for each year
b) Compute real GDP in each year using 2006 as the base year
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Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
GDP Deflator
Methods to calculate GDP
Value Added Method
Income method
Expenditure method
Ex. Circular flow diagram
An Identity:
Income = Expenditure components of GDP
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Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
Circular Flow Diagram
Expenditure equals Income because every dollar spent by a
buyer becomes income to the seller
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Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
Calculating Real GDP
a)
b) Chain-Weighted Real GDP
 Over time, relative prices change, so the base year
should be updated periodically.
 Chain-weighted real GDP updates the base year
every year, so it is more accurate than constantprice GDP.
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Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
Identifications
 Nominal GDP measures the current $ value of the
output of the economy.
 Real GDP measures output valued at constant prices.
 The GDP deflator measures the price of output
relative to its price in the base year
 GDP or GNP is a flow variable
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Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
Other Measures
GNP=GDP-Net Income of Foreigners
NNP =GNP-Depreciation
National Income (NI)=NNP-Indirect business taxes
Personal Income = National Income
- Corporate Profits
- Social Insurance Contributions
- Net Interest
+ Dividends
+ Govt. Transfer to Individuals
+ Personal Interest Income
Personal Disposable Income = Personal Income - Personal Tax
Payments
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Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
Expenditure Components of GDP
Consumption (C)
 The value of all goods and services bought by
households.
 Includes: durable goods, nondurable goods, services
Investment (I)
 Spending on [the factor of production] capital.
 Spending on goods bought for future use
 Includes: business fixed investment; residential fixed
investment; inventory investment
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Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
Government Spending (G)
 Includes: all government spending on goods and
services.
 But excludes: transfer payments (e.g., unemployment
insurance payments). Because they do not represent
spending on goods and services.
Net Export (NX: X-M)
 Export (X)
 Import (M)
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Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
Example: Components of GDP
Components
Billion $
% of GDP
Consumption
762.0
55.7%
Investment
254.4
18.6%
Government
297.5
21.7%
Net Export
54.8
4%
GDP
$1,368.7
100
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Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
2. PRICE LEVEL AND INFLATION
Price level
 Stabilizing of the monetary system - Indirectly important.
 There is no single measure of the price level.
Consumer Price Index (CPI)
 an index measure of a the price of a bundle of
consumption goods
where, x represents goods in a typical consumer’s
basket. It changes from time to time.
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Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
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Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
GDP Deflator
Where, q is a domestically produced good or service
Inflation
It is the rate of change in the price level
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Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
Difference between CPI and GDP Deflator
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Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
Difference between CPI and GDP Deflator
CPI
GDP Deflator
Based on prices of a basket of
goods and services
Based on prices of all goods and
services produced
Includes imported goods as
well as domestic ones
Based only on domestically
produced goods
Uses fixed weights of the
Uses changing weights of the
prices of goods (quantities are prices of goods (quantities
fixed)
change w/ time)
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Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
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Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
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Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
3. UNEMPLOYMENT
 Important policy issue — wasted resources (hence
lower aggregate standard of living); socially costly.
 Each adult is categorized as either:
 In Labor Force
 Employed (E) — in paid work
 Unemployed (U) — actively looking for
work
 Not in labour force — none of the above
including discouraged workers
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Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
Definitions
 Labour force:
where E is the employment and U is the
unemployment
 Unemployment Rate:
 Participation Rate:
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Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
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Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
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Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
Okun’s Law
 Negative relationship between cyclical unemployment
and GDP
 Change in the Unemployment rate
 Any real GDP growth rate below 4% (for Canada) will
cause unemployment to increase
Notes:
 Different countries, different definitions of E, U, and L
 U may not be a good measure of wasted resources or
social costs
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Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012