The data of macroeconomics

Measuring the Cost of Living: The Consumer Price Index
2-3 Measuring Joblessness: The Unemployment Rate
2-4 Conclusion: From Economic Statistics to
Economic Models

02. The Data of Macroeconomics

GDP

U

CPI

before one has data.
Sherlock Holmes
We focus on the three statistics:
GDP
tells us the nation’s total income and the total expenditure on its output of G&S.
CPI
measures the level of prices.
U
tells us the fraction of workers who are unemployed.

Policymakers use them to
monitor developments;
formulate policies.

Economists use statistics to
study the economy

statistics.
Income must equal expenditure.
When Baurzhan paints Gaukhar’s house for $1,000, that $1,000 is
income to Baurzhan and
expenditure by Gaukhar.
To understand GDP more fully,
we turn to national income accounting:
the accounting system used to measure
GDP and
many related statistics.

Expenditure, and the Circular Flow
Rules for Computing GDP
Real GDP Versus Nominal GDP;The GDP Deflator

time,
A flow is a quantity measured per unit of time.
The bathtub contains 50 gallons of water
but that
Water is coming out of the faucet at 5 gallons per minute.

STOCKS AND FLOWS

We measure
stocks
and
flows
in
different units.

flows.
The number of unemployed people is a stock;
the number of people losing their jobs is a flow.
The amount of capital in the economy is a stock;
the amount of investment is a flow.
The government debt is a stock;
the government budget deficit is a flow.

Questions

flows.
The number of unemployed people is a stock;
the number of people losing their jobs is a flow.
The amount of capital in the economy is a stock;
the amount of investment is a flow.
The government debt is a stock;
the government budget deficit is a flow.

Answers

Oranges × Quantity of Oranges)
= ($0.50 × 4) + ($1.00 × 3) = $5.00.
Used Goods
GDP measures the value of currently produced G&S.
The Treatment of Inventories
If produced G&S spoil, it does not alter GDP.
If produced G&S is put into inventory, GDP rises.

2.1 Gross Domestic Product

Income, Expenditure, and the Circular Flow
Rules for Computing GDP
Real GDP Versus Nominal GDP;The GDP Deflator

GDP is
1) the market value of
2) all final G&S
3) produced within an economy
4) in a given period of time.

G&S produced.
Examle
A cattle rancher sells meat to McDonald’s for $1, and then
McDonald’s sells you a hamburger for $3.
The value added of the rancher is $1, and
the value added of McDonald’s is $2 or $3 – $1,
Total value added is $1 + $2 = $3.

2.1 Measuring the Value of Economic Activity: Gross Domestic Product

Income, Expenditure, and the Circular Flow
Rules for Computing GDP
Real GDP Versus Nominal GDP;The GDP Deflator

GDP = $4 (1+3)
or
GDP = $3 ?

The value added of a firm equals (=)
the value of the firm’s OUTPUT less (-)
the value of the intermediate goods that the firm purchases

marketplace and
do not have market prices.
For GDP, we must use an estimate of their value.
Such an estimate is called an IMPUTED VALUE.

2.1 Measuring the Value of Economic Activity: Gross Domestic Product

Income, Expenditure, and the Circular Flow
Rules for Computing GDP
Real GDP Versus Nominal GDP;The GDP Deflator

Expenditure, and the Circular Flow
Rules for Computing GDP
Real GDP Versus Nominal GDP;The GDP Deflator
Chain-Weighted Measures of Real GDP
The Components of Expenditure
Other Measures of Income; Seasonal Adjustment

countries.
The imperfections remains fairly constant over time =>
GDP is USEFUL for comparing economic activity from year to year.

2.1 Measuring the Value of Economic Activity: Gross Domestic Product

Income, Expenditure, and the Circular Flow
Rules for Computing GDP
Real GDP Versus Nominal GDP;The GDP Deflator
Chain-Weighted Measures of Real GDP
The Components of Expenditure
Other Measures of Income; Seasonal Adjustment

would be
Real GDP = (2011 Price of Apples × 2011 Quantity of Apples)
+ (2011 Price of Oranges × 2011 Quantity of Oranges).
Real GDP in 2012 would be
Real GDP = (_______ Price of Apples × _____ Quantity of Apples)
+ (2011 Price of Oranges × 2012 Quantity of Oranges).
Real GDP in 2013 would be
Real GDP = (_____ Price of Apples × _________ Quantity of Apples)
+ (_______ Price of Oranges × _______ Quantity of Oranges).

2.1 Measuring the Value of Economic Activity: Gross Domestic Product

The value of G&S measured at current prices is nominal GDP.
Real GDP is the value of G&S measured using a constant set of prices.

of nominal GDP to real GDP:
The GDP deflator measures
the price of output relative to
its price in the base year.
A new base year updates about every 5 years.

2.1 Gross Domestic Product

Income, Expenditure, and the Circular Flow
Rules for Computing GDP
Real GDP Versus Nominal GDP
The GDP Deflator

over time.
This CWM of RGDP is better than the more traditional measure because -
it ensures that the prices are never far out of date.

2.1 Measuring the Value of Economic Activity: Gross Domestic Product

Chain-Weighted Measures of Real GDP
The Components of Expenditure
Other Measures of Income
Seasonal AdjustmenCt

IN ESSENCE,
average prices in 2011 and 2012 are used to measure real
growth from 2011 to 2012,
average prices in 2012 and 2013 are used to measure real
growth from 2012 to 2013, and so on.

Y+
growth in P = 8%

Gross Domestic Product

This equation is
an national income accounts
identity.

Net exports are
the value of G&S sold to other countries (exports) minus
the value of G&S that foreigners sell us (imports).

Government purchases are
the G&S bought by federal, state, and local governments.

Investment consists of goods bought for future use:
business fixed investment,
residential fixed investment, and
inventory investment

Consumption consists of the G&S bought by
households -
nondurable goods,
durable goods, and
services

Factor Payments to Abroad.
GDP measures the total income produced domestically,
GNP measures the total income earned by nationals (residents of a nation).
NNP
Net national product = GNP – Depreciation.
The depreciation—the amount of the economy’s stock of plants, equipment, and residential structures that wears out during the year
Depreciation is also called the consumption of fixed capital.

2.1 Measuring the Value of Economic Activity: Gross Domestic Product

Chain-Weighted Measures of Real GDP
The Components of Expenditure
Other Measures of Income
Seasonal Adjustment

statistical discrepancy, which arises because different data sources may not be completely consistent.
National income measures how much everyone in the economy has earned.
National income includes 6 components, depending on who earns the income.

2.1 Measuring the Value of Economic Activity: Gross Domestic Product

Chain-Weighted Measures of Real GDP
The Components of Expenditure
Other Measures of Income
Seasonal Adjustment

(14%).
The income of corporations
3 Proprietors’ income (8%).
The income of noncorporate businesses
4 Rental income (3%).
The income that landlords receive
5 Net interest (4%).
The interest domestic businesses pay minus the interest they receive, plus interest earned from foreigners.
III - Government
6 - Indirect business taxes (8%).

2.1 Gross Domestic Product

Chain-Weighted Measures of Real GDP
The Components of Expenditure
Other Measures of Income
Seasonal Adjustment

+ Dividends
− Social Insurance Contributions
+ Government Transfers to Individuals
− Net Interest
+ Personal Interest Income.
Disposable Personal Income
= Personal Income
– Personal Tax and
- Nontax Payments.

2.1 Measuring the Value of Economic Activity: Gross Domestic Product

Chain-Weighted Measures of Real GDP
The Components of Expenditure
Other Measures of Income
Seasonal Adjustment

adjusted.
This means that the data have been adjusted to remove the regular seasonal fluctuations.
=> when you observe a rise or fall in real GDP or any other data series, you must look beyond the seasonal cycle for the explanation.

2.1 Measuring the Value of Economic Activity: Gross Domestic Product

Chain-Weighted Measures of Real GDP
The Components of Expenditure
Other Measures of Income
Seasonal Adjustment

commonly used measure of the level of prices is the consumer price index (CPI).
For example,
The typical consumer buys 5 apples and 2 oranges every month.
Then the basket of goods consists of 5 apples and 2 oranges, and the CPI is
The index tells us how much it costs now to buy 5 apples and 2 oranges relative to how much it cost to buy the same basket of fruit in 2011.

2-2 Measuring the Cost of Living: The Consumer Price Index

The Price of a Basket of Goods
The CPI Versus the GDP Deflator
Does the CPI Overstate Inflation?

firms.
price indexes for SPECIFIC TYPES of goods,
food, housing, and energy.
CORE INFLATION STATISTIC
a consumer basket that excludes food and energy products.

2-2 Measuring the Cost of Living: The Consumer Price Index

The Price of a Basket of Goods
The CPI Versus the GDP Deflator
Does the CPI Overstate Inflation?

produced domestically
assigns changing weights
CPI
measures the prices of only the G&S bought by consumers
Includes goods produced Domestically & imported goods
assigns fixed weights to the prices of different goods

2-2 Measuring the Cost of Living: The Consumer Price Index

The Price of a Basket of Goods
The CPI Versus the GDP Deflator
Does the CPI Overstate Inflation?

% change in the GDP deflator and in the CPI for every year from 1948 to 2010.
Although these two measures of prices diverge at times, they usually tell the same story about how quickly prices are rising.

of a Basket of Goods
The CPI Versus the GDP Deflator
Does the CPI Overstate Inflation?

If prices of different goods are
changing by different amounts

the increase in the cost of living

we have already discussed.
A second problem is the introduction of new goods.
A third problem is unmeasured changes in quality
economists have suggested revising laws to reduce the degree of indexation
For example
Social Security benefits could be indexed to CPI inflation minus 1%.

2-2 Measuring the Cost of Living: The Consumer Price Index

The Price of a Basket of Goods
The CPI Versus the GDP Deflator
Does the CPI Overstate Inflation?

COLAs (cost-of-living allowances) use the CPI to adjust for changes in the price level

retailers.
From their offices in Cambridge, Massachusetts, they track about
5 million items sold in
70 countries by
300 online retailers.

THE BILLION PRICES PROJECT

+
Quickly,
daily
Less work
Similar to CPI in USA

-
Not all G&S
Significantly different from CPI in some countries

those people wanting to work who do not have jobs.
The U comes from a survey of households.
age 16 and older
three categories:
Employed
worked as paid employees,
worked in their own business,
Worked as unpaid workers in a family member’s business
not working but who had jobs from which they were temporarily absent
vacation,
illness, or
bad weather.
Unemployed
were not employed,
were available for work,
had tried to find employment during the previous 4 weeks.
waiting to be recalled to a job from which they had been laid off.
Not in the labor force
fit neither of the first two categories
full-time student,
homemaker,
retiree.

2-3 Measuring Joblessness: The Unemployment Rate

The Household Survey
The Establishment Survey

is counted as not being in the labor force.
The labor force is defined as the sum of the employed and unemployed,
Labor Force = Number of Employed + Number of Unemployed
The unemployment rate is defined as the percentage of the labor force that is unemployed.
Unemployment Rate = Number of Unemployed × 100/Labor Force
A related statistic is the labor-force participation rate, the percentage of the adult population:
Labor -Force Participation Rate = Labor Force × 100/Adult Population

2-3 Measuring Joblessness: The Unemployment Rate

The Household Survey
The Establishment Survey

participation rate for women has risen, while the rate for men has declined.

Men:
Stay at school longer
Retire earlier & Live longer
Raise their children

the performance of the economy:
gross domestic product,
The consumer price index,
the unemployment rate.
These statistics is used
to monitor changes in the economy
to formulate appropriate policies
to develop and test theories about how the economy works.
We will
examine some of these theories,
build models that explain how these variables are determined and how economic policy affects them.