Macroeconomic StatisticsDefinition of Macroeconomics

Calculating GDP

Statistics & Policy

Statistics & Models

Business Cycle

Calculating Inflation

Calculating Unemployment

Types of Economic Indicators

Macroeconomics - Overview

Macroeconomics is the study of how the economy as a whole should function. In contrast to microeconomics, focused on individuals and companies, macroeconomics focuses on the large economic issues that face society.

Macroeconomics is more than just a study of large-scale economic systems – the aggregate economy, according to economists. Macroeconomics at its core is debate about modern philosophy – it asks the age-old questions about how society should operate.

Similar to classical philosophy, the study of macroeconomics is based on constant questions – Why is something done? Who must bear the costs? Who receives the benefits? What are the short-run and long-run effects?

Areas of Study

Macroeconomics covers more participants than studied in microeconomics. While it examines people and companies, it considers them as groups, not individuals.

The focus of macroeconomics is government policy – the legal system, fiscal policy (taxing and spending) and monetary policy (money and banking) – and how these things affect companies and individuals.

In addition macroeconomics includes international economics. The force of globalization have turned issues of national economies into international issues – governments not only think about exchange rates and trade in terms of globalization, but also levels of taxation, spending and banking systems.

Macroeconomic Issues

Macroeconomics is primarily focused on three issues:

•Economic Growth – both creating opportunities for and sustaining the growth of economies. The goal of economic growth is not just to create more stuff, but to improve peoples’ standard of living.

•Unemployment – reducing the economic and social impact of “involuntary” unemployment. Economist view involuntary unemployment as a waste of resources – it is time that wasted.

•Inflation – control the rate at which money loses its value in terms of its purchasing power. Inflation robs people of the value of their money and investments.

Macroeconomic Issues & Statistics

Economist track the three macroeconomic issues using statistics:

•Economic Growth – Changes in Gross Domestic Product (GDP) and GDP per capita.

•Inflation – The rate at which the price level (averaging of prices in the economy) is changing – this involves converting nominal prices into real prices.

•Unemployment – The unemployment rate – percentage of the labor force unable to find employment.

Most of the time inflation is an issue at the peak of the business cycle and unemployment is an issue in the trough of the business cycle. Simultaneous inflation and unemployment is a clear sign of a dysfunctional economy – such as the Stagflation period in the 1970’s.

Economic Statistics & Economic Policy

The core of macroeconomics is the issue of government policy in the economy – “should the government be involved in influencing the economy, if so, how should it influence the economy and by how much?” is the core question.

This is a philosophical question that has real implications to how people live their lives. While nobody has a definitive answer, economists try to answer the question by using economic theory, models and statistics.

Economic statistics are the way economists measure and justify macroeconomic policy.

Understanding how and why economist use statistics, and what are the limitations to these statistics is important to any fundamental understating of economics.

Economics and Reasoning Skills

When analyzing the economy, economists use the three basic reasoning skills – generalization, cause & effect and comparison.

•Generalization – Used in analyzing statistics - How well do the statistics represent the whole economic phenomenon being analyzed?

•Cause & Effect – Used in analyzing economic models - How clear are the connections between the two parts of the economy.

•Comparison – Used in analyzing economic policy - How similar, and in what way, is this economic event similar to other economic events?

Basic Macroeconomic Model

The macroeconomy can be summed up in a basic model that is comprised of the components of the economy. This model takes the form:

Y = C + I + G + NXY = Gross Domestic Product (Total value of everything produce in the economy)

C = ConsumptionI = InvestmentG = Government government spending minus taxes NX = Net Exports exports minus imports

This simple model can be used to gain a number of insights into the working of the macroeconomy. The model clearly shows the parts of the economy economists watch when trying to predict future GDP. If there is a change in consumption, investment, government spending or net exports, it will affect GDP.

What do you see in the picture?

Statistics & Models

Economists look at the economy in a manner similar to how you view this picture - while the subject of the picture is not immediately apparent, you can fit the bits information available into a mental representation of the world to figure out it is a picture of a dog.

This process is similar to how economists analyze the economy by fitting economic statistics into models they make of the economy – such as the basic macroeconomic model: Y = C + I + G + NX

Economist can use statistical data in connection with a model to understand the economy. Models help separate the “signal from the noise” in a world with a lot of noise.

Example of a Complex Economic ModelThis is an equation of a economic model of consumption that explains how people decide to how much to spend on consumption. Can you understand it and does it make sense? Don’t think of it as a “math problem” to be solved – think of it as a “number sentence” that expresses an idea in the language of math.

It explains how people’s current consumption decisions are based on past and future consumption habits factoring in a willingness to change their consumption habits in response to interest rates and future inflation. This model is useful for Central Banks that control the interest rate – through it they can affect the economy.

Measuring GDP

The Gross Domestic Product (GDP) is defined as the total market value of the final goods and services produced within the borders of a nation. This number is generally used as a measure of the total size of an economy. The Gross National Product (GNP) measures the total output of the citizens of a country – this measure is less used now because of issues of globalization.

Economists generally focus on GDP because it represents economic activity in a region, rather than a group of citizens who might be working in several regions.

GDP is measured in both nominal and real, adjusted for inflation amounts. Typically, economists pay more attention to the Real GDP since it more accurately shows changes in output – since it factors out inflation.

Calculating GDP

The United States government uses national income accounting to measure GDP. This method of calculation involves adding up the total value of all the final goods and services produced within the country in one year.

The Bureau of Economic Analysis calculates the GDP for the United States.

The current GDP for the United States about $ 17 trillion – largest economy in the world.

The growth of the economy is measured as a percentage of GDP. A 3% growth rate for the United States is a good rate of growth.

In its most recent quarter (Q2), the United States grew at an annual rate of 4% (note the negative growth in Q1).

Source: FRBSF 8/14

Problems with GDP Accounting

GDP accounting provides a rough measure of the economy because it is incomplete as it does not account for many economic activities that improve national welfare and does not account for events that destroy economic welfare. GDP does not account for:

•Improved product quality – new iphones have the same price as the iphones sold years ago when they were new. Because the price has not change GDP counts old and new iphones the same – it does not mark improved quality.

•Non-Market transactions – work not paid for or part of the “underground” economy.

•The value of leisure – GDP values time working over time not working – even though not working may be more valuable to national welfare.

•Environmental damage – GDP does not account for loss of environmental resources.

•Government spending is accounted at cost, not value created.

                                                              

When making economic predictions economists look at the long-term trend of GDP growth and use that as the basis for future forecasts. While the future can be different from the historical trend, this historical trend provides a “baseline” by which to gauge growth prospects. The graph below shows a trend line imposed on historical GDP data.

GDP Data Broken down into Model Components

Basic Macroeconomic Model: Y = C + I + G + NX

Year GDP(Y)

Consumption(C)

Investment(I)

Government (G)

Net Exports(NX)

1940 101.3 71.2 13.6 15.1 1.4

1950 294.3 192.7 54.1 46.9 0.7

1960 527.4 332.3 78.9 113.8 2.4

1970 1,039.7 648.9 152.4 237.1 1.2

1980 2,795.6 1,762.9 477.9 569.7 -14.0

1990 5,803.2 3,831.5 861.7 1,181.4 -71.4

2000 9,824.6 6,883.7 1,755.4 1,751.0 -365.5

2001 10,082.2 6,987.0 1,586.0 1,858.0 -348.9

2002 10,446.2 7,303.7 1,593.2 1,972.9 -423.6

Analysis & Business Cycle

Economic analysis involves using mathematical models to analyzing statistics to determine the future path of the economy.

Models project a growth trend based on historical evidence that follows trend for “full employment” and “non-inflationary growth”.

Economists analyze how the economy passes through the business cycle of recovery and recession by tracking how economic statistics change in their model of the economy.

The passage of the economy through recession and recovery is “officially” done by the National Bureau of Economic Research, which officially declared the recession over in the second quarter of 2009 – the point when GDP was at the bottom of the trough. Technically, the economy is not in recession. The reason it still “feels like a recession” is because economic growth has been so weak.

The depth of a recession can be measured as the difference between actual and potential GDP (Based on the historic trend). Economists call this the Output Gap in GDP. The output gap is shown in the graph below – note the depth of the recession.

Output Gap

Updated Output Gap – July 2011

This is the Congressional Budget Office’s chart of the output gap based on the revised July 2011 GDP numbers. The revised numbers show the recession was deeper than previously reported.

Output Gap – Will Actual GDP pull down Potential GDP?

There is a concern among economists that the prolonged recession that began with the economic crisis in 2008 has opened up such a large output gap that it may pull down potential GDP.

Calculating Inflation

The way government calculates inflation is by calculating a price index based on comparing the nominal prices for the same basket of goods on different years. In this calculation, one year is established as a “base year” and changes in prices are measured against that year. The index calculated is a percentage – rate of inflation. This is the equation:

Price Index =Price of Basket - specific year * 100

Price of Basket - base year

The Bureau of Labor Statistics calculates the Consumer Price Index (CPI) and the Producer Price Index (PPI), through price check surveys, that are used to measure inflation in the United States. This is the equation for calculating inflation:

Inflation = [(CPI2 – CPI1)/ CPI1 ] * 100

Inflation measures the percentage increase in the price level. Inflation has been low throughout this recession and is expected to stay low. A 2% inflation rate is good. The current rate of inflation is 2% is the “ideal rate”

CPI Inflation – 2003 to 2013

Source: Bureau of Labor Statistics

Headline and Core Inflation

Economist separate inflation into two categories:

•Headline – The measure of inflation that is reported in the news (hence the name), which is rate of inflation based on the CPI.

•Core – The measure of inflation that excludes the influence of energy and food prices. Energy and food prices tend to be more volatile than prices for other goods and services.

When making policy, economists tend to focus on core inflation numbers since they indicate the effect on inflation on the whole economy. While headline inflation can sometimes be an indication of future inflation, since energy an food prices affect the whole economy, it takes time for their affects to pass into the wider economy.

Historic Relationship - Headline and Core Inflation

Notice that the core price index reflects the overall price index, but is less volatile.

Calculating Real GDP and Per Capita GDP

The price index can be used to calculate real GDP. Basically, this is adjusting nominal GDP for the effects of inflation. The equation for doing this is:

Real GDP = nominal GDP

price index (in hundredths)

Real Per Capita GDP, which measures GDP in relation to the population is calculated by dividing GDP by the population:

GDP per Capita = GDP / Population

This number can be a truer measure of economic growth because is accounts for inflation and population change – it shows whether a population is really materially better off.

Unemployment

Unemployment is a psychological, social and economic problem. The economic problem is that it represents economic resources (human labor) that are not being utilized, which means that society is poorer than it otherwise would have been.

Unemployment statistics are based on the number of people in the labor force – not the population. The Bureau of Labor Statistics calculates the unemployment rate for the United States based on interviews with 60,000 households. It sorts the respondents into three categories:

•Employed – person who has a job

•Unemployed – did not have a job, but was actively looking.

•Not in Labor Force – students, non-working spouses, retires and “discouraged workers” – gave up on finding a job.

Calculating the Rate of Unemployment

The unemployment rate only accounts for the number of people in the labor force who are actively seeking employment but cannot find a job. The labor force is the sum of people employed and unemployed. Discouraged workers do not count as unemployed since they are not in the labor force. For this reason, the unemployment rate may understate the level of unemployment.

The unemployment rate is calculated by dividing the number of unemployed by the number of people in the labor force.

Unemployment Rate = Number of Unemployed

Labor Force

Most economists consider a 4% unemployment rate to be the full employment rate for the economy. Currently the unemployment rate is 6.1% - significantly higher than full employment – 6 years after the beginning of the financial crisis. “Why?” is the big question and debate among economists.

Unemployment – 2003 to 2014

Types of Unemployment

Economists divide unemployment into four categories.

•Frictional – unemployment created by people quitting to find better jobs or employers fire people to find better employees.

•Seasonal – unemployment caused by seasonal variation in industries (i.e. life guards and ski instructors)

•Cyclical – unemployment caused by changes in the business cycle – when cyclical unemployment is zero, the economy is considered at full employment.

•Structural – unemployment caused by structural changes in the economy that affect entire industries or types of jobs.

Macroeconomic policy focuses on the last two types of unemployment – Cyclical and Structural.

Employment, Unemployment & the Whole Population

Persistent high unemployment has been a major problem in the current recession – the reason the feeling of recession has continued for so long is that job growth has been very low – the debate hinges on whether the economy has undergone a “structural change” in which they types of new jobs are different than the old types of jobs which were lost.

How to “jump-start” job growth is a major point of debate.

Job Recovery - Weak

Millions of jobs have been created since the recession ended – however, this is only part of the millions more that were lost in the recession – the number of currently employed is still less than that in 2008

Types of Economic Indicators

The difficulty in using economic statistics in predicting the future of the economy is that the data is “old” – the economy has changed by the time the data has been reported. Because of the time lag in getting data, policy based on old data can be poorly timed.

For this reason, economists use specific types of statistics as indicators or where the economy is going, is, and has been. These statistics are categorized as:

•Leading indicators – statistics that turn in advance of changes in the economy

•Coincidence indicators – statistics that change with the economy and can be used as a reference point for the business cycle

•Lagging indicators – statistics that follow changes in the economy.

Leading Indicators – Statistics that indicate the future

The Conference Board releases a monthly index of ten statistics that provide indications of future changes in GDP. These are indicators and relationship to changes in GDP:

Length of average workweek - Positive

Initial claims for unemployment – Negative

New orders for consumer goods - Positive

Vendor performance or Timeliness of Deliveries - Negative

New orders of capital goods - Positive

Building permits for new houses - Positive

Stock prices - Positive

Money Supply (M2) - Positive

Consumer Expectations - Positive

Other Sources of Leading Economic Indicators

Beige Book - Federal Reserve Board publishes this document eight times a year in preparation for the Federal Open Market Committee meeting. It contains a mixture of statistics and anecdotal evidence from around the United States.

Business Outlook Survey - Federal Reserve Bank of Philadelphia

Existing Home Sales - National Association of Realtors

Stock and Bond Markets

and interest rates

can show the business cycle.

Coincidence Indicators

These statistics move in time with the business cycle and are indicators of current change.

•Employees on nonagricultural payrolls

•Personal income

•Index of industrial production

•Manufacturing and trade sales

These statistics can be found on the web pages for the Bureau of Labor Statistics and the Bureau or Economic Analysis.

Lagging Indicators

These are indicators that follow behind the business cycle and are useful for confirming that a change in economy has happened – i.e. past the worst point in a recession.

•Average duration of unemployment

•Ratio of business inventories to sales

•Change in manufacturing cost per unit of output

•Average prime interest rate changed by banks

•Value of commercial and industrial loans outstanding

•Consumer Price Index for services