Download Consumption

Macroeconomics:
Study of the determinants of
Output, Employment and
the Price Level
Put less formally, macroeconomics is about
understanding the causes of prosperity and
poverty.
Two Frameworks

Long run: concerned with growth
– most obvious feature of capitalism: affluence
– Benefits and Costs of Growth

Short run: business cycle
Percent Change in GDP
Percentage Change in GDP: The
Business Cycle
20%
10%
0%
-10%
-20%
-30%
1930 35
40
45
50
55
60
Years
65
70
75
80
85
90
Relation Between
Unemployment and the Business
Cylce

Okun’s law: for every 3 percent increase in
GDP, unemployment falls by 1 percent
Unemployment

Social problem
– Cyclical unemployment: unemployment
associated with the business cycle
– Family or social problem?

Government’s problem
– Frictional unemployment: unemployment
associated with changing jobs

Who is responsible?
Employment
Unemployment rate--unemployed/labor
force
 unemployed

– between 16 and 65
– involuntarily unemployed
– noninstitutionalized

labor force--employed + unemployed
Unemployment Rate
Unemployment Rate
30%
20%
10%
0%
1930 35 40 45 50 55 60 65 70 75 80 85 90 95
Vi et namOi l Fed
Gr eat WWI I Kor ean
Embar goI nduced
Depr essi on War
Recessi on
Labor Force Participation Rate
Number employed/working age population
68.0
66.0
64.0
62.0
60.0
58.0
56.0
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
70
19
68
19
66
19
64
19
62
19
60
19
58
19
56
19
19
54
54.0
Types of Unemployment
Frictional unemployment
 structural unemployment
 seasonal unemployment
 cyclical unemployment

Costs and Benefits of
Unemployment

Costs
– Costs of supporting the
unemployed
– loss of output
– crime, suicide, etc.
– psychological costs

Benefits (dubious)
– disciplines the labor
force
– checks wage increases
(Marx’s point)
– reduces inflationary
pressures
Inflation
Percentage change in the price level
 Price level--average level of prices of a
market basket of goods

Price Level
120
100
80
60
40
20
0
1930
40
50
60
70
80
90
Inflation Rate: Percentage change
in the price level
Total
20
Sum of CPI Year to Year
15
10
5
0
1929
Total
1942
1947
1952
1957
1962
1967
1972
-5
-10
Year
1977
1982
1987
1992
1997
2002
Measures of inflation
Index—ratio, prices in one year over prices
in the base year
 CPI--measures changes in prices of
consumer goods
 PPI-- measures changes in prices of
producer goods
 GDP Price Deflator--measures changes in
prices of goods making up GDP

Costs and Benefits of Inflation

Costs
– hurts creditors
– hurts those on fixed
incomes
– increases uncertainty
– costs of marking up
prices, updating
contracts (transactions
costs) etc.

Benefits
– alleviates the burden of
debt
– raises profits, and
therefore may help the
economy
Inflation and interest rates
Interest—this the price paid to induce
people to forgo liquidity
 Interest rate—ratio of interest per year/loan
 Nominal interest rate—interest measured in
terms of current dollars (market interest rate
 Real interest rate = nominal interest rate –
inflation rate

Chapter 7
National Income Accounting
Purpose: measure the performance of the
economy for purposes of public policy
 Created in the aftermath of the Great
Depression
 GDP: most important measure of the
economy’s performance

Gross Domestic Product
GDP is the most important measure of
economic output
 GDP is defined as the total value of all final
goods and services produced by the
domestic economy in one year

Other Measures of Economic
Output
GNP=total value of all goods and services
produced by the nation’s citizens
 GNP = GDP + net foreign factor income
 Net national product (NNP) = GNP depreciation
 National Income (NI) = NNP - indirect
taxes + business transfer payments (gifts,
etc)


Personal Income (PI) = NI
- contributions to social insurance (FICA)
- corporate profits minus dividends
+ personal interest income from the government
and consumers
+ government transfer payments (e.g.,
unemployment insurance, relief, benefits to
veterans)

Disposable Income (Yd) = NI - personal
taxes
Measuring GDP
Expenditure Approach:
GDP = C + I + G + X M
Income Approach:
GDP = Wages + Profits +
Rents + Interest +
Indirect Business
Taxes
Types of Expenditures

Consumption:
– durable goods
– nondurable goods
– services

Investment
– inventories
– producer goods
– new construction


Government
Net Exports
– exports
– imports
Consumption as a Percentage of
GDP
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1930
35
40
45
50
55
60
65
70
75
80
85
90
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003: I
Consumption as a
Percentage of GDP
Total
Sum of C/Y
0.7
0.65
0.6
Total
0.55
0.5
Year or quarter
Investment as a Percentage of
GDP
20%
15%
10%
5%
0%
1930
35
40
45
50
55
60
65
70
75
80
85
90
95
0.25
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003: I
Investment as a
Percentage of GDP
Total
Sum of I/Y
0.2
0.15
Total
0.1
0.05
0
Year or quarter
Government Spending as a
Percentage of GDP
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
1930 35
40
45
50
55
60
65
70
75
80
85
90
95
Government Spending as
a Percentage of GDP
Total
50
Sum of Outlays
45
40
35
30
25
Total
20
15
10
5
0
1934
1939
1944
1949
1954
1959
1964
1969
1974
Fiscal year or period
1979
1984
1989
1994
1999
2004 1
Government expenditures
Government Expenditures as a Portion of the Budget
100%
Other
80%
Social Security
60%
Income Security
International
Affiars
40%
Medicare
Health
Defense
20%
Net Interest
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
0%
Exports and Imports
as a Percentage of GDP
14%
12%
10%
8%
6%
4%
2%
0%
1930
35
40
45
50
55
60
65
70
Years
Imports
Exports
75
80
85
90
95
GDP based on the Income Approach:
Aggregatre expenditure = GDP =
Aggregate Income
 Value added – look at the value that is
added by each firm in the production
process

Types of Income
Compensation
 Corporate Profits
 Proprietor Profits
 Interest
 Rents

Employee Compensation as a
Percentage of National Income
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
30
35
40
45
50
55
60
65
Years
70
75
80
85
90
95
Corporate Profits,
Proprietorships, and Interest as a
Percentage of National Income
25%
20%
Pr opr i et or shi ps
15%
10%
Copor at e Pr of i t s
5%
I nt er est
0%
30
-5%
35
40
45
50
55
60
65
70
75
80
85
90
95
Circular Flow
GDP over time
Real versus nominal variables
Nominal—expressed in current dollars
(unadjusted for inflation)
 Real—expressed in constant dollars
(adjusted for inflation)

Nominal and Real GDP
8,000.0
Nominal GDP
7,000.0
Real GDP
5,000.0
4,000.0
3,000.0
2,000.0
1,000.0
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
0.0
1959
Billions of Dollars
6,000.0
Converting Real to Nominal
GDP


Nominal GDP:
expressed in current
dollars
Real GDP: GDP
produced in one year
expressed in some
base year prices



Real GDP= nominal
GDP/GDP deflator
Nominal GDP=PcQc
GDP deflator=Pc/Pb
– where c stands for the
current year, b the base
year
– Pb is always set to 100