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MACROECONOMICSMACROECONOMICS
2010 Worth Publishers, all rights reserved 2010 Worth Publishers, all rights reserved
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PowerPointPowerPointSlides by Ron CronovichSlides by Ron Cronovich
N. Greory !"n#iwN. Greory !"n#iw
C H $ P T EC H $ P T E
RR
The Science o%The Science o%!"croecono&ics!"croecono&ics
''
Modified for EC 204by Bob Murphy
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In this chapter, you will learn:In this chapter, you will learn:
the meaning and measurement of themost important macroeconomic statistics:
Gross Domestic Product GDP!
"he Consumer Price #nde$ CP#!
"he %nemp&oyment 'ate
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(CHAPTER 2 "he Data of Macroeconomics
Gross Domestic Prouct !Prou"
Domesti" #ruto$
E%peniture an Income")o definitions:
"ota& e$penditure tota& penge&uaran! terhadap
barang*+asa a,hir yang dihasi&,an secara
domesti,-
"ota& income yang diterima pemi&i, fa,tor2
produ,si di da&am negeri-
Expenditure equals income because
every dollar spent by a buyer
becomes income to the seller.
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4CHAPTER 2 "he Data of Macroeconomics
&he Circular 'low
.ouseho&ds /irms
Goods
Labor,modal, skill,
dll
Expenditure ($)
Income ($)
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CHAPTER 2 "he Data of MacroeconomicsC.1P"E' 2 "he Data of Macroeconomics
Gross Domestic Prouct:
E%peniture an Income
ne ca3eat:
Measurement of income and e$penditure is
imperfect-
Difference in GDP and Gross Domestic #ncome
GD#! is ca&&ed the 5tatistica& Discrepancy-6
ee upplement !"#
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7CHAPTER 2 "he Data of Macroeconomics
(alue ae
Value added:
"he 3a&ue of output minus
the 3a&ue of the intermediate goods
used to produce that output
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'inal )oos, *alue ae, an GDP
GDP 9 3a&ue of fina& goods produced
9 sum of 3a&ue added at a&& stages
of production-
"he 3a&ue of the fina& goods a&ready inc&udes the
3a&ue of the intermediate goods
so inc&uding intermediate and fina& goods in GDP
)ou&d be doub&e;counting-
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=0CHAPTER 2 "he Data of Macroeconomics
Consumption !C$
durable goods&ast a &ong timee-g- cars homeapp&iances
nondurable goods&ast a short timee-g- food c&othing
services
)or, done forconsumerse-g- dry c&eaningair tra3e&
definition: "he 3a&ue of a&&goods and ser3ices boughtby househo&ds- #nc&udes:
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==CHAPTER 2 "he Data of Macroeconomics
01S1 consumption, 2334
42-7
20-8
>-2
>0-?
707
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=2CHAPTER 2 "he Data of Macroeconomics
In*estment !I$
5pending on goods bought for future use
i.e. capita& goods!
#nc&udes:
Business fixed investment
5pending on p&ant and euipment
Residential fixed investment
5pending by consumers and &and&ords on
housing units Inventory investment
"he change in the 3a&ue of a&& firms in3entories
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=(CHAPTER 2 "he Data of Macroeconomics
01S1 In*estment, 2334
0-(
(-4
=0--0
48>->
=2-8
@=
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=4CHAPTER 2 "he Data of Macroeconomics
In*estment *s1 Capital
Aote: #n3estment is spending on ne) capita&-E$amp&e (assumes no depreciation):
=*=*200
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=CHAPTER 2 "he Data of Macroeconomics
Stoc"s *s1 'lows
1 flowis a uantity measured per unit of time-
E.- %-5- in3estment )as @2- tri&&ion during 200
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=7CHAPTER 2 "he Data of Macroeconomics
Stoc"s *s1 'lows 5 e%amples
the go3t budget deficitthe go3t debt
F of ne) co&&ege
graduates this year
F of peop&e )ith co&&ege
degrees
a persons
annua& sa3inga persons )ea&th
flowstock
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=8CHAPTER 2 "he Data of Macroeconomics
Go*ernment spenin) !G$
Ginc&udes a&& go3ernment spending on goodsand ser3ices-
Ge$c&udes transfer payments
e-g- unemp&oyment insurance payments!because they do not represent spending on
goods and ser3ices-
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=
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Net E%ports: N . E 6 IM
def: the 3a&ue of tota& e$ports EH! minus the 3a&ue
of tota& imports #M!
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NO7 -O0 &R-:
An e%peniture5output pu88le9
5uppose a firm:
produces @=0 mi&&ion )orth of fina& goods
on&y se&&s @< mi&&ion )orth
Does this 3io&ate the
expenditure= output identityI
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22CHAPTER 2 "he Data of Macroeconomics
7hy output . e%peniture
%nso&d output goes into in3entoryand is counted as in3entory in3estment6
)hether or not the in3entory bui&dup )as
intentiona&- #n effect )e are assuming that
firms purchase their unso&d output-
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2(CHAPTER 2 "he Data of Macroeconomics
GDP:
An important an *ersatile
conceptJe ha3e no) seen that GDP measures:
tota& income
tota& output tota& e$penditure
the sum of 3a&ue;added at a&& stages
in the production of fina& goods
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24CHAPTER 2 "he Data of Macroeconomics
GNP *s1 GDP
Gross NationalProductGAP!:
"ota& income earned by the nations factors of
production regard&ess of )here &ocated
Gross Domestic ProductGDP!:
"ota& income earned by domestica&&y;&ocatedfactors of production regard&ess of nationa&ity
GAP GDP 9 factor payments from abroad
minus factor payments to abroad
E$amp&es of factor payments: )ages profits
rent interest di3idends on assets
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NO7 -O0 &R-:
Discussion uestion
In your country,
hich ould you
ant to be bier,G' or G*+
hy+
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GNP *s1 GDP in select countries, 233;
Country GN G! GN " G!#$ of G!%
Phi&ippines @=>08> @=44072 9.!
apan @4(0=20= @=(>=400 .$!
Canada @=(=8(04 @=(24=4= @28(00> %".&!
Ae) Kea&and @=2 %'.2!
Peru @2 %#.&!
G* and G' in millions o% current -.. dollars
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2>CHAPTER 2 "he Data of Macroeconomics
Other Measures o+ Income
Aationa& #ncome 9 GAP ; Depreciation
Aationa& #ncome 9 Compensation of
Emp&oyees L Proprietors #ncome L 'enta&
#ncome L Corporate Profits L Aet #nterest L#ndirect Business "a$es
*ote: upplement !"describes recent change
in definition of Aationa& #ncome to inc&ude#ndirect Business "a$es-
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28CHAPTER 2 "he Data of Macroeconomics
Components o+ National Income
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2
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(0CHAPTER 2 "he Data of Macroeconomics
Real *s1 nominal GDP
GDP is the 3a&ue of a&& fina& goods and ser3icesproduced-
nominal GDPmeasures these 3a&ues using
current prices-
(eal GDPmeasure these 3a&ues using constant
prices-
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(=CHAPTER 2 "he Data of Macroeconomics
Real GDP controls +or in
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(2CHAPTER 2 "he Data of Macroeconomics
Real *s1 nominal GDP
GDPt( P
it)
it
i==
n
RGDPt( P
i*)
it
i==
n
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(7CHAPTER 2 "he Data of Macroeconomics
GDP De
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NO7 -O0 &R-:
GDP e to 2008-
Aom- GDP 'ea& GDPGDP
def&ator#nf&ation
rate
2007 @47200 @47200 n.a.
200> =400 0000
2008 8(00 2000
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NO7 -O0 &R-:
Answers
Aomina&GDP
'ea& GDPGDP
def&ator#nf&ation
rate
2007 @47200 @47200 =00-0 n.a.
200> =400 0000 =02-8 2-8?
2008 8(00 2000 ==2-=
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4=CHAPTER 2 "he Data of Macroeconomics
&wo arithmetic tric"s +or
wor"in) with percenta)e chan)es
EH: #f your hour&y )age rises ?
and you )or, >? more hoursthen your )age income rises
appro$imate&y =2?-
&. /or any 3ariab&es& and '
percentage change in &*'!
9 percentage change in&
L percentage change in '
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42CHAPTER 2 "he Data of Macroeconomics
&wo arithmetic tric"s +or
wor"in) with percenta)e chan)es
EH: GDP def&ator 9 AGDP*'GDP-
#f AGDP rises
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4(CHAPTER 2 "he Data of Macroeconomics
Measurin) Economic Growth
RGDPt+ RGDP
t=( P
i*)
iti==
n
+ Pi*)it=i==
n
=
Pi*)
it=)
it+ )
it=
i==
n
Pi*)it=i==
n
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44CHAPTER 2 "he Data of Macroeconomics
Measurin) Economic Growth
RGDPt+ RGDP
t=(
Pi*)
it=)
it+ )
it= i==
n
Pi*)it=i==
n
=+ t
= i )it + )it=
i==
n
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4CHAPTER 2 "he Data of Macroeconomics
Measurin) Economic Growth
A ,(o-lem a(ises wen usin/ fi0ed
-ase+1ea( wei/ts Growt( will vary
depending on base year c(osen)
Ra,idl1 /(owin/ secto(s wit declinin/
(elati3e ,(ices will -e wei/ted *too
muc(+as -ase 1ea( -ecomes fu(te(
and fu(te( in te ,ast. 4,,osite fo(slowl1 /(owin/ secto(s.
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47CHAPTER 2 "he Data of Macroeconomics
Chain57ei)hte Real GDP
3er time re&ati3e prices change so the baseyear shou&d be updated periodica&&y;;)hich BE1
used to do-
#n essence cain+wei/ted (eal GDPupdates the base year e3ery year
so it is more accurate than fi$ed base;year GDP-
fficia& measure of GDP no) produced by BE1-
ee upplement !"0.
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4>CHAPTER 2 "he Data of Macroeconomics
Chain57ei)hte Real GDP
,=+ gt-
t;=(
Pi t;=
)it=
)it+ )
it= i==
n
Pi t;=)it=i==
n
=+ t
t;=
= i t;=
)it+ )
it=
i==
n
5tep =:
'e)rite as:
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48CHAPTER 2 "he Data of Macroeconomics
Chain57ei)hte Real GDP
,=+ gt-
t(
Pi t)
it=)
it+ )
it= i==
n
Pi t)it=i==
n
=+ t
t
= i t
)it+ )
it=
i==
n
5tep 2:
'e)rite as:
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4
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0CHAPTER 2 "he Data of Macroeconomics
7hen is the Economy in a
Recession9
'u&e of "humb: ")o uarters of dec&ine in 'ea& GDP
Aationa& Bureau of Economic 'esearch uses more nuanced
approach see upplement #"1!:
Month&y #ndicators rather than Nuarter&y-
1 significant dec&ine in acti3ity spread across the
economy &asting more than a fe) months 3isib&e in
industria& production emp&oyment rea& income and)ho&esa&e;retai& trade-6
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2CHAPTER 2 "he Data of Macroeconomics
)0ic#Ti&e1 "nd "deco&2ressor"re needed to see this 2ict0re.
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(CHAPTER 2 "he Data of Macroeconomics5ource: Department of Commerce Bureau of Economic 1na&ysis-
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4CHAPTER 2 "he Data of Macroeconomics5ource: Board of Go3ernors of the /edera& 'eser3e-
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CHAPTER 2 "he Data of Macroeconomics5ource: Department of Commerce Bureau of the Census and Bureau of Economic 1na&ysis-
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7CHAPTER 2 "he Data of Macroeconomics
Consumer Price Ine% !CPI$
1 measure of the o3era&& &e3e& of prices
Pub&ished by the Bureau of Oabor 5tatistics
BO5!
%ses:
trac,s changes in the typica& househo&ds
cost of &i3ing
ad+usts many contracts for inf&ation CO1s6!
a&&o)s comparisons of do&&ar amounts o3er time
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>CHAPTER 2 "he Data of Macroeconomics
=ow the #>S constructs the CPI
&- 5ur3ey consumers to determine composition ofthe typica& consumers bas,et6 of goods
2- E3ery month co&&ect data on prices of a&& items
in the bas,et compute cost of bas,et
"- CP# in any month eua&s
&he composition o+ the CPI?s
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&he composition o+ the CPI?s
@as"etB
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7(CHAPTER 2 "he Data of Macroeconomics
0nerstanin) the CPI
CP#=Et
EB
()i*Pit
i==
n
)
i*P
i*
i==
n
(
)i*Pi*P
it+ P
i*
i==
n
)i*Pi*
i==
n
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74CHAPTER 2 "he Data of Macroeconomics
0nerstanin) the CPI
CP#= EtE
B
( i*
Pit+ P
i*
i==
n
i*
= )
i*Pi*
)i*Pi*
i==
n
)here the )eights aregi3en by:
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7CHAPTER 2 "he Data of Macroeconomics
0nerstanin) the CPI
,(e CP) is a weig(ted average of prices relative
to t(eir value in t(e base period)
,(e weig(t on eac( *price relative+ reflectst(at good-s relative importance in t(e CP)5s
basket)
Note t(at t(e weig(ts remain fixed over time)
7hy the CPI may o*erstate
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77CHAPTER 2 "he Data of Macroeconomics
7hy the CPI may o*erstate
in
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7>CHAPTER 2 "he Data of Macroeconomics
&he si8e o+ the CPI?s ias
#n =
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7
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&wo measures o+ in
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>=CHAPTER 2 "he Data of Macroeconomics
Cate)ories o+ the population
em,lo1ed)or,ing at a paid +ob
unem,lo1ednot emp&oyed but &oo,ing for a +ob
la-o( fo(cethe amount of &abor a3ai&ab&e for producinggoods and ser3ices a&& emp&oyed p&us
unemp&oyed persons not in te la-o( fo(ce
not emp&oyed not &oo,ing for )or,
&he =ousehol Sur*ey: &wo
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>2CHAPTER 2 "he Data of Macroeconomics
&he =ousehol Sur*ey: &wo
important laor +orce concepts
unem,lo1ment (ate
percentage of the &abor force that is unemp&oyed
see upplement !"#!for a&ternati3e measures of
the unemp&oyment rate! la-o( fo(ce ,a(tici,ation (ate
the fraction of the adu&t popu&ation
that participates6 in the &abor force
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>>CHAPTER 2 "he Data of Macroeconomics
&he Estalishment Sur*ey
"he BO5 obtains a second measure ofemp&oyment by sur3eying businesses
as,ing ho) many )or,ers are on their payro&&s-
Aeither measure is perfect and they
occasiona&&y di3erge due to:
treatment of se&f;emp&oyed persons
ne) firms not counted in estab&ishment sur3ey
technica& issues in3o&3ing popu&ation inferencesfrom samp&e data
& + l t th
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&wo measures o+ employment )rowth
Percentag
echange
from=
2mo
nthsear&ier
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Chapter SummaryChapter Summary
Gross Domestic Product GDP! measures bothtota& income and tota& e$penditure on the
economys output of goods ser3ices-
Aomina& GDP 3a&ues output at current prices
rea& GDP 3a&ues output at constant prices-
Changes in output affect both measures
but changes in prices on&y affect nomina& GDP-
GDP is the sum of consumption in3estment
go3ernment purchases and net e$ports-
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Chapter SummaryChapter Summary
"he o3era&& &e3e& of prices can be measuredby either:
the Consumer Price #nde$ CP#!
the price of a fi$ed bas,et of goods purchased
by the typica& consumer or
the GDP def&atorthe ratio of nomina& to rea& GDP
"he unemp&oyment rate is the fraction of the&abor force that is not emp&oyed-