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    Measurement of Output, Inflation and Unemployment: Required Reading

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    The document discusses the measurement of key macroeconomic variables including output, inflation, and unemployment. It describes how gross domestic product (GDP) is measured and defines real and nominal GDP. Methods for calculating inflation rates using the GDP deflator and consumer price index (CPI) are also outlined.

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    Measurement of Output, Inflation and Unemployment: Required Reading

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    puss_tr
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    The document discusses the measurement of key macroeconomic variables including output, inflation, and unemployment. It describes how gross domestic product (GDP) is measured and defines real and nominal GDP. Methods for calculating inflation rates using the GDP deflator and consumer price index (CPI) are also outlined.

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    Macro Lecture1

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    The document discusses the measurement of key macroeconomic variables including output, inflation, and unemployment. It describes how gross domestic product (GDP) is measured and defines real and nominal GDP. Methods for calculating inflation rates using the GDP deflator and consumer price index (CPI) are also outlined.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    46 views30 pages

    Measurement of Output, Inflation and Unemployment: Required Reading

    Uploaded by

    puss_tr
    The document discusses the measurement of key macroeconomic variables including output, inflation, and unemployment. It describes how gross domestic product (GDP) is measured and defines real and nominal GDP. Methods for calculating inflation rates using the GDP deflator and consumer price index (CPI) are also outlined.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 30

    Lecture 1

    • Measurement of output, inflation and


    unemployment

    Required reading:
    • Blanchard chapter 2: A tour of the book
    Macroeconomic Variables
    The major macroeconomic variables are:
    1) Output

    2) Inflation

    3) Unemployment
    1) Measurement of Output
    • Great depression there were no
    measure of aggregate economic
    activity.

    • At the end of World War II National


    Income and Product Accounts put
    together.

    • GROSS DOMESTIC PRODUCT (GDP):


    measure of aggregate economic activity
    Definitions and Derivation of GDP
    (Production Side)

    • GDP1: value of all final goods and


    services produced in an economy
    during a given period (monthly,
    quarterly or monthly)
    • GDP2: sum of value added in an
    economy during a period.
    Value added by a firm: Sales-
    Payments for the intermediate goods
    (Value of production for firm- value of
    intermediate goods)
    Definitions and Derivation of GDP
    (Income Side)

    • GDP3: sum of incomes in an economy


    during a period
    Example:

    • Based on the example in Blanchard.


    2 Firms producing milk & pudding
    Firm A: Milk Production in 2010
    Revenue from Sales 120,000 TL
    Expenses 75,000TL
    Wages 75,000 TL
    Profit 45,000TL
    Example
    • Firm B: Smoothie Production in 2007

    Revenue from Sales 200,000TL


    Expenses 155,000 TL
    Wages 35,000 TL
    Milk Purchases 120,000 TL
    Profits 45,000TL
    Let’s do the following:
    1) Use GDP1 to derive GDP.
    Final good & intermediate goods?
    2) Use GDP2 to derive GDP.
    Value added by Firm A and Firm B?
    3) Use GDP3 to derive GDP.
    Workers income / Producer Income/Gov
    Income?
    CONCERNS ABOUT GDP
    • 1) Do include imputed values but not for
    everything. Only for housing.

    • 2) Household production not included.

    • 3) Informal market activities are not


    included.
    Real vs. Nominal GDP
    • Turkey GDP:
    1970 17 billion $
    2009 617 billion $
    • Nearly 36 times increase in GDP. Does this
    reflect the increase in only?
    Nominal GDP
    • Value of all final goods and services
    produced in US in current prices.
    Assume a two goods economy:
    Apples &Oranges

    NGDP(2009)=(Price of Apples in 2009*Quantity of Apples


    Produced in 2009)+(Price of Oranges in 2009)*(Quantity of
    Oranges Produced in 2009)
    Nominal GDP
    • Nominal GDP changes for two reasons:
    1) Prices of most goods increase over time
    2) Production of most goods increases over
    time
    • How to measure the production changes
    only?
    Real GDP
    • Value of all goods and services at constant
    prices.
    • Assume a two goods economy: Apples &
    Oranges
    • Assume that base year is 2000.
    RGDP(2009)=(Price of Apples in 2000*Quantity of Apples
    Produced in 2009)+(Price of Oranges in 2000)*(Quantity of
    Oranges Produced in 2009)
    Exercise:
    Blanchard, Chapter 2, Questions and Problems #4

    • An economy produces three goods:


    cars, computers and oranges.
    Quantities and prices per unit for years
    2003 and 2004 are as follows:
    Exercise
    1) Nominal GDP (2003), Nominal GDP
    (2004), percentage change in nominal
    GDP from 2003 to 2004 ( g nom ) ?
    2) Base year is 2003, Real GDP (2003)
    and Real GDP (2004)? Percentage
    change in real GDP from 2003 to 2004
    (g real )?
    Economic Growth
    • Indicators of Economic Performance?
    GDP level / GDP growth rate
    Periods of + growth expansions
    Periods of – growth recessions
    Economic Performance
    • Best indicator of Economic Performance?
    GDP? GDP growth? NGDP? NGDP growth?
    RGDP? RGDP per capita
    GDP vs. GNP
    • Gross Domestic Product (GDP)
    • Gross National Product(GNP)

    • GNP:Counts all the output produced by


    Turkish owned inputs.

    • GDP: Counts all the output produced in


    Turkey(country of concern).
    • A Turkish firms production in China:
    included in GNP of Turkey and GDP of
    China but not GNP of China or GDP of
    Turkey.
    • Toyota (a Japanese firm) produce in
    Turkey: included in GNP of Japan, GDP
    of Turkey but not in GNP in Turkey or
    GDP in Japan.
    2) Measurement of
    Unemployment
    • Employment= # of people having a job

    • Unemployment= # of people a) who do


    not have a job but b) are looking for a
    job

    • Labor Force (L)=Employment


    (E)+Unemployment(U)
    • Unemployment Rate=u=U/L
    • No job & not looking for a job=not in the
    labor force=can be discouraged workers
    In recessions what happens to
    (a) the unemployment rate?
    (b) discouraged workers?
    (c) participation rate?

    Participation rate=Labor Force/ Total


    Population at the working age
    • OKUN’s LAW: Negative relation
    between unemployment and GDP.
    (Employed actually help to increase
    GDP)
    3) Measurement of Inflation
    • Inflation rate: Percentage change in price
    level
    • Inflation (increase in price level)
    • Deflation (decrease in price level)
    • Two measures of price level (price indexes)
    (a) GDP Deflator
    (b) CPI (Consumer Price Index)
    (a) GDP Deflator
    • Nominal GDP= Real GDP * GDP Def.
    Blanchard, Questions and Problems #4
    ( continue)
    nom
    GDP2003  $25, 000, GDP2004
    nom
     $40, 000,
    real
    GDP2003  GDP2003
    nom
     $25, 000, GDP2004
    real
     $31, 000

    • What is the GDP deflator in 2003 and


    2004? What is the rate of inflation?
    2) Consumer Price Index (CPI)
    • CPI: measures the price level of goods
    purchased by the consumers.

    • GDP Deflator: measures the price level


    of output, all final goods and services
    produced in the economy.
    • Calculation of CPI in 2004, Assume that
    the consumption basket includes 5
    basket of apples & 2 oranges a month
    where 2002 is the base year.
    • Biases in CPI (overstate inflation by
    nearly
    A) Commodity substitution
    B) New goods and quality change

    • Why do we care about inflation?


    1) Distort income distribution
    2) Distort firm decisions / Result in
    uncertainties
    3) Distortions in tax brackets
    What determines aggregate
    output in the economy?
    • 1) Short-Run (a few years): Δ in
    demand consumer
    confidence/interest rate
    • 2) Medium-Run (a decade): Δ in supply
    Capital stock, technology, productivity,
    size of the labor force
    • 3) Long Run (Half century or more):
    political system, education, savings

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