Macroeconomic Measurement and Business Cyclesfaculty.missouri.edu/~hedlunda/teaching/2015fall...2...
Transcript of Macroeconomic Measurement and Business Cyclesfaculty.missouri.edu/~hedlunda/teaching/2015fall...2...
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Macroeconomic Measurement and Business Cycles
Economics 4353 - Intermediate Macroeconomics
Aaron Hedlund
University of Missouri
Fall 2015
Econ 4353 (University of Missouri) Measurement and Business Cycles Fall 2015 1 / 22
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NIPA and GDP Accounting
GDP is measured quarterly as part of the National Income andProduct Accounts (NIPA).
I Data published by the Bureau of Economic Analysis athttp://www.bea.gov.
Output includes goods and services, where goods can be stored ininventory, and services cannot.
GDP only measures final goods and services.
Three approaches:1 Product approach
2 Expenditure approach
3 Income approach
Econ 4353 (University of Missouri) Measurement and Business Cycles Fall 2015 2 / 22
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A Fictional Economy Example
An island economy consists of a coconut producer, a restaurant,consumers, and the government.
The coconut producer owns the trees and employs workers to harvestthe coconuts. The producer sells these coconuts to consumers andrestaurants and pays taxes to the government.
The restaurant purchases coconuts and hires workers to sell meals toconsumers. The restaurant also pays taxes.
The government employs an army to provide national defense.
Econ 4353 (University of Missouri) Measurement and Business Cycles Fall 2015 3 / 22
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Computing GDP Using the Production Approach
Coconut Producer
Total Revenue $20 million
Wages $5 million
Loan Interest $0.5 million
Taxes $1.5 million
Restaurant
Total Revenue $30 million
Cost of Coconuts $12 million
Wages $4 million
Taxes $3 million
After-Tax Profits
Coconut Producer $13 million
Restaurant $11 million
Government
Tax Revenue $5.5 million
Wages $5.5 million
Consumers
Wage Income $14.5 million
Interest Income $0.5 million
Taxes $1 million
Distributed Profits $24 million
Coconut Expenditures $8 million
Restaurant Expenditures $30 million
Value added = revenue − cost ofintermediate goods.
Nominal GDP = sum of value added toall industries.
Value added in this fictional economyis:
I Coconuts: $20 million.
I Restaurant food: $30 million − $12million = $18 million.
I Government: $5.5 million.
GDP is $43.5 million.
Econ 4353 (University of Missouri) Measurement and Business Cycles Fall 2015 4 / 22
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Computing GDP Using the Expenditure Approach
Coconut Producer
Total Revenue $20 million
Wages $5 million
Loan Interest $0.5 million
Taxes $1.5 million
Restaurant
Total Revenue $30 million
Cost of Coconuts $12 million
Wages $4 million
Taxes $3 million
After-Tax Profits
Coconut Producer $13 million
Restaurant $11 million
Government
Tax Revenue $5.5 million
Wages $5.5 million
Consumers
Wage Income $14.5 million
Interest Income $0.5 million
Taxes $1 million
Distributed Profits $24 million
Coconut Expenditures $8 million
Restaurant Expenditures $30 million
GDP = total expenditures =C + I + G + NX .
Total expenditures:I Consumption: $8 million in coconuts
+ $30 million at restaurants.
I Investment: 0
I Government expenditures: $5.5million.
I Net exports: 0
GDP is $43.5 million.
Econ 4353 (University of Missouri) Measurement and Business Cycles Fall 2015 5 / 22
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Computing GDP Using the Income Approach
Coconut Producer
Total Revenue $20 million
Wages $5 million
Loan Interest $0.5 million
Taxes $1.5 million
Restaurant
Total Revenue $30 million
Cost of Coconuts $12 million
Wages $4 million
Taxes $3 million
After-Tax Profits
Coconut Producer $13 million
Restaurant $11 million
Government
Tax Revenue $5.5 million
Wages $5.5 million
Consumers
Wage Income $14.5 million
Interest Income $0.5 million
Taxes $1 million
Distributed Profits $24 million
Coconut Expenditures $8 million
Restaurant Expenditures $30 million
GDP = total income received byeconomic agents contributing toproduction.
Total income:I Wage income: $14.5 million.
I After-tax profits: $24 million.
I Interest income: $0.5 million.
I Taxes: $4.5 million
GDP is $43.5 million.
Econ 4353 (University of Missouri) Measurement and Business Cycles Fall 2015 6 / 22
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A Few Remarks
GNP measures the value of output produced by domestic factors ofproduction, regardless of where the production takes place.
I Example: a Nike plant in Southeast Asia vs. a Honda plant in Ohio.
GNP = GDP + NFP. GDP2002 = $10, 446.2 billion,GNP2002 = $10, 436.7 billion ⇒ NFP2002 = −$9.5 billion.
No market prices for government production, so value imputed at costof inputs.
GDP does not capture the underground economy or householdproduction.
I Household production is goods and services produced and consumed(or invested) within a household. No market prices to impute value.
I Example: owner occupied housing vs. renting out your house.
Econ 4353 (University of Missouri) Measurement and Business Cycles Fall 2015 7 / 22
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The Components of Aggregate Expenditure
Consumption augments currentmaterial living standards.
I Types of consumption: durable goods,nondurable goods, and services.
Investment augments the futureproduction of output.
I Types of investment: nonresidentialfixed, residential fixed, and inventories.
The distinction between consumptionand investment not always clean cut.
Econ 4353 (University of Missouri) Measurement and Business Cycles Fall 2015 8 / 22
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The Components of Aggregate Expenditure
Investment is a flow variable that adds new capitalgoods and services to the existing capital stock.
Kt+1 = (1− δ)Kt + It
Capital refers to a durable factor of productionand inventories.
I Types: physical capital (machinery, computers,buildings, roads, etc.), human capital, intangiblecapital, etc.
I Major measurement difficulties.
I Financial assets are often lumped together withcapital but are actually claims to future objects.
Econ 4353 (University of Missouri) Measurement and Business Cycles Fall 2015 9 / 22
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The Distribution of National Income
Employees’ compensation: wages, salaries, and fringe benefits.
Proprietors’ income: income of noncorporate business.
Rental income: income that landlords receive from renting.
Corporate profits: income after payments to workers and creditors.
Net interest: interest paid by domestic businesses and foreigners.
Econ 4353 (University of Missouri) Measurement and Business Cycles Fall 2015 10 / 22
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Nominal and Real GDP and Price Indices
A price index is a weighted average of the prices of a basket of goodsand services that gives a measure of the price level.
Allows us to measure the inflation rate and thus decompose changesin nominal GDP into real and nominal changes.
An example to calculate nominal GDP growth:
Data for Real GDP Example
Apples Oranges
Quantity in year 1 Qa1 = 50 Qo
1 = 100
Price in year 1 Pa1 = $1.00 Po
1 = $0.80
Quantity in year 2 Qa2 = 80 Qo
2 = 120
Price in year 2 Pa2 = $1.25 Po
2 = $1.60
GDP1 = Pa1Q
a1 + Po
1Qo1 = $130
GDP2 = Pa2Q
a2 + Po
2Qo2 = $292
%∆GDP =
(GDP2
GDP1− 1
)× 100% = 125%
Econ 4353 (University of Missouri) Measurement and Business Cycles Fall 2015 11 / 22
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A Real GDP Example
Data for Real GDP Example
Apples Oranges
Quantity in year 1 Qa1 = 50 Qo
1 = 100
Price in year 1 Pa1 = $1.00 Po
1 = $0.80
Quantity in year 2 Qa2 = 80 Qo
2 = 120
Price in year 2 Pa2 = $1.25 Po
2 = $1.60
Calculate real GDP growth using year 1 as the base year:
RGDP11 = GDP1,RGDP1
2 = Pa1Q
a2 + Po
1Qo2 = $176
g1 =
(RGDP1
2
RGDP11
− 1
)× 100% = 35.4%
Calculate real GDP growth using year 2 as the base year:RGDP2
2 = GDP2,RGDP21 = Pa
2Qa1 + Po
2Qo1 = $222.50
g2 =
(RGDP2
2
RGDP21
− 1
)× 100% = 31.2%
Chain-weighting helps correct for relative price changes:gc =
(√(1 + g1)(1 + g2)− 1
)× 100% = 33.3%
Econ 4353 (University of Missouri) Measurement and Business Cycles Fall 2015 12 / 22
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Measures of the Price Level
Two common price level measures: implicit GDP price deflator andconsumer price index (CPI).
Implicit GDP price deflator =Nominal GDP
Real GDP× 100
Current year CPI =
∑i P
icurrentQ
ibase∑
i PibaseQ
ibase
× 100
Econ 4353 (University of Missouri) Measurement and Business Cycles Fall 2015 13 / 22
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Measurement Problems
Inflation calculations can differ substantially depending on whetherthe CPI or the GDP deflator is used.
Major implications for credit and labor contracts as well as formonetary policy.
Three problems:1 Relative prices change over time.
⋆ Substitution effect is ignored by CPI.
⋆ Boskin Commission attributed substantial upward bias to CPI.
⋆ Implications for taxes, Social Security payments, etc.
2 Improvements in the quality of goods.
3 New goods that did not previously exist.
Econ 4353 (University of Missouri) Measurement and Business Cycles Fall 2015 14 / 22
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Savings, Wealth, and Capital
Private disposable income Y d = Y + NFP + TR + INT − T .
Private sector savingSp = Y d − C = Y + NFP + TR + INT − T − C .
Government saving Sg = T − TR − INT − G . Government deficitD = −Sg .
National savingS = Sp + Sg = Y + NFP − C − G = GNP − C − G .
Y = C + I + G + NX ⇒ S = I + NX + NFP = I + CA.
Econ 4353 (University of Missouri) Measurement and Business Cycles Fall 2015 15 / 22
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Labor Market Measurement
People divided into three groups:1 Employed— part-time and full-time workers during the past week.
2 Unemployed— those who were not employed during the past weekbut actively searching for work at some time during the last 4 weeks.
3 Not in the labor force— those neither employed nor unemployed.
Unemployment rate =Number unemployed
Labor force
Participation rate =Labor force
Working age population
Unemployment is a useful measure of labor market tightness, buttwo measurement problems:
1 The unemployment rate does not count discouraged workers.
2 The unemployment rate does not adjust for search intensity.
Econ 4353 (University of Missouri) Measurement and Business Cycles Fall 2015 16 / 22
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Business Cycles
Business cycles are fluctuations of the economy about a trend.
Different ways to compute trends: linear regression, Kalman filter,Hodrick-Prescott filter, etc.
The H-P filter divides a time series yt into cyclical and growthcomponents, yt = y ct + ygt , where ygt is chosen to solve, for a given λ,
min{yg
t }
T∑t=1
(y ct )2 + λ
T∑t=1
[(ygt+1 − ygt )− (ygt − ygt−1)]2
Periods of below-trend growth (negative cyclical component) differfrom periods of recession as defined by the NBER.
Econ 4353 (University of Missouri) Measurement and Business Cycles Fall 2015 17 / 22
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Business Cycles
Econ 4353 (University of Missouri) Measurement and Business Cycles Fall 2015 18 / 22
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Business Cycles
Business cycle analysis studies the properties of the cyclicalcomponents of different time series and their co-movements.
Objects of interest:1 Volatilities (both absolute and relative to GDP).
2 Whether a series is procyclical, countercyclical, or acyclical.
3 Whether a series is a leading or lagging indicator.
Econ 4353 (University of Missouri) Measurement and Business Cycles Fall 2015 19 / 22
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Business Cycles
Econ 4353 (University of Missouri) Measurement and Business Cycles Fall 2015 20 / 22
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Business Cycles
Econ 4353 (University of Missouri) Measurement and Business Cycles Fall 2015 21 / 22
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Co-movement Summary
Correlations and Standard Deviations of Cyclical Components
Correlation Standard Deviation (% of S.D. of GDP)
Consumption 0.76 75.6%
Investment 0.83 469.2%
Price Level -0.26 57.6%
Money Supply 0.38 77.9%
Employment 0.81 59.3%
Average Labor Productivity 0.83 62.8%
Summary of Business Cycle Facts
Cyclicality Lead/Lag Variability Relative to GDP
Consumption Procyclical Coincident Smaller
Investment Procyclical Coincident Larger
Price Level Countercyclical Coincident Smaller
Money Supply Procyclical Leading Smaller
Employment Procyclical Lagging Smaller
Real Wage Procyclical ? ?
Average Labor Productivity Procyclical Coincident Smaller
Econ 4353 (University of Missouri) Measurement and Business Cycles Fall 2015 22 / 22