Post on 15-Jan-2016
Measuring Macroeconomics
Aggregate Output
National income accounts An accounting system used to measure aggregate economic activity.
The typical measure of aggregate output in the national income accounts is gross domestic product, or GDP.
GDP: Production and Income
There are three ways of defining GDP:1. The value of the final goods and
services produced in the economy.
2. The sum of value added in the economy.
3. The sum of the incomes in the economy.
Nominal and Real GDP Nominal GDP is the sum of the
quantities of final goods produced times their current price.
Nominal GDP usually increases over time because:1. production increases…2. prices increase...
Real GDP is constructed as the sum of the quantities of final goods times constant (rather than current) prices.
Nominal and Real GDP
Using 1996 dollars to compute real GDP, then:
Year Quantity of Cars
Price of cars(in ,000)
Nominal GDP
1995 10 $20 $200
1996 12 $24 $288
1997 13 $26 $338
Year Quantity of Cars
Price of cars(in ,000)
Nominal GDP
1995 10 $24 $240
1996 12 $24 $288
1997 13 $24 $312
Nominal and Real GDP Nominal GDP is also called
dollar GDP GDP in current dollars
Real GDP is also called GDP in constant dollars GDP adjusted for inflation GDP in 1996 dollars
Nominal and Real GDP
From 1960 to 2000, nominal GDP increased by a factor of 19. Real GDP increased by a factor of 4.
Nominal and Real Nominal and Real GDP U.S. GDP, GDP U.S. GDP, 1960-20001960-2000
“GDP is obviously the most important macroeconomic variable.” (?)
Two other variables that inform us on other important aspects of how an economy is performing:
1. Unemployment2. Inflation
The Unemployment Rate
labor force = employed + unemployed L = N + U
Unemployment rate:L
Uu
The Inflation Rate The inflation rate is the rate at
which the price level changes (typically increases).
Two ways to measure inflation: GDP Deflator CPI
The GDP Deflator
The rate of change in the GDP deflator equals the rate of inflation:
PY
Ytt
t
nom ina l G D P
rea l G D Pt
t
$
( )P P
Pt t
t
1
1
The Consumer Price Index
The GDP deflator measures the average price of domestic output, while the consumer price index (CPI) measures the average price of consumption (the cost of living).
The composition of the CPI’s “basket”
16.2%
40.0%
4.5%
17.6%5.8% 5.9%
2.8%
2.5%
4.8%
Food and bev.
Housing
Apparel
Transportation
Medical care
Recreation
Education
Communication
Other goods andservices
Measurement Issues - CPI
The ‘average’ (?) consumption basket.
Accounting for quality of products. Updating the consumption basket
over time. Substitution of cheaper goods for
more expensive ones (or vice versa).
The CPI and the GDP Deflator
The inflation rates, computed using either the CPI or the GDP deflator, are largely similar.
Effects of InflationEffects of Inflation
Inflation makes buyers poorer. Inflation makes sellers richer. Since most people are both buyers
(as consumers) and sellers (as owners of factors of production), the average person’s income and wealth should not change because of inflation.
Inflation Redistributes IncomeInflation Redistributes Income
Inflation redistributes income from those who cannot raise their prices to those who can. People do not raise prices if inflation is
unanticipated. People can not raise their prices if they are
fixed by a contract. Inflation redistributes income from
lenders to borrowers
Dead-Weight Costs of InflationDead-Weight Costs of Inflation
Informational Costs Uncertainty Costs Menu Costs Shoe-leather Costs
A Road-Map for the course
Output is determined by: demand in the short run, say, a few years, the level of technology, the capital stock, and
the labor force in the medium run, say, a decade or so.
factors such as education, research, saving, and the quality of government in the long run, say, a half century or more.