Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #1 Chapter Topics Aggregate Output The...

Chapter 2: A Tour of the Book Slide #1Blanchard: Macroeconomics

Chapter TopicsChapter Topics

Aggregate Output

The Other Major Macroeconomic Variables


Aggregate OutputAggregate Output

Gross Domestic Product (GDP) The value of the final goods and services

produced in an economy during a given period

Y = C + I + G + X - Im

Aggregate Output (national income and product accounts, or NIPA)Aggregate Output (national income and product accounts, or NIPA)



1) Final good

2) Value added

3) Income

Defining GDP: Three ApproachesDefining GDP: Three Approaches



Firm 1: Steel Company

Revenues from sales $100Expenses (wages) $80Profit $20

Firm 2: Car CompanyRevenues from sales $210Expenses $170

Wages $70Steel purchases $100

Profit $40

What is GDP?$310 or $210

GDP: The final goods approach



($110) cars added value ($100) steel added Value

($210) GDP

Two Firm ExampleTwo Firm Example



GDP from the income side

income capital

income labor

taxes indirect (income) GDP

Defining GDPDefining GDP


Income (steel) Labor = $80 Capital = $20

$100

Income (car) Labor = $70 Capital = $40

$110

$210 $110 $100 (income) GDP


($110) car added value

($100) steel added value -$210)-added (value GDP

Compared to:



GDP = Price x Quantity of final goods produced

If price increases and quantity remains constant, the $ value of final output increases. But real output hasn’t changed.

Nominal & Real GDPNominal & Real GDP


Nominal and RealNominal and RealU.S. GDP, 1960-1998U.S. GDP, 1960-1998



Real GDP = value of final goods in constant prices

The increase in real GDP is less than nominal GDP when prices are rising

More variation in real GDP than nominal GDP

ObservationsObservations



Real GDP GDP in terms of goods GDP in constant dollars GDP adjusted for inflation GDP in 1992 dollars

Synonyms for GDP AccountingSynonyms for GDP Accounting



GDP -- refers to real GDP

Yt -- real GDP in year t

$GDP -- nominal GDP

$Yt = nominal GDP in year t

Technical Notes: For the CourseTechnical Notes: For the Course


The Other MajorThe Other MajorMacroeconomic VariablesMacroeconomic Variables

)( force labor

)( unemployed number )( Rate ntUnemployme

L

Uu

)(unemployed )( employed )( Force Labor UNL

The Unemployment RateThe Unemployment Rate


Current population survey 60,000 households monthly Employed -- job holders Unemployed -- job seekers


Counting the UnemployedCounting the Unemployed


1998

)6.2( )( 131.4

)( 6.2 4.5%

6.2

131.4

UN

Uu

U

N


Counting the UnemployedCounting the Unemployed


Unemployed and Discouraged Workers

)(16 population adult

)( force labor Rate ionParticipat

L


Macro TermsMacro Terms



Okun’s Law High output growth -- reduces

unemployment Low output growth -- increases

unemployment

Unemployment and Economic ActivityUnemployment and Economic Activity


Change in the U.S. Unemployment Rate Change in the U.S. Unemployment Rate versus U.S. GDP Growth 1960 - 1998versus U.S. GDP Growth 1960 - 1998



The Inflation Rate A sustained rise in the price level

Two Measures of the Price Level GDP Deflator Consumer Price Index (CPI)



Average price of final goods produced

GDP deflator in year t = Pt

t

t

t

tt Y

$YP

GDP Real

GDP nominal

The GDP DeflatorThe GDP Deflator



Pt is an index number

• P1993 = 102.6 (1992 = 100)

Index numbers are used to measure rate of change over time

t 1- t

1- t t PP

PP

%

inflation of Rate




t

t t Y

YP

$

ttt YP Y $




Average prices of goods consumed

The CPI is not equal to the GDP deflator Some final goods are sold to business,

government, and foreigners Some consumer goods are imported

The Consumer Price Index (CPI)The Consumer Price Index (CPI)



1) Consumer expenditure survey to determine a market basket of items

2) Bureau of labor statistics (BLS) field workers price the items monthly (85 cities, 22,000 stores)

3) A base period is chosen, currently 1982-84

4) End 2001 CPI = 177.4 (1982-84 = 100) A basket of goods that cost $100 in 1982 – 84 cost

$177.40 at end of 2001. The price of the representative consumer good

increased by 77.4% over this period.

Steps in Calculating the CPISteps in Calculating the CPI


Inflation Rate, Using the CPIInflation Rate, Using the CPIand the GDP Deflator, 1960, 1998and the GDP Deflator, 1960, 1998


Change in the U.S. Inflation Rate versus Change in the U.S. Inflation Rate versus the U.S. Unemployment Rate, 1970-1998the U.S. Unemployment Rate, 1970-1998



Low unemployment --inflation rate increases

High unemployment -- inflation rate decreases

The Phillips CurveThe Phillips Curve


What determines the level of aggregate output? Demand? Supply? Government, education, and savings?

• Short-run (a few years) demand

• Medium-run (10+ years) supply

• Long-run (50+ years) government, education, savings

The Central Question of MacroeconomicsThe Central Question of Macroeconomics


A Road MapA Road Map

What determines the level of aggregate output? Short-run (a few years) -- demand Medium-run (10+ years) -- supply Long-run (50+ years) -- government,

education, savings

The Central Question of MacroeconomicsThe Central Question of Macroeconomics

Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #1 Chapter Topics Aggregate Output The...

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