Download Figure 1-1

Figure 1-1
Figure 1.1 Real GDP per Person in the U.S. Economy Real GDP measures the total income of everyone in the economy, and real GDP per person measures the
income of the average person in the economy. This figure shows that real GDP per person tends to grow over time and that this normal growth is sometimes interrupted
by periods of declining income, called recessions or depressions.
Note: Real GDP is plotted here on a logarithmic scale. On such a scale, equal distances on the vertical axis represent equal percentage changes. Thus, the distance
between $4,000 and $8,000 (a 100 percent change) is the same as the distance between $8,000 and $16,000 (a 100 percent change).
Source: U.S. Department of Commerce and Economic History Services.
Figure 1-2
Figure 1.2 The Inflation Rate in the U.S. Economy The inflation rate measures the percentage change in the average level of prices from the year before. When
the inflation rate is above zero, prices are rising. When it is below zero, prices are falling. If the inflation rate declines but remains positive, prices are rising but at a
slower rate.
Note: The inflation rate is measured here using the GDP deflator.
Source: U.S. Department of Commerce and Economic History Services.
Table 2-1
In 2005 the GDP of the United States totaled about $12.5 trillion. This number is so large that it is almost impossible to comprehend. We can make it easier to
understand by dividing it by the 2005 U.S. population of 296 million. In this way, we obtain GDP per person—the amount of expenditure for the average
American—which equaled $42,123 in 2005.
How did this GDP get used? Table 2.1 shows that about two-thirds of it, or $29,507 per person, was spent on consumption. Investment was $7,095 per
person. Government purchases were $7,973 per person, $1,981 of which was spent by the federal government on national defense.
Table 2.1 GDP and the Components of Expenditure: 2005
Total (billions of dollars)
Gross Domestic Product
Per Person (dollars)
$12,485.7
$42,123
8,746.2
29,507
Nondurable goods
2,564.6
8,652
Durable goods
1,026.5
3,463
Services
5,155.1
17,392
2,103.1
7,095
1,330.6
4,489
755.8
2,550
16.6
56
2,363.4
7,973
Federal
877.8
2,961
Defense
587.2
1,981
Nondefense
290.6
980
State and local
1,485.6
5,012
Net Exports
−726.9
−2,452
Exports
1,301.6
4,391
Imports
2,028.6
6,844
Consumption
Investment
Nonresidential fixed investment
Residential fixed investment
Inventory investment
Government Purchases
Source: www.bea.gov
The average American bought $6,844 of goods imported from abroad and produced $4,391 of goods that were exported to other countries. Because the
average American imported more than he exported, net exports were negative. Furthermore, because the average American earned less from selling to
foreigners than he spent on foreign goods, he must have financed the difference by taking out loans from foreigners (or, equivalently, by selling them some of
his assets). Thus, the average American borrowed $2,452 from abroad in 2005.
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Figure 4-2
Figure 4.2 International Data on Inflation and Money Growth In this scatterplot, each point represents a
country. The horizontal axis shows the average growth in the money supply (as measured by currency plus demand
deposits) during the period 1996 to 2004, and the vertical axis shows the average rate of inflation (as measured by
the CPI). Once again, the positive correlation is evidence for the quantity theory's prediction that high money growth
leads to high inflation. Source: International Financial Statistics.
Figure 4-4
Figure 4.4 Inflation and Nominal Interest Rates Across Countries This scatterplot shows the average nominal
interest rate on short-term Treasury bills and the average inflation rate in 77 countries during the period 1996 to
2004. The positive correlation between the inflation rate and the nominal interest rate is evidence for the Fisher
effect. Source: International Financial Statistics.
Figure 5-13
Figure 5.13 Inflation Differentials and the Exchange Rate This scatterplot shows the relationship between
inflation and the nominal exchange rate. The horizontal axis shows the country's average inflation rate minus the U.S.
average inflation rate over the period 1972–2004. The vertical axis is the average percentage change in the country's
exchange rate (per U.S. dollar) over that period. This figure shows that countries with relatively high inflation tend to
have depreciating currencies, and that countries with relatively low inflation tend to have appreciating
currencies. Source: International Financial Statistics.
Table 5-2
The doctrine of purchasing-power parity says that after we adjust for exchange rates, we should find that goods sell for the
same price everywhere. Conversely, it says that the exchange rate between two currencies should depend on the price levels
in the two countries.
To see how well this doctrine works, The Economist, an international newsmagazine, regularly collects data on the price of a
good sold in many countries: the McDonald's Big Mac hamburger. According to purchasing-power parity, the price of a Big Mac
should be closely related to the country's nominal exchange rate. The higher the price of a Big Mac in the local currency, the
higher the exchange rate (measured in units of local currency per U.S. dollar) should be.
Table 5.2 presents the international prices in 2005, when a Big Mac sold for $3.06 in the United States (this was the average
price in New York, San Francisco, Chicago, and Atlanta). With these data we can use the doctrine of purchasing-power parity
to predict nominal exchange rates. For example, because a Big Mac cost 28 pesos in Mexico, we would predict that the
exchange rate between the dollar and the peso was 28/3.06, or around 9.15, pesos per dollar. At this exchange rate, a Big
Mac would have cost the same in Mexico and the United States.
Table 5.2 Big Mac Prices and the Exchange Rate: An Application of Purchasing-Power
Parity
Exchange Rate
(per U.S. dollar)
Country
Currency
Indonesia
Rupiah
South Korea
Price of a Big Mac
Predicted
Actual
14,770
4,771
9,654
Won
2,498
817
1,003
Chile
Peso
1,496
490
591
Hungary
Forint
532
173
205
Japan
Yen
252
81.7
108
Taiwan
Dollar
75.4
24.5
31.3
Thailand
Baht
60.2
19.6
40.7
Czech Rep.
Koruna
56.6
18.4
24.6
Russia
Ruble
42.1
13.7
28.4
Sweden
Krona
31.4
10.1
7.53
Mexico
Peso
28.1
9.15
10.9
Denmark
Krone
27.9
9.07
6.10
South Africa
Rand
14.2
4.56
6.76
China
Yuan
10.5
3.43
8.28
Egypt
Pound
8.99
2.94
5.80
Poland
Zloty
6.49
2.12
3.31
Switzerland
Franc
6.34
2.06
1.25
Brazil
Real
5.95
1.93
2.49
Malaysia
Ringgit
5.24
1.72
3.80
Argentina
Peso
4.75
1.55
2.90
New Zealand
Dollar
4.45
1.45
1.40
Singapore
Dollar
3.61
1.18
1.66
Canada
Dollar
3.30
1.07
1.26
Australia
Dollar
3.26
1.06
1.30
United States
Dollar
3.06
1.00
1.00
Euro Area
Euro
2.93
0.95
0.82
United Kingdom
Pound
1.89
0.61
0.55
Note: The predicted exchange rate is the exchange rate that would make the price of a Big Mac in that country equal to its
price in the United States.
Source: The Economist, June 9, 2005.
Table 5.2 shows the predicted and actual exchange rates for 27 countries, ranked by the predicted exchange rate. You can
see that the evidence on purchasing-power parity is mixed. As the last two columns show, the actual and predicted exchange
rates are usually in the same ballpark. Our theory predicts, for instance, that a U.S. dollar should buy the greatest number of
Indonesian rupiahs and fewest British pounds, and this turns out to be true. In the case of Mexico, the predicted exchange
rate of 9.15 pesos per dollar is close to the actual exchange rate of 10.9. Yet the theory's predictions are far from exact and,
in many cases, are off by 30 percent or more. Hence, although the theory of purchasing-power parity provides a rough guide
to the level of exchange rates, it does not explain exchange rates completely.
Table 6-4
Figure 6.4 Unemployment in Europe This figure shows the unemployment rate in the four largest nations in
Europe. The figure shows that the European unemployment rate has risen substantially over time, especially in France
and Germany. Source: Bureau of Labor Statistics.
Table 7-6
Figure 7.6 International Evidence on Investment Rates and Income per Person This scatterplot shows the
experience of 96 countries, each represented by a single point. The horizontal axis shows the country's rate of
investment, and the vertical axis shows the country's income per person. High investment is associated with high
income per person, as the Solow model predicts. Source: Alan Heston, Robert Summers and Bettina Aten, Penn World Table
Version 6.1, Center for International Comparisons at the University of Pennsylvania (CICUP), October 2002.
Table 9-1
Figure 9.1 Real GDP Growth in the United States Growth in real GDP averages about 3.5 percent per year, but
there are substantial fluctuations around this average. The shaded areas represent periods of recession.
Figure 10-7
Figure 10.7 Deriving the IS Curve Panel (a) shows the investment function: an increase in the interest rate from r1 to r2 reduces planned investment from I(r1) to
I(r2). Panel (b) shows the Keynesian cross: a decrease in planned investment from I(r1) to I(r2) shifts the planned-expenditure function downward and thereby reduces
income from Y1 to Y2. Panel (c) shows the IS curve summarizing this relationship between the interest rate and income: the higher the interest rate, the lower the level
of income.
Figure 11-6
Figure 11.6 How Monetary and Fiscal Policies Shift the Aggregate Demand Curve Panel (a) shows a monetary expansion. For any given price level, an
increase in the money supply raises real money balances, shifts the LM curve downward, and raises income. Hence, an increase in the money supply shifts the
aggregate demand curve to the right. Panel (b) shows a fiscal expansion, such as an increase in government purchases or a decrease in taxes. The fiscal expansion
shifts the IS curve to the right and, for any given price level, raises income. Hence, a fiscal expansion shifts the aggregate demand curve to the right.
Figure 13-2
Figure 13.2 The Cyclical Behavior of the Real Wage This scatterplot shows the percentage change in real GDP and the
percentage change in the real wage (measured here as real private hourly earnings). As output fluctuates, the real wage
typically moves in the same direction. That is, the real wage is somewhat procyclical. This observation is inconsistent with
the sticky-wage model.
Source: U.S. Department of Commerce and U.S. Department of Labor.
Figure 13-5
Figure 13.5 Inflation and Unemployment in the United States Since 1960 This figure uses annual data on the
unemployment rate and the inflation rate (percentage change in the GDP deflator) to illustrate macroeconomic developments
in almost a half century of U.S. history.