Download Chapter 1

Chapter Topics
 Aggregate Output
 The Other Major Macroeconomic
Variables
 A Road Map
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #1
Aggregate Output
Aggregate Output (national income
and product accounts, or NIPA)
 Gross Domestic Product (GDP)
 The
value of the final goods and services
produced in an economy during a given
period
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #2
Aggregate Output
Defining GDP: Three Approaches
1) Final good
2) Value added
3) Income
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #3
Aggregate Output
GDP: The final goods approach
Firm 1: Steel Company
Revenues from sales
Expenses (wages)
Profit
What is GDP?
$100
$80
$20
$310 or $210
Firm 2: Car Company
Revenues from sales
Expenses
Wages
Steel purchases
Profit
Blanchard: Macroeconomics
$210
$170
$70
$100
Chapter 2: A Tour of the Book
$40
Slide #4
Aggregate Output
Defining GDP
 Answer:
$210
 If
both firms are summed ($100 + $210)
the $100 in steel is counted twice
 Counting
only the final good (cars) includes
the intermediate good (steel)
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #5
Aggregate Output
Question for Discussion
 What would GDP be if the firms
merged?
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #6
Aggregate Output
Defining GDP: Three Approaches
2) Value Added Approach
Value added
= value of production - value of intermediate goods
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #7
Aggregate Output
Two Firm Example
 Steel
 No
intermediate goods
 Value
added = $100
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #8
Aggregate Output
Two Firm Example
 Cars
 Intermediate
 Value
goods (steel) = $100
added = $210 - $100 = $110
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #9
Aggregate Output
Two Firm Example
GDP ($210) 
Value added steel ($100)  value added cars ($110)
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #10
Aggregate Output
Question for Discussion
 Would a merger change the total value
added?
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #11
Aggregate Output
 Defining GDP
 Final goods approach  Value added approach
 Sum of the value of final goods 
Sum of the value added along the
production chain
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #12
Aggregate Output
 Defining GDP
 Approach
1 & 2 define GDP from the
production side
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #13
Aggregate Output
 Defining GDP
3) GDP from the income side
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #14
Aggregate Output
Consider
 Revenues after payment for
intermediate goods
 Some
pay indirect taxes (sales taxes)
 Some
pay workers (labor income)
 Remainder
Blanchard: Macroeconomics
to the firm (capital income)
Chapter 2: A Tour of the Book
Slide #15
Aggregate Output
Defining GDP
 GDP from the income side
GDP (income)  indirect taxes
 labor income
 capital income
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #16
Aggregate Output
GDP: Income Approach
Firm 1: Steel Company
Revenues from sales
Expenses (wages)
Profit
$100
$80
$20
Firm 2: Car Company
Revenues from sales
Expenses
Wages
Steel purchases
Profit
Blanchard: Macroeconomics
$210
$170
$70
$100
Chapter 2: A Tour of the Book
$40
Slide #17
Aggregate Output
 Income (steel)
 Income (car)

Labor = $80

Labor = $70

Capital = $20

Capital = $40
$100
$110
GDP (income)  $100  $110  $210
Compared to:
GDP (value added - -$210)  value added steel ($100)
 value added car ($110)
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #18
The Composition of GDP by
Type of Income, 1960 and 1998
In Percent
1960
1998
Labor income
66%
65%
Capital income
26%
27%
8%
8%
Indirect taxes
 Question for Discussion

How do these compare to the two firm example
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #19
Aggregate Output
Defining GDP – A Summary
 Output Approach = Income Approach
 Final
goods & value added = sum of
indirect taxes + labor income + capital
income
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #20
Aggregate Output
Nominal & Real GDP
 Recall
 GDP
= the value of final goods and
services produced
 Value
is the price of the final good
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #21
Aggregate Output
Nominal & Real GDP
 Therefore,
 GDP
= Price x Quantity of final goods
produced
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #22
Aggregate Output
 Nominal & Real GDP (correcting for
inflation)
 One
Year
1991
1992
1993
good economy
Quantity of Cars
10
12
13
Blanchard: Macroeconomics
Price of Cars
Nominal GDP
$10,000
$12,000
$13,000
$100,000
$144,000
$169,000
Chapter 2: A Tour of the Book
Slide #23
Aggregate Output
Real GDP in 1992 $s
Car Production x 1992 Prices
 1991 -- 10 x $12,000 = $120,000
 1992 -- 12 x $12,000 = $144,000 (20% increase)
 1993 -- 13 x $12,000 = $156,000 (8% increase)
Note: Nominal 1992 GDP = Real 1992 GDP
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #24
Nominal and Real
U.S. GDP, 1960-1998
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #25
Aggregate Output
Technical Notes: For the Course
 GDP -- refers to real GDP
 Yt -- real GDP in year t
 $GDP -- nominal GDP
 $Yt = nominal GDP in year t
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #26
The Other Major
Macroeconomic Variables
The Unemployment Rate
number unemployed (U )
Unemployme nt Rate (u ) 
labor force (L)
Labor Force (L )  employed (N )  unemployed (U )
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #27
Die Arbeitslosenrate lt. Mikrozensus
bzw. lt. AMS für Österreich
Arbeitslosenrate (u ) 
Arbeitslose (U )
Arbeitskräftepotential (L)
Arbeitskräftepotential (L)  Beschäftigte (N )  Arbeitslose(U )
Beschäftigte (N1) lt. AMS  Unselbständige
Erwerbspersonen (N2 ) lt. Mikrozensus  Unselbständige  Selbständi ge
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #28
The Other Major
Macroeconomic Variables
Macro Terms
Unemployed and Discouraged Workers
labor force (L)
Participation Rate 
adult population (16 )
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #29
The Other Major
Macroeconomic Variables
What Do You Think?
 Can the unemployment rate rise when
the number of employed increases?
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #30
The Other Major
Macroeconomic Variables
Unemployment and Economic Activity
 Okun’s Law
 High
output growth -- reduces
unemployment
 Low
output growth -- increases
unemployment
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #31
Change in the U.S. Unemployment Rate
versus U.S. GDP Growth 1960 - 1998
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #32
The Other Major
Macroeconomic Variables
Economic Policy Implications of Okun’s
Law
 If unemployment is too high -- high
growth policy must be pursued to reduce
it
 If unemployment is too low -- low growth
policy is required
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #33
The Other Major
Macroeconomic Variables
Social Implications of Unemployment
 Unemployment rates and duration vary
by population groups
 Certain groups incur a disproportionate
share of the unemployed when
unemployment increases
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #34
The Other Major
Macroeconomic Variables
The GDP Deflator
 Average
 GDP
price of final goods produced
deflator in year t = Pt
nominal GDPt $Yt
Pt 

Real GDPt
Yt
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #35
The Other Major
Macroeconomic Variables
The GDP Deflator
 Pt
is an index number
• P1993 = 102.6 (1992 = 100)
 Index
numbers are used to measure rate of
change over time
Pt  Pt - 1
Rate of inflation 
 %Pt
Pt - 1
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #36
The Other Major
Macroeconomic Variables
The Consumer Price Index (CPI)
 Average prices of goods consumed
 The CPI is not equal to the GDP deflator
 Some
final goods are sold to business,
government, and foreigners
 Some
consumer goods are imported
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #37
The Other Major
Macroeconomic Variables
Steps in Calculating the CPI
1) Consumer expenditure survey to determine
a market basket of items
2) Bureau of labor statistics (BLS) field
workers price the items monthly (85 cities,
22,000 stores)
3) A base period is chosen, currently 1982-84
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #38
Inflation Rate, Using the CPI
and the GDP Deflator, 1960, 1998
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #39
Change in the U.S. Inflation Rate versus
the U.S. Unemployment Rate, 1970-1998
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #40
The Other Major
Macroeconomic Variables
Why Do Economists Care About Inflation?
 Prices and wages do not rise proportionately
 Inflation creates market distortions due to:
 Regulation (regulierte Preise v. “freie” Preise)
 Taxation (stille Steuerprogression)
 Verteilungsaspekte: fixe Transfers und Pensionen,
steigende Preise
 Uncertainty for business investment
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #41
A Road Map
The Central Question of Macroeconomics
 What determines the level of aggregate
output?
 Short-run
(a few years) -- demand
 Medium-run
(10+ years) -- supply
 Long-run
(50+ years) -- government,
education, savings
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #42
The Organization of the Book
Blanchard: Macroeconomics
Chapter 2: A Tour of the Book
Slide #43
Aufgaben:
Zeichnen Sie für Österreich (1988-2001;
falls möglich) die Graphiken (vgl.
Blanchard):
 Okun’s
 BIP-
Law (Fig.2-2)
und VPI-Index (Fig.2-3)
 Phillips-Kurve
Blanchard: Macroeconomics
(Fig.2-4)
Chapter 2: A Tour of the Book
Slide #44