Download Output and Inflation

Output and Inflation
Are We Measuring Them Correctly?
Measuring Economic Welfare
• The standard benchmark for economic well
being is Gross Domestic Product (GDP)
Measuring Economic Welfare
• The standard benchmark for economic well
being is Gross Domestic Product (GDP)
• GDP is defined as the current market value
of all goods and services produced within a
country’s borders during a fixed time period
(the BEA measures GDP on a quarterly
basis)
Measuring Economic Welfare
• The standard benchmark for economic well being
is Gross Domestic Product (GDP)
• GDP is defined as the current market value of all
goods and services produced within a country’s
borders during a fixed time period (the BEA
measures GDP on a quarterly basis)
• Is GDP an adequate measure of economic well
being?
GDP vs. GNP
• While GDP allocates production based on
location, GNP (Gross National Product)
allocates production based on nationality
GDP vs. GNP
• While GDP allocates production based on
location, GNP (Gross National Product)
allocates production based on nationality
• GNP is defined as the total market value of
goods and services produced by a country’s
citizens
GDP vs. GNP
• While GDP allocates production based on
location, GNP (Gross National Product)
allocates production based on nationality
• GNP is defined as the total market value of
goods and services produced by a country’s
citizens
• GDP = GNP – Net Factor Payments
Example: GNP vs. GDP
• Suppose that Toyota has a plant in Ohio
producing $100M worth of cars per year.
Toyota’s labor costs are $70M per year.
Example: GNP vs. GDP
• Suppose that Toyota has a plant in Ohio
producing $100M worth of cars per year.
Toyota’s labor costs are $70M per year.
• Meanwhile, Nike has a plant in Singapore
producing $200M worth of sneakers per
year. Nike’s labor costs are $10M per year
Example: GNP vs. GDP
• Suppose that Toyota has a plant in Ohio
producing $100M worth of cars per year.
Toyota’s labor costs are $70M per year.
• Meanwhile, Nike has a plant in Singapore
producing $200M worth of sneakers per
year. Nike’s labor costs are $10M per year
• There is $300M in total production. How
much does the US get credit for?
Example: GNP vs. GDP
• GDP in the US would
include the entire $100M
worth of cars, but none of
the $200M in sneakers.
Example: GNP vs. GDP
• GDP in the US would
include the entire $100M
worth of cars, but none of
the $200M in sneakers.
• GNP would count the
$70M earned by US
workers plus the $190M
earned by Nike
shareholders abroad for a
total of $260M
Example: GNP vs. GDP
• GDP in the US would
include the entire $100M
worth of cars, but none of
the $200M in sneakers.
• GNP would count the
$70M earned by US
workers plus the $190M
earned by Nike
shareholders abroad for a
total of $260M
• Net Factor Payments are
equal to income earned
abroad by US citizens
minus income earned by
foreign citizens in the US
Example: GNP vs. GDP
• GDP in the US would
include the entire $100M
worth of cars, but none of
the $200M in sneakers.
• GNP would count the
$70M earned by US
workers plus the $190M
earned by Nike
shareholders abroad for a
total of $260M
• Net Factor Payments are
equal to income earned
abroad by US citizens
minus income earned by
foreign citizens in the US
• In the case, NFP = $190M
- $30M = $160M
Example: GNP vs. GDP
• GDP in the US would
include the entire $100M
worth of cars, but none of
the $200M in sneakers.
• GNP would count the
$70M earned by US
workers plus the $190M
earned by Nike
shareholders abroad for a
total of $260M
• Net Factor Payments are
equal to income earned
abroad by US citizens
minus income earned by
foreign citizens in the US
• In the case, NFP = $190M
- $30M = $160M
• Recall, GDP = GNP - NFP
Calculating GDP
• Rule #1: Be sure and count everything!
Calculating GDP
• Rule #1: Be sure and count everything!
• Rule #2: Don’t count anything more than
once!
Calculating GDP: An easy
example
• There are two farmers:
one farmer produces
1,000 bushels of
oranges while the
other produces 2,000
bushels of apples
Calculating GDP: An easy
example
• There are two farmers:
one farmer produces
1,000 bushels of
oranges while the
other produces 2,000
bushels of apples
• Apples cost $3/Bushel
and oranges cost
$2/Bushel
Calculating GDP: An easy
example
• There are two farmers:
one farmer produces
1,000 bushels of
oranges while the
other produces 2,000
bushels of apples
• Apples cost $3/Bushel
and oranges cost
$2/Bushel
1,000 x $2 = $2,000
+ 2,000 x $3 = $6,000
GDP = $8,000
A more complicated example
• Intel produces 1,000
computer chips (P =
$100). Intel sells 900 of
these chips to Dell and the
remaining 100 directly to
consumers.
A more complicated example
• Intel produces 1,000
computer chips (P =
$100). Intel sells 900 of
these chips to Dell and the
remaining 100 directly to
consumers.
• Dell uses 500 chips to
produce 500 computers
(P=$1,000) which are sold
to consumers.
A more complicated example
• Intel produces 1,000
computer chips (P =
$100). Intel sells 900 of
these chips to Dell and the
remaining 100 directly to
consumers.
• Dell uses 500 chips to
produce 500 computers
(P=$1,000) which are sold
to consumers.
+
1,000 x $100 = $100,000
500 x $1,000 = $500,000
GDP = $600,000?
A more complicated example
• Intel produces 1,000
computer chips (P =
$100). Intel sells 900 of
these chips to Dell and the
remaining 100 directly to
consumers.
• Dell uses 500 chips to
produce 500 computers
(P=$1,000) which are sold
to consumers.
1,000 x $100 = $100,000
+ 500 x $1,000 = $500,000
GDP = $600,000?
• $50, 000 worth of
computer chips are
already included in the
value of the computers.
Therefore, the above
calculation counts them
twice!
The Output Approach
• To avoid double counting,
the output approach
requires firms to report
value added (value of
output – value of inputs)
The Output Approach
• To avoid double counting,
the output approach
requires firms to report
value added (value of
output – value of inputs)
• Note, however, that Dell
actually has two types of
output: consumer goods
(computers) and
inventories (remaining
computer chips)
The Output Approach
• To avoid double counting,
the output approach
requires firms to report
value added (value of
output – value of inputs)
• Note, however, that Dell
actually has two types of
output: consumer goods
(computers) and
inventories (remaining
computer chips)
Intel:
$100,000
$0
$100,000
Dell:
$500,000
+ $40,000
- $90,000
$450,000
Total = $550,000
The expenditure approach
• The expenditure approach
recognizes that ALL
produced output is purchased
by someone
The expenditure approach
• The expenditure approach
recognizes that ALL
produced output is purchased
by someone
• Expenditures are roughly
classified as consumer
expenditures, business
investment, government
purchases, exports, and
imports
The expenditure approach
• The expenditure approach
recognizes that ALL
produced output is purchased
by someone
• Expenditures are roughly
classified as consumer
expenditures, business
investment, government
purchases, exports, and
imports
• Y = C + I + G + (X-M)
Intel: $0
Dell: $40,000 (Inventory
Investment)
Consumers: $500,000
+ $10,000
$510,000
Total: $550,000
The income approach
• The value added produced in an economy will accrue to
someone in the form of income
The income approach
• The value added produced in an economy will accrue to
someone in the form of income
• In the previous example, the $100,000 of value added from
Intel plus the $450,000 of value added from Dell will
accrue to either Intel and Dell workers in the form of
wages, or the owners (shareholders) of Intel and Dell in the
form of corporate profits.
The income approach
• The value added produced in an economy will accrue to
someone in the form of income
• In the previous example, the $100,000 of value added from
Intel plus the $450,000 of value added from Dell will
accrue to either Intel and Dell workers in the form of
wages, or the owners (shareholders) of Intel and Dell in the
form of corporate profits.
• The broad classifications of income are: wages, proprietor
income, corporate profits, rental income, and interest.
The income approach
• The value added produced in an economy will accrue to
someone in the form of income
• In the previous example, the $100,000 of value added from
Intel plus the $450,000 of value added from Dell will
accrue to either Intel and Dell workers in the form of
wages, or the owners (shareholders) of Intel and Dell in the
form of corporate profits.
• The broad classifications of income are: wages, proprietor
income, corporate profits, rental income, and interest.
• Output = Expenditures = C + I + G + NX
Flow of Funds
• Recall that Y = C + I + G + NX (Output =
Expenditures)
• Further, Y = C + S + T (Income = Outlays)
Flow of Funds
• Recall that Y = C + I + G + NX (Output =
Expenditures)
• Further, Y = C + S + T (Income = Outlays)
C + S + T = C + I + G + NX
Flow of Funds
• Recall that Y = C + I + G + NX (Output =
Expenditures)
• Further, Y = C + S + T (Income = Outlays)
C + S + T = C + I + G + NX
S = I + (G-T) + NX
The NIPA Accounts
• Begun in the 1930’s, the National Income and Product
Accounts are calculated on a quarterly basis by the Bureau
of Economic Analysis (A division of the Department of
Commerce)
• The “Advance” estimates are released approximately 1
month after the end of the quarter, followed by the
“Preliminary” revision (1 month later) and the “Final”
Revision (2 months later)
• Even after the Final release, the data is revised annually for
2 years and undergoes a comprehensive revision after 5
years
GDP 2004Q2 (Billions)
Category
Amount
(B)
Consumption $8,146.2
% of Total Growth
70%
4.0%
Investment
$1,891.2
16%
12%
Government
$2,172.9
18%
6%
Net Exports
-561.0
-4%
----
GDP
$11,649.3
100%
6.0%
Output Equals Income (Almost)
GDP ($11,649.3)
+ Net Factor Payments ($73.5)
GNP ($11,722.8)
Output Equals Income (Almost)
GDP ($11,649.3)
+ Net Factor Payments ($73.5)
GNP ($11,722.8)
- Depreciation ($1,370.1)
Net National Product ($10,352.7)
Output Equals Income (Almost)
GDP ($11,649.3)
+ Net Factor Payments ($73.5)
GNP ($11,722.8)
- Depreciation ($1,370.1)
Net National Product ($10,352.7)
- Indirect Taxes ($834.4)
National Income ($9518.3)
National Income 2004Q2
Category
Amount(B)
% of Total
Growth
Wages
$6,600.6
69%
5%
Proprietor’s
Income
$902.8
9%
14%
Rental Income
$173.8
2%
2%
Corporate Profits
$1294.2
14%
36%
Interest
$546.9
6%
-4%
100%
6%
National Income $9518.3
Personal Income/Outlays 2004Q2
Category
Amount(B)
% of Total
Personal Income $9614.8
100%
Taxes
$1030.3
10%
Consumption
$8146.2
85%
Interest
$296.3
3%
Personal
Savings
142.0
2%
Savings/Investment 2004Q2
Category
Amount(B)
% of Total
Gross
Investment
$1631.3
100%
Depreciation
$1355.0
85%
Private Saving
$142.0
9%
Undistributed
Profits
$506.7
31%
Government
-$372.4
-25%
Borrowing by Sector 2004Q1
Category
Amount(B)
% of Total
Total
$2801.3
100%
Financial Sector
$805.7
28%
Federal Government
$466.0
17%
State & Local Government
$149.7
5%
Non-Financial Business
$303.3
11%
Household
$1008.2
37%
Foreign
$68.4
2%
Does GDP accurately reflect well
being?
• GDP in 2003 is $10,688.4 Billion while GDP in 1950 was
$275.7 Billion. (an increase of 3800%). Are we 38 times as well
off now than we were in 1950?
Does GDP accurately reflect well
being?
• GDP in 2003 is $10,688.4 Billion while GDP in 1950 was
$275.7 Billion. (an increase of 3800%). Are we 38 times as well
off now than we were in 1950?
• Real GDP (1996 $s) in 2003 was $9,562.9 Billion while Real
GDP in 1950 was $1,610.5 Billion (A 600% increase). Are
Americans 6 times as well of now compared to 1950?
Does GDP accurately reflect well
being?
• GDP in 2003 is $10,688.4 Billion while GDP in 1950 was
$275.7 Billion. (an increase of 3800%). Are we 38 times as well
off now than we were in 1950?
• Real GDP (1996 $s) in 2003 was $9,562.9 Billion while Real
GDP in 1950 was $1,610.5 Billion (A 600% increase). Are
Americans 6 times as well of now compared to 1950?
• Real GDP per capita in 2003 is $36,911 compared to $10,736 in
1950 ( a 350% increase). Are we 3.5 times better off?
Does GDP accurately reflect well
being?
• GDP in 2003 is $10,688.4 Billion while GDP in 1950 was
$275.7 Billion. (an increase of 3800%). Are we 38 times as well
off now than we were in 1950?
• Real GDP (1996 $s) in 2003 was $9,562.9 Billion while Real
GDP in 1950 was $1,610.5 Billion (A 600% increase). Are
Americans 6 times as well of now compared to 1950?
• Real GDP per capita in 2003 is $36,911 compared to $10,736 in
1950 ( a 350% increase). Are we 3.5 times better off?
• Median real income in 2003 is approximately $24,000 while
median real income in 1950 was approximately $8,000 (a 300%
increase)
Does GDP adequately measure
welfare?
• Annual defense spending has grown from $35B in
1950 to $400B in 2003. Should this be subtracted
out?
Does GDP adequately measure
welfare?
• Annual defense spending has grown from $35B in
1950 to $400B in 2003. Should this be subtracted
out?
• The service industry has grown from 30M employees
in 1950 to 108M in 2003. Is this really “new
activity”?
Does GDP adequately measure
welfare?
• Annual defense spending has grown from $35B in
1950 to $400B in 2003. Should this be subtracted
out?
• The service industry has grown from 30M employees
in 1950 to 108M in 2003. Is this really “new
activity”?
• Should we count things like pollution as economic
“bads”?
Does GDP adequately measure
welfare?
• Annual defense spending has grown from $35B in
1950 to $400B in 2003. Should this be subtracted
out?
• The service industry has grown from 30M employees
in 1950 to 108M in 2003. Is this really “new
activity”?
• Should we count things like pollution as economic
“bads”?
• How do we account for the added quality and
convenience of new products and technologies?
Price Indices
• We mentioned earlier that nominal variables are in terms of
currency (i.e., your income is $50,000/yr) while real
variables are in terms of goods (i.e., if the price of oranges
is $2/orange, then your real income is 25,000 oranges per
year)
Price Indices
• We mentioned earlier that nominal variables are in terms of
currency (i.e., your income is $50,000/yr) while real
variables are in terms of goods (i.e., if the price of oranges
is $2/orange, then your real income is 25,000 oranges per
year)
• To calculate real variables, we divide the corresponding
nominal variable by a price (i.e., 50,000/2 = 25,000).
Price Indices
• We mentioned earlier that nominal variables are in terms of
currency (i.e., your income is $50,000/yr) while real
variables are in terms of goods (i.e., if the price of oranges
is $2/orange, then your real income is 25,000 oranges per
year)
• To calculate real variables, we divide the corresponding
nominal variable by a price (i.e., 50,000/2 = 25,000).
• Real GDP = Nominal GDP/P , but what should we use for
“price”?
Fixed Weight Indices
• A price index is meant to capture the average price of
goods and services in the economy. Therefore, any price
index should be a weighted average of all (or at least,
most) prices in the economy.
Fixed Weight Indices
• A price index is meant to capture the average price of
goods and services in the economy. Therefore, any price
index should be a weighted average of all (or at least,
most) prices in the economy.
• With any fixed weight index, the weights used in the index
are chosen ex ante and remain fixed over time (hence, the
name fixed weight index).
Fixed Weight Indices
• A price index is meant to capture the average price of
goods and services in the economy. Therefore, any price
index should be a weighted average of all (or at least,
most) prices in the economy.
• With any fixed weight index, the weights used in the index
are chosen ex ante and remain fixed over time (hence, the
name fixed weight index).
• Think of the a fixed weight index as simply defining a
“basket” of goods. The value of that index is the cost of
that basket.
Example: A Fixed Weight Index
• Suppose that in 2002, Apples
cost $3 and Oranges cost $5. In
2003, Apples cost $4 (a 30%
increase) and oranges cost $6.
(20% increase)
Example: A Fixed Weight Index
• Suppose that in 2002, Apples
cost $3 and Oranges cost $5. In
2003, Apples cost $4 (a 30%
increase) and oranges cost $6.
(20% increase)
• Let’s define the price index as
.5(Apples) + .5(Oranges)
Example: A Fixed Weight Index
• Suppose that in 2002, Apples
cost $3 and Oranges cost $5. In
2003, Apples cost $4 (a 30%
increase) and oranges cost $6.
(20% increase)
• Let’s define the price index as
.5(Apples) + .5(Oranges)
P(2002) = .5($3) + .5($5)
= $4.
Example: A Fixed Weight Index
• Suppose that in 2002, Apples
cost $3 and Oranges cost $5. In
2003, Apples cost $4 (a 30%
increase) and oranges cost $6.
(20% increase)
• Let’s define the price index as
.5(Apples) + .5(Oranges)
P(2002) = .5($3) + .5($5)
= $4.
P(2003) = .5($4) + .5($6)
= $5
Example: A Fixed Weight Index
• Suppose that in 2002, Apples
cost $3 and Oranges cost $5. In
2003, Apples cost $4 (a 30%
increase) and oranges cost $6.
(20% increase)
• Let’s define the price index as
.5( Apples) + .5(Oranges)
• Usually, prices are in
represented in terms of a “base
year”. This is done by dividing
every year by the base year
price
P(2002) = .5($3) + .5($5)
= $4.
P(2003) = .5($4) + .5($6)
= $5
Example: A Fixed Weight Index
• Suppose that in 2002, Apples
cost $3 and Oranges cost $5. In
2003, Apples cost $4 (a 30%
increase) and oranges cost $6.
(20% increase)
• Let’s define the price index as
.5( Apples) + .5(Oranges)
• Usually, prices are in
represented in terms of a “base
year”. This is done by dividing
every year by the base year
price
P(2002) = .5($3) + .5($5)
= $4.
P(2003) = .5($4) + .5($6)
= $5
If 2002 is the “base year”, then
P(2002) = 1 (or 100)
P(2003) = $5/$4 = 1.25 (or 125)
The Consumer Price Index
16%
Housing
Apparel
4%
40%
1%
Transportation
Medical
5%
Recreation
Education &
Communication
Tobacco & Smoking
Products
Personal Care
6%
6%
5%
17%
Food & Beverage
The Consumer Price index
• The CPI is calculated monthly by the Bureau of
Labor Statistics using the fixed weights.
The Consumer Price index
• The CPI is calculated monthly by the Bureau of
Labor Statistics using the fixed weights.
• The inflation rate is just the percentage change in
the CPI.
The Consumer Price index
• The CPI is calculated monthly by the Bureau of
Labor Statistics using the fixed weights.
• The inflation rate is just the percentage change in
the CPI.
• The “core inflation rate” is the the percentage
change in the CPI less energy and food prices
(known to be extremely volatile)
The Consumer Price index
• The CPI is calculated monthly by the Bureau of
Labor Statistics using the fixed weights.
• The inflation rate is just the percentage change in
the CPI.
• The “core inflation rate” is the the percentage
change in the CPI less energy and food prices
(known to be extremely volatile)
• The producer price index (PPI) is the corporate
analogue to the CPI
Problems with the CPI
• A formal commission
headed by Stanford
economist Michael
Boskin in 1996
determined that the
CPI overestimated by
as much as 2.4% per
year
Problems with the CPI
• A formal commission
headed by Stanford
economist Michael
Boskin in 1996
determined that the
CPI overestimated by
as much as 2.4% per
year
Formula Bias: .3-.4%
Substitution Bias: .2-.4%
Outlet Bias: .1-.3%
New Products: .2-.7%
Quality Bias: .2-.6%
Total: 1 - 2.4%
Why should we care?
Why should we care?
• Cost of living adjustments for social security as
well as government pension plans are indexed to
the CPI
Why should we care?
• Cost of living adjustments for social security as
well as government pension plans are indexed to
the CPI
• All federal assistance are based on the official
poverty line, which is indexed to the CPI
Why should we care?
• Cost of living adjustments for social security as
well as government pension plans are indexed to
the CPI
• All federal assistance are based on the official
poverty line, which is indexed to the CPI
• Tax Brackets are indexed to the CPI
Why should we care?
• Cost of living adjustments for social security as
well as government pension plans are indexed to
the CPI
• All federal assistance are based on the official
poverty line, which is indexed to the CPI
• Tax Brackets are indexed to the CPI
• A 1% overstatement in inflation amounts to a $50$60 billion loss to the federal government
Variable Weight Indices
• Variable weight indices correct for the substitution bias of
the CPI by allowing the weights to vary over time.
Variable Weight Indices
• Variable weight indices correct for the substitution bias of
the CPI by allowing the weights to vary over time.
• The GDP Deflator (or, more commonly, the deflator) uses
actual production of each commodity as a fraction of total
GDP for the weights. Therefore as production (and, hence,
consumption) of a commodity rises, so does its weight in
the deflator.
Variable Weight Indices
• Variable weight indices correct for the substitution bias of
the CPI by allowing the weights to vary over time.
• The GDP Deflator (or, more commonly, the deflator) uses
actual production of each commodity as a fraction of total
GDP for the weights. Therefore as production (and, hence,
consumption) of a commodity rises, so does its weight in
the deflator.
• The deflator is defined as
deflator = value of GDP at current prices
value of GDP at base year prices
Example: Variable Weight Index
• Suppose that in 2002, Apples
cost $3 and Oranges cost $5. In
2003, Apples cost $4 (a 30%
increase) and oranges cost $6.
(20% increase)
Example: Variable Weight Index
• Suppose that in 2002, Apples
cost $3 and Oranges cost $5. In
2003, Apples cost $4 (a 30%
increase) and oranges cost $6.
(20% increase)
• In 2002, we had production of
100 apple and 100 oranges. In
2003 we had production of 200
apples and 150 oranges.
Example: Variable Weight Index
• Suppose that in 2002, Apples
cost $3 and Oranges cost $5. In
2003, Apples cost $4 (a 30%
increase) and oranges cost $6.
(20% increase)
• In 2002, we had production of
100 apple and 100 oranges. In
2003 we had production of 200
apples and 150 oranges.
• Let 2002 be the base year. Note
that the deflator in the base4
year is, by definition, equal to
1.
Example: Variable Weight Index
• Suppose that in 2002, Apples
cost $3 and Oranges cost $5. In
2003, Apples cost $4 (a 30%
increase) and oranges cost $6.
(20% increase)
• In 2002, we had production of
100 apple and 100 oranges. In
2003 we had production of 200
apples and 150 oranges.
• Let 2002 be the base year. Note
that the deflator in the base4
year is, by definition, equal to
1.
2003 GDP (Using 2003 prices)
$4(200) + $6(150) = $1700
Example: Variable Weight Index
• Suppose that in 2002, Apples
cost $3 and Oranges cost $5. In
2003, Apples cost $4 (a 30%
increase) and oranges cost $6.
(20% increase)
• In 2002, we had production of
100 apple and 100 oranges. In
2003 we had production of 200
apples and 150 oranges.
• Let 2002 be the base year. Note
that the deflator in the base4
year is, by definition, equal to
1.
2003 GDP (Using 2003 prices)
$4(200) + $6(150) = $1700
2003 GDP (Using 2002 prices)
$3(200) + $5(150) = $1350
Example: Variable Weight Index
• Suppose that in 2002, Apples
cost $3 and Oranges cost $5. In
2003, Apples cost $4 (a 30%
increase) and oranges cost $6.
(20% increase)
• In 2002, we had production of
100 apple and 100 oranges. In
2003 we had production of 200
apples and 150 oranges.
• Let 2002 be the base year. Note
that the deflator in the base4
year is, by definition, equal to
1.
2003 GDP (Using 2003 prices)
$4(200) + $6(150) = $1700
2003 GDP (Using 2002 prices)
$3(200) + $5(150) = $1350
P(2003) = $1700/$1350 = 1.26
Example: Choosing a Base Year
• Consider the following example:
Apples
Oranges
Price (2002)
$10
$5
Quantity (2002)
100
200
Price(2003)
Quantity (2003)
$5
200
$10
100
• There is no aggregate growth in this economy, there is only
a “sectoral shift”
Example: Choosing a Base Year
Using 2002 as a base year
2002
GDP = $2000
Real GDP = $2000
P=1
2003
GDP = $2000
Real GDP = $2500
P = .8
Example: Choosing a Base Year
Using 2002 as a base year
Using 2003 as a base year
2002
GDP = $2000
Real GDP = $2000
P=1
2002
GDP = $2000
Real GDP = $2500
P = .8
2003
GDP = $2000
Real GDP = $2500
P = .8
2003
GDP = $2000
Real GDP = $2000
P=1
Chain Weighting
• During periods of large relative price
changes, the choice of base year is critical
for determining real growth and the
behavior of prices.
Chain Weighting
• During periods of large relative price
changes, the choice of base year is critical
for determining real growth and the
behavior of prices.
• Chain weighting is a process by which a
range of years is chosen for the “base year”
and that range moves over time.
The New Economy
Productivity Using a Base Year
3
2.5
2
Labor Productivity
Total Productivity
1.5
1
0.5
0
1950s
1960's 1970's 1980's 1990's
The New Economy: A fluke?
Productivity Using Chain Weighting
3.5
3
2.5
2
Labor Productivity
Total Productivity
1.5
1
0.5
0
1950s
1960's
1970's
1980's
1990's
The New Economy?
• It was previously assumed that the productivity gains from
IT eventually appeared in the mid nineties and was the
underlying reason for fast growth/low inflation
The New Economy?
• It was previously assumed that the productivity gains from
IT eventually appeared in the mid nineties and was the
underlying reason for fast growth/low inflation
• When the BEA switched to chain weighting as the standard
methodology for calculating real GDP, the sharp rise in
productivity disappeared. Why?
The New Economy?
• It was previously assumed that the productivity gains from
IT eventually appeared in the mid nineties and was the
underlying reason for fast growth/low inflation
• When the BEA switched to chain weighting as the standard
methodology for calculating real GDP, the sharp rise in
productivity disappeared. Why?
• During the 1990’s there was a large relative price change
as goods (specifically tech goods) fell in price while the
cost of services (notably health care) rose.
The New Economy?
• It was previously assumed that the productivity gains from
IT eventually appeared in the mid nineties and was the
underlying reason for fast growth/low inflation
• When the BEA switched to chain weighting as the standard
methodology for calculating real GDP, the sharp rise in
productivity disappeared. Why?
• During the 1990’s there was a large relative price change
as goods (specifically tech goods) fell in price while the
cost of services (notably health care) rose.
• Apparently, the largest productivity gains from computers
occurred during the 80’s, not the 90’s!