The Data of Macroeconomics

Macroeconomics
• Macroeconomics is the study of the behaviour
of the economy as a whole.

Macroeconomics Goals
– Rapid Growth of Output
– Low Unemployment rate
– Stable Prices
 The Tools of Macroeconomic Policy

A policy instrument is an economic variable

under the control of government that can affect
one or more of the macroeconomic goals.
 Fiscal Policy
• Fiscal Policy – the government policy instrument
used to affect taxation and government spending.

Government expenditures come in two distinct forms:

1. Government Purchases
2. Government Transfer Payments
Taxation affects the overall economy in two ways:
1. taxes affect people’s incomes.
2. taxes affect the prices of goods and factors of
production
 Fiscal Policy
• Fiscal policy is primarily used to affect
long-term economic growth through its
impact on national saving and investment; it is
also used to stimulate spending in deep or
sharp recessions.
 Monetary Policy

Monetary Policy – is the instrument used by the

government to affect money supply which
the government conducts through managing the
nation’s money, credit, and banking system.
 In this chapter, you will learn…
…the meaning and measurement of the
most important macroeconomic statistics:
– Gross Domestic Product (GDP)
– The Consumer Price Index (CPI)
– The unemployment rate
 Gross Domestic Product: Expenditure and
Income
Two definitions:
– Total expenditure on domestically-produced
final goods and services.
– Total income earned by domestically-located
factors of production.

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 Gross Domestic Product
• GDP – is the value of all final goods produced
within a country in a given period of time.
Final goods, value added, and GDP
• GDP = value of final goods produced
= sum of value added at all stages
of production.
• The value of the final goods already includes
the value of the intermediate goods,
so including intermediate and final goods in
GDP would be double-counting.
 Value added
definition:
A firm’s value added is
the value of its output
minus
the value of the intermediate goods
the firm used to produce that output.
 The expenditure components of GDP
• consumption
• investment
• government spending
• net exports
Consumption (C)
• Or “personal consumption expenditures.”
• definition: The value of all goods and services
bought by households. Includes:
• durable goods
last a long time
ex: cars, home appliances
• nondurable goods
last a short time
ex: food, clothing
• services
work done for consumers
ex: dry cleaning,
air travel.
Investment (I)
Definition 1: Spending on [the factor of production] capital.
Definition 2: Spending on goods bought for future use
Includes:
– business fixed investment
Spending on plant and equipment that firms will use to
produce other goods & services.
– residential fixed investment
Spending on housing units by consumers and landlords.
– inventory investment
The change in the value of all firms’ inventories.
Government spending (G)
• G includes all government spending on goods and
services. Examples: spending on roads, bridges,
salaries of government employees, etc.
• G excludes transfer payments
because they do not represent spending on goods and
services.
– Examples of government transfers include unemployment
insurance, veterans’ benefits, and old-age or disability
payments
Net Exports(NX)
• Net Exports = Exports – Imports

Exports - goods that are produced domestically

and sold abroad.
Imports – are goods produced abroad and sold
domestically.
 An important identity
GDP (Y) = C + I + G + NX

aggregate
value of expenditure
total output
 GDP:
An important and versatile concept
We have now seen that GDP measures
– total income
– total output
– total expenditure
– the sum of value-added at all stages
in the production of final goods
 GNP vs. GDP
• Gross National Product(GNP):
Total income earned by the nation’s factors of production,
regardless of where located. Now term as Gross National
Income(GNI).
• Gross Domestic Product (GDP):
Total income earned by domestically-located factors of
production, regardless of nationality.
(GNP – GDP) = (factor payments from abroad)
– (factor payments to abroad)

GDP per capita = GDP divided by total population

 Real vs. nominal GDP
• GDP is the value of all final goods and services
produced.
• nominal GDP measures these values using
current prices.
• real GDP measure these values using the
prices of a base year
 Practice problem, part 1
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

 Compute nominal GDP in each year.

 Compute real GDP in each year using 2006 as the
base year.
 Answers to practice problem, part 1

nominal GDP multiply Ps & Qs from same year

2006: ₱46,200 = ₱ 30  900 + ₱100  192
2007: ₱51,400
2008: ₱58,300

real GDP multiply each year’s Qs by 2006 Ps

2006: ₱46,200
2007: ₱50,000
2008: ₱52,000 = ₱30  1050 + ₱100  205
 Real GDP controls for inflation
Changes in nominal GDP can be due to:
– changes in prices.
– changes in quantities of output produced.

Changes in real GDP can only be due to changes

in quantities, because real GDP is constructed
using constant base-year prices.
 GDP Deflator
• The inflation rate is the percentage increase in
the overall level of prices.
• One measure of the price level is
the GDP deflator, defined as

Nominal GDP
GDP deflator = 100 
Real GDP
Calculating Inflation Rate
 Practice problem, part 2
GDP Inflation
Nom. GDP Real GDP
deflator rate

2006 ₱46,200 ₱46,200 n.a.

2007 51,400 50,000

2008 58,300 52,000

• Use your previous answers to compute

the GDP deflator in each year.
• Use GDP deflator to compute the inflation rate from
2006 to 2007, and from 2007 to 2008.
Answers to practice problem, part 2
Nominal GDP Inflation
Real GDP
GDP deflator rate

2006 ₱46,200 ₱46,200 100.0 n.a.

2007 51,400 50,000 102.8 2.8%

2008 58,300 52,000 112.1 9.1%

 Consumer Price Index (CPI)
• A measure of the overall level of prices
• Published by the Bureau of Labor Statistics
(BLS)
• Uses:
– tracks changes in the typical household’s
cost of living
– adjusts many contracts for inflation
– allows comparisons of peso amounts over time
 How the BLS constructs the CPI
1. 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

Cost of basket in that month

100 
Cost of basket in base period
 Reasons why
the CPI may overstate inflation
• Substitution bias: The CPI uses fixed weights,
so it cannot reflect consumers’ ability to substitute
toward goods whose relative prices have fallen.
• Introduction of new goods: The introduction of new
goods makes consumers better off and, in effect,
increases the real value of the dollar. But it does not
reduce the CPI, because the CPI uses fixed weights.
• Unmeasured changes in quality:
Quality improvements increase the value of the dollar,
but are often not fully measured.
 CPI vs. GDP Deflator
prices of capital 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
 Categories of the population
• employed
working at a paid job
• unemployed
not employed but looking for a job
• labor force
the amount of labor available for producing goods and services;
all employed plus unemployed persons
• not in the labor force
not employed, adult population that is keeping house,
retired, too ill to work, or simply not looking for
work.
 Two important labor force concepts
• unemployment rate
percentage of the labor force that is
unemployed
• labor force participation rate
the fraction of the adult population
that “participates” in the labor force
 Exercise:
Compute labor force statistics
U.S. adult population by group, June 2006
Number employed = 144.4 million
Number unemployed = 7.0 million
Adult population = 228.8 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
 Answers:
• data: E = 144.4, U = 7.0, POP = 228.8
• labor force
L = E +U = 144.4 + 7 = 151.4
• not in labor force
NILF = POP – L = 228.8 – 151.4 = 77.4
• unemployment rate
U/L x 100% = (7/151.4) x 100% = 4.6%
• labor force participation rate
L/POP x 100% = (151.4/228.8) x 100% = 66.2%
 Business cycles
• Business cycles are economy wide
fluctuations in total national output, income,
and employment, usually lasting for a period
of 2 to 10 years, marked by widespread
expansion or contraction in most sectors of
the economy
 Business cycles

A Business Cycle, like the Year, Has Its Seasons

Business cycles are the irregular expansions and contractions in economic activity.
 Phases of the Business Cycle
• Economists typically divide business cycles into two main phases: recession and expansion. Peaks
and troughs mark the turning points of the cycle.

• Recession is a recurring period of decline in total output, income, and employment, usually
lasting from
6 to 12 months and marked by contractions in many
sectors of the economy. A recession that is large in both scale and duration is called a depression.

• Expansion – is the phase of the cycle when the economy moves from trough to a peak. It is a
period where GDP expands until it reaches its peak.
 Characteristics of a recession
The following are a few of the customary characteristics of a
recession:
 Investment usually falls sharply in recessions
 Employment usually falls sharply in the early stages
of a recession.
 As output falls, inflation slows, and the demand
for crude materials declines, and materials’
prices tumble.
 Business profits fall sharply in recessions.
 Generally, as business conditions deteriorate and
employment falls
 Chapter Summary
1. Gross Domestic Product (GDP) measures both
total income and total expenditure on the
economy’s output of goods & services.
2. 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.
3. GDP is the sum of consumption, investment,
government purchases, and net exports.
 Chapter Summary
4. 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
5. The unemployment rate is the fraction of the labor force that is not
employed.

6. Business cycles are the irregular expansions and contractions in

economic activity.