Download The Data of Macroeconomics

The Data of Macroeconomics
Chapter 2 of Macroeconomics, 7th
edition, by N. Gregory Mankiw
ECO62 Udayan Roy
Chapter Overview
• What do the following macroeconomic
variables represent? How are they
measured?
– Gross Domestic Product (GDP)
– The Consumer Price Index (CPI)
– The Unemployment Rate
You’ve seen this before
in Introductory
Macroeconomics. So, I
will try to be brief.
GROSS DOMESTIC PRODUCT AND
ITS COMPONENTS
GDP is both …
• Total expenditure on domestically-produced
final goods and services.
• Total income earned by domestically-located
productive resources.
Expenditure equals income because
every dollar spent by a buyer
becomes income to the seller.
Final and Intermediate Goods
• GDP counts the value of only final goods, not
intermediate goods
– Intermediate goods are those goods that
disappear inside other goods that are produced
for sale
– Final goods are goods that are not intermediate
goods
• This way, the value of intermediate goods is
counted only once, not twice or thrice.
The Circular Flow of Income and Expenditure
Income ($)
Labor
Firms
Households
Goods
Expenditure ($)
The expenditure components of GDP
• consumption, C
• investment, I
• government spending, G
• net exports, NX
The national income identity:
Y = C + I + G + NX
value of
total
output
aggregate
expenditure
Consumption (C)
Consumption is the value of all
goods and services bought by
households. It includes:
– durable goods
last a long time
e.g., cars, home
appliances
– nondurable goods
last a short time
e.g., food, clothing
– services
work done for
consumers
e.g., dry cleaning,
air travel
U.S. Consumption, 2010
Total
Per Person
$ billions % of GDP
$
Gross domestic product
14526.5
100.0
46844
Personal consumption expenditures 10245.5
70.5
33039
Goods
3387.0
23.3
10922
Durable goods
1085.5
7.5
3500
Nondurable goods
2301.5
15.8
7422
Services
6858.5
47.2
22117
Investment (I)
• This is spending on goods bought for future use
(i.e., capital goods)
• It includes:
– Business fixed investment
Spending on plant and equipment
– Residential fixed investment
Spending by consumers and landlords on housing
units
– Inventory investment
The change in the value of all firms’ inventories
U.S. Investment, 2010
Total
% of Per Person
$ billions GDP
$
Gross domestic product
14,526.5 100.0
46,844
Gross private domestic investment 1,795.1 12.4
5,789
Fixed investment
1,728.2 11.9
5,573
Nonresidential
1,390.1
9.6
4,483
Structures
374.4
2.6
1,207
Equipment and software
1,015.7
7.0
3,275
Residential
338.1
2.3
1,090
Change in private inventories
66.9
0.5
216
Government spending (G)
• G includes all government spending on goods
and services.
• It excludes transfer payments (e.g.,
unemployment insurance payments), because
they do not represent spending on goods and
services.
U.S. Government Spending, 2010
Gross domestic product
Government consumption expenditures and
gross investment
Federal
National defense
Nondefense
State and local
Total
Per Person
$ billions % of GDP
$
14,526.5
100.0
46,844
3,002.8
1,222.8
819.2
403.6
1780
20.7
8.4
5.6
2.8
12.3
9,683
3,943
2,642
1,301
5,740
U.S. Net Exports, 2010
Total
Per Person
$ billions % of GDP
$
Gross domestic product
14,526.5
100.0
46,844
Net exports of goods and services
-516.9
-3.6
-1,667
Exports
1,839.8
12.7
5,933
Goods
1,277.8
8.8
4,121
Services
562.0
3.9
1,812
Imports
2,356.7
16.2
7,600
Goods
1,947.3
13.4
6,279
Services
409.4
2.8
1,320
Net Exports: NX = EX – IM
• It is the value of total exports (EX) minus the value of
total imports (IM)
20%
NX
16%
exports
imports
12%
8%
4%
0%
-4%
-8%
1950
1960
1970
1980
1990
2000
2010
Real and Nominal GDP
• GDP is the market value of all final goods and
services produced.
• nominal GDP measures these values using
current prices.
– Current prices are the prices that prevailed at the
time of production
• real GDP measure these values using constant
prices (the prices during the base year).
NOW YOU TRY:
Real and Nominal GDP
2006
2007
2008
P
Q
P
Q
P
Q
good A
$30
900
$31
1,000
$36
1,050
good B
$100
192
$102
200
$100
205
Nominal GDP
Real GDP
 Compute nominal GDP in each year.
 Compute real GDP in each year using 2006 as the base year.
NOW YOU TRY:
Real and Nominal GDP
2006
2007
2008
P
Q
P
Q
P
Q
good A
$30
900
$31
1,000
$36
1,050
good B
$100
192
$102
200
$100
205
Nominal
GDP
(30 900) +
(100 192) =
$46,200
(31 1000) +
(102 200) =
$51,400
(36 1,050) +
(100 205) =
$58,300
Real
GDP
(30 900) +
(100 192) =
$46,200
(30 1000) +
(100 200) =
$50,000
(30 1,050) +
(100 205) =
$52,000
GDP Deflator: overall price level
2006
GDP
Deflator
good A
P
$30
Q
100
900
2007
2008
P 100 Q
51,400/50,000 =
$31102.8
1,000
P 100 Q
58,300/52,000
$36
1,050
= 112.1
Average prices
compared to
base year
good B
$100
Same192
$102
200
2.8% higher
$100
205
12.1% higher
Nominal
GDP
(30 900) +
(100 192) =
$46,200
(31 1000) +
(102 200) =
$51,400
(36 1,500) +
(100 205) =
$58,300
Real
GDP
(30 900) +
(100 192) =
$46,200
(30 1000) +
(100 200) =
$50,000
(30 1,500) +
(100 205) =
$52,000
U.S. Nominal and Real GDP,
1929-2010
U.S. Gross Domestic Product per capita
50000
45000
40000
35000
30000
25000
20000
15000
10000
5000
1929
1931
1933
1935
1937
1939
1941
1943
1945
1947
1949
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
0
Source: bea.gov National Income and Product Accounts Tables, Table 7.1.
Income in chained (2005) dollars.
Growth Rate: computation
Value for the year  value for previous year
Growth Rate 
100
value for previous year
2006
2007
2008
NOW YOU TRY:
Real and Nominal GDP
Nominal
$46,200 $51,400 $58,300
GDP
Growth
Rate %
Real
GDP
$46,200 $50,000 $52,000
Growth
Rate %
Value for the year  value for previous year
Growth Rate 
100
value for previous year
2006
2007
2008
NOW YOU TRY:
Real and Nominal GDP
Nominal
$46,200 $51,400 $58,300
GDP
Growth
Rate %
11.26
Real
GDP
$46,200 $50,000 $52,000
Growth
Rate %
8.23
13.42
[(51,400 – 46,200) /
46,200] ✕ 100 = 11.26
4.00
Value for the year  value for previous year
Growth Rate 
100
value for previous year
2006
2007
2008
NOW YOU TRY:
Real and Nominal GDP
Nominal
$46,200 $51,400 $58,300
GDP
Growth
Rate %
11.26
Real
GDP
$46,200 $50,000 $52,000
Growth
Rate %
8.23
4.00
1.028
1.121
2.80
9.06
GDP
Deflator
Growth
Rate %
1.00
13.42
GDP Deflator = Nominal
GDP / Real GDP
It is a measure of the
overall price level
Its growth rate is a
measure of the rate of
inflation
As an approximation, the
GDP Deflator’s growth
rate = growth rate of
Nominal GDP – growth
rate of Real GDP
Where to find US data
• Bureau of Economic Analysis, U.S. Department
of Commerce: http://bea.gov
• Federal Reserve Bank of St. Louis:
http://research.stlouisfed.org/fred2/categorie
s/18
International Comparisons
• When the GDP numbers for various countries’
are being compared, the same currency units
must be used
• There are two ways of converting from
national countries to a common currency,
such as the US dollar
– Use market exchange rates
– Use a common set of prices (PPP)
GDP per capita, in US dollars
PPP
Market Exchange Rates
44063.34
44063.34
United Kingdom 33849.18
40237.54
Japan
32051.81
34263.64
Uruguay
10584.77
6036.12
Ukraine
6269.05
2324.32
China
5815.12
4657.28
2891.94
2021.97
India
2317.19
762.14
Bangladesh
1223.01
417.66
724.61
202.05
333.45
170.88
United States
Albania
Ethiopia
Liberia
Source: World Economic Outlook 2008 database, IMF
Chain-Weighted Real GDP
• Over time, relative prices change, so the base
year should be updated periodically.
• In essence, chain-weighted real GDP
updates the base year every year,
so it is more accurate than constant-price GDP.
• Your textbook uses constant-price real GDP,
because:
– the two measures are highly correlated
– constant-price real GDP is easier to compute.
GROWTH RATE MATH
Two arithmetic tricks for
working with percentage changes
1. For any variables X and Y,
percentage change in (X  Y )
 percentage change in X
+ percentage change in Y
Example: If your hourly wage rises 5%
and you work 7% more hours,
then your wage income rises
approximately 12%.
Two arithmetic tricks for
working with percentage changes
2. percentage change in (X/Y )
 percentage change in X
 percentage change in Y
Example:
GDP deflator = 100  NGDP/RGDP.
If NGDP rises 9% and RGDP rises 4%,
then the inflation rate is approximately 5%.
• The growth rate of the ratio of two variables
equals the difference of their growth rates.
• The growth rate of the product of two
variables equals the sum of their growth rates.
• The growth rate of a variable raised to an
exponent, is the growth rate of the variable
times the exponent.
If Z = X × Y then gz = gx + gy
z new  zold z new
gz 

1
zold
zold
z new xnew ynew
1 gz 


zold xold yold
1  g z  (1  g x )(1  g y )
1 gz  1 gx  g y  gx  g y
gz  gx  g y  gx  g y
gz  gx  g y
The growth rates here are in decimal
form: for example, if X grows at the rate
of 5%, then gx = 0.05. The product of
two decimals is small enough to be
ignored: for example, 0.05 × 0.04 =
0.0020.
If Z = X ÷ Y then gz = gx – gy
x
z
y
z y  x
gz  gy  gx
gz  gx  g y
If Z = Xa then gz = a × gx
zx 
x 
x 
x

a
a times
gz  gx  gx  gx  a  gx

a times
CONSUMER PRICE INDEX (CPI)
Consumer Price Index (CPI)
• It is a measure of the overall level of prices
• It is published by the Bureau of Labor
Statistics (BLS)
• The CPI is used to:
– track changes in the typical household’s
cost of living
– adjust many contracts for inflation (“COLAs”)
– allow comparisons of dollar amounts over time
How the BLS constructs the CPI
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
1.
Cost of basket in that month
100 
Cost of basket in base period
The composition of the CPI’s “basket”
Food and bev.
17.4%
Housing
Apparel
6.2%
5.6%
3.0%
3.1%
3.8%
3.5%
Transportation
Medical care
Recreation
15.1%
Education
Communication
Other goods
and services
42.4%
NOW YOU TRY:
Compute the CPI
Typical consumer’s basket: 20 pizzas, 10 compact discs
prices:
2002
2003
2004
2005
pizza
$10
$11
$12
$13
CDs
$15
$15
$16
$15
For each year, compute
 the cost of the basket
 the CPI (use 2002 as the
base year)
 the inflation rate from the
preceding year
NOW YOU TRY:
Compute the CPI and Inflation Rate
Typical consumer’s basket: 20 pizzas, 10 compact discs
2002
2003
2004
2005
pizza
$10
$11
$12
$13
CDs
$15
$15
$16
$15
cost
CPI
inflation
Cost of typical consumer' s basket in current period
CPI 
100
Cost of typical consumer' s basket in base period
NOW YOU TRY:
Compute the CPI and Inflation Rate
Typical consumer’s basket: 20 pizzas, 10 compact discs
2002
2003
2004
2005
pizza
$10
$11
$12
$13
CDs
$15
$15
$16
$15
cost
$350
$370
$400
$410
CPI
inflation
Cost of typical consumer' s basket in current period
CPI 
100
Cost of typical consumer' s basket in base period
NOW YOU TRY:
Compute the CPI and Inflation Rate
Typical consumer’s basket: 20 pizzas, 10 compact discs
2002
2003
2004
2005
pizza
$10
$11
$12
$13
CDs
$15
$15
$16
$15
cost
$350
$370
$400
$410
CPI
100
105.71
114.29
117.14
inflation
Cost of typical consumer' s basket in current period
CPI 
100
Cost of typical consumer' s basket in base period
NOW YOU TRY:
Compute the CPI and Inflation Rate
Typical consumer’s basket: 20 pizzas, 10 compact discs
2002
2003
2004
2005
pizza
$10
$11
$12
$13
CDs
$15
$15
$16
$15
cost
$350
$370
$400
$410
CPI
100
105.71
114.29
117.14
inflation
5.71
8.11
2.50
Cost of typical consumer' s basket in current period
CPI 
100
Cost of typical consumer' s basket in base period
CPI in current period  CPI in preceding period
Inflation 
100
CPI in preceding period
U.S. Inflation (%)
20
15
10
5
2010
2007
2004
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
1968
1965
1962
1959
1956
1953
1950
1947
1944
1941
1938
1935
1932
1929
1926
1923
1920
1917
1914
0
-5
-10
-15
Source: See ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt for historical data and
http://bls.gov/news.release/cpi.nr0.htm for latest data.
CPI vs. GDP Deflator
Prices of non-consumer 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
Two measures of inflation in the U.S.
15%
Percentage change
from 12 months earlier
CPI
10%
5%
GDP deflator
0%
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
UNEMPLOYMENT
The Current Population Survey
• The Bureau of Labor Statistics (BLS) of the U.S.
Department of Labor computes the
unemployment rate every month
• The data comes from a monthly survey of U.S.
households called the Current Population Survey
– See http://bls.gov/cps/
• This survey classifies each adult into one of three
categories: employed, unemployed, and not in
the labor force
Three Population Categories
• This survey classifies each adult into one of
three categories:
– employed (working at a paid job)
– unemployed (not employed but looking for a job),
and
– not in the labor force (not employed, not looking
for work)
• Labor force = employed + unemployed
Two important labor market stats
• unemployment rate
percentage of the labor force that is
unemployed
• labor force participation rate
the fraction of the adult population that is in
the labor force
U.S. Unemployment Rate (%)
12
10
8
6
4
2
0
Source: See ftp://ftp.bls.gov/pub/special.requests/lf/aat1.txt. for historical data and
http://bls.gov/news.release/empsit.toc.htm for latest month’s data.
NOW YOU TRY:
Computing labor statistics
U.S. adult population by group, May 2009
Number employed
=
140.57 million
Number unemployed
=
14.51 million
Adult population
=
235.45 million
Use the above data to calculate
 the labor force
 the number of people not in the labor force
 the labor force participation rate
 the unemployment rate
NOW YOU TRY:
Answers
data: E = 140.57, U = 14.51, POP = 235.45
 labor force
L = E +U = 140.57 + 14.51 = 155.08
 not in labor force
NILF = POP – L = 235.45 – 155.08 = 80.37
 unemployment rate
U/L x 100% = (14.51/155.08) x 100% = 9.4%
 labor force participation rate
L/POP x 100% = (155.08/ 235.45) x 100% = 65.9%
The Current Establishment Survey
• The BLS obtains a second measure of
employment by surveying businesses, asking
how many workers are on their payrolls.
– See http://bls.gov/ces/
• Neither measure is perfect, and they
occasionally diverge due to:
– treatment of self-employed persons
– new firms not counted in establishment survey
– technical issues involving population inferences
from sample data
Two measures of employment growth
8%
Percentage change
from 12 months earlier
household survey
6%
establishment survey
4%
2%
0%
-2%
-4%
1960
1970
1980
1990
2000
2010
U.S. Labor Data
• Current Population Survey: http://bls.gov/cps/
• ftp://ftp.bls.gov/pub/special.requests/lf/aat1.txt
• Current Establishment Survey:
http://bls.gov/ces/
• ftp://ftp.bls.gov/pub/suppl/empsit.ceseeb1.txt
• ftp://ftp.bls.gov/pub/suppl/empsit.ceseeb2.txt
International Labor Comparisons
• The BLS presents internationally comparable
labor data for many countries at
http://bls.gov/fls/home.htm
Chapter Summary
• Gross Domestic Product (GDP) measures both total
income and total expenditure on the economy’s
output of goods & services.
• Nominal GDP values output at current prices;
real GDP values output at constant prices. Changes
in output affect both measures,
but changes in prices only affect nominal GDP.
• GDP is the sum of consumption, investment,
government purchases, and net exports.
Chapter Summary
• The overall level of prices can be measured
by either:
– the Consumer Price Index (CPI),
the price of a fixed basket of goods purchased
by the typical consumer, or
– the GDP deflator,
the ratio of nominal to real GDP
• The unemployment rate is the fraction of
the labor force that is not employed.