chapter 6 measuring gdp, inflation, and economic growth chapter 23 in economics

CHAPTER 6Measuring GDP,

Inflation, and Economic Growth

CHAPTER 6Measuring GDP,

Inflation, and Economic Growth

Chapter 23 in EconomicsChapter 23 in EconomicsChapter 23 in EconomicsChapter 23 in Economics

TM 6-2Copyright © 1998 Addison Wesley Longman, Inc.

Learning Objectives

• Distinguish between the stocks of capital and wealth and the flows of production, income, investment and saving

• Explain why aggregate income, expenditure, and product are equal

• Explain how GDP is measured


Learning Objectives (cont.)

• Explain how the Consumer Price Index (CPI) and GDP deflator are measured

• Explain how the shortcomings of the CPI and the GDP deflator as measures of inflation



• Explain how real GDP is measured

• Explain the shortcomings of real GDP growth as a measure of improvements in living standards


Learning Objectives





Gross Domestic Product

• Gross domestic product (GDP) is the value of the aggregate production of goods and services in a country during a given time period.



• Flows and Stocks

1) A flow is the quantities per unit of time.• GDP

2) A stock is a quantity that exists at a point in time



• Flows and Stocks

• Capital is the key macroeconomic stock.

• Capital

• The plant, equipment, buildings, and inventories of raw materials and semifinished goods that are used to produce other goods and services.



• Depreciation

• The decrease in the stock of capital that results from wear and tear and obsolescence.• Otherwise known as capital consumption



• Gross Investment

• The total amount spent on adding to the stock of capital and on replacing depreciated capital

• Net Investment

• The amount spent on adding to the stock of capital• Gross Investment minus Depreciation


Capital and Investment

0

1

2

3

4S

ewin

g m

ach

ines

Initialcapital

less depreciation

Initialcapital



0

1

2

3

4S

ewin

g m

ach

ines

Initialcapital

Time

Jan. 1, 1997

Initialcapital

less depreciation

Initialcapital



0

1

2

3

4S

ewin

g m

ach

ines

Initialcapital

Depreciation

Time

Jan. 1, 1997 During 1997

Initialcapital

less depreciation

Initialcapital

less depreciation

Initialcapital


GrossInvestment


0

1

2

3

4S

ewin

g m

ach

ines

Initialcapital

Depreciation

Time

Jan. 1, 1997 During 1997

Initialcapital

less depreciation

Initialcapital

less depreciation

Initialcapital


GrossInvestment


0

1

2

3

4S

ewin

g m

ach

ines

Initialcapital

Depreciation

Netinvestmentduring 1997

Time

Jan. 1, 1997 During 1997 Dec. 31, 1997

Initialcapital

less depreciation

Initialcapital

less depreciation

Initialcapital


Learning Objectives






• Wealth is another macroeconomic stock

• Wealth

• The value of all the things that people own• Related to their earnings (a flow)



• Consumption Expenditure

• The amount spent on consumption goods and services

• Saving

• The amount of an income after meeting consumption expenditures



• Income, Expenditure, and the Value of Production

1) Households sell their labor, capital, land, and entrepreneurship to firms

2) Firms sell consumer goods and services

3) Firms buy and sell capital goods

4) Firms borrow to finance investment



• Governments

• Government purchases are purchases of goods and services by governments• Paid for with tax revenue

• Net taxes are taxes paid to governments minus transfer payments received from governments and minus interest payments from the government on its debt.



• Rest of World Sector

• Net exports is the value of exports minus the value of imports

• Gross Domestic Product

• Production can be valued by what:• Buyers pay for it

• It costs producers to make it


The Circular Flow ofIncome and Expenditure


Learning Objectives






• Expenditure Equals Income

Y = C + I + G + NX



• How Investment is Financed

1) National saving is the amount of saving by households and businesses plus

government saving

National saving = S + (T – G)

2) Borrowing from the rest of the world



• Measuring U.S. GDP

1) Expenditure Approach

2) Income Approach



• Expenditure Approach

• Uses data on consumption expenditure, investment, government purchases, and net exports




• Personal consumption expenditures are the expenditures by households on goods and services produced in the United States and the rest of the world




• Gross domestic investment is expenditure on capital equipment and buildings by firms and expenditure on new homes by households. Also, it includes the change in inventories.




• Government purchases of goods and services are the purchases of goods and services by all levels of government.• Does not include transfer payments




• Net exports of goods and services are the value of exports minus the value of imports


GDP: The Expenditure Approach

Personal consumptionexpenditures C 5, 152 68.0

Gross private domesticinvestment I 1,116 14.7

Government purchaseof goods and services G 1,407 18.6

Net exports of goodand services NX –99 – 1.3

Gross domestic

product Y 7,576 100.0

Amountin 1996(billions of Percentage

Item Symbol dollars of GDP



• Expenditures Not in GDP

1) Intermediate goods and services

2) Used goods

3) Financial assets



• Income Approach

• Measures GDP by summing the incomes that firms pay households for the resources they hire



• Income Approach

• Compensation of employees is the payment for labor services• Includes net wages and salaries plus taxes withheld

on earnings plus fringe benefits such as social security and pension fund contributions



• Income Approach

• Net interest is the interest households receive on loans they make minus the interest households pay on their own borrowing

• Rental income is the payment for the use of land and other rented inputs.



• Income Approach

• Corporate profits are the profits of corporations.

• Proprietors’ income is a combination of all of these.



• Net Domestic Income at Factor Cost

• The sum of the five categories of income

We must convert factor cost to market prices.



• Income Approach

• Indirect taxes are taxes paid by consumers when they buy goods and services• Due to this additional cost, the market price is

greater than the factor cost value for measuring GDP.



• Income Approach

• Subsidies are payments by the government to a producer.• Due to this payment, the factor cost is greater than the

market price for measuring GDP.

We must convert from Net Domestic Product to Gross Domestic Product.



• Income Approach

• Net profit of businesses--profit after subtracting depreciation—is a component of aggregate incomes.

• To get gross domestic product, we must add depreciation to aggregate income.


Aggregate Expenditure,Output, and Income

0

40

60

80

100P

erce

nta

ge o

f G

DP

20



0

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60

80

100P

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nta

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DP

Aggregateexpenditure

20

NX G

I

C

GDP

GDP



0

40

60

80

100P

erce

nta

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DP


20

NX G

I

C


GDP: The Income Approach

Compensation ofemployees 4,449 58.7

Net Interest 405 5.4

Rental Income 127 1.7

Corporate Profits 650 8.6

Proprietors’ income 518 6.8Indirect taxesless subsidies 569 7.5

Capital consumption(depreciation) 858 11.3

Gross domestic 7,576 100.0product

Amount in 1996 Percentage

Item (billions of dollars of GDP



0

40

60

80

100P

erce

nta

ge o

f G

DP


20

NX G

I

C

GDP

GDP

Depreciation

Indirect taxesless subsidiesProprietor’sincomesInterestProfitsRent

Wages and otherlabor income

Aggregateincome



• Valuing the Output of Industries

• Value added is the value of a firm's production minus the value of the intermediate goods that the firm buys from other firms.


Value Added andFinal Expenditure

Value addedFarmer Farmer’s

value added

Final expenditure

Intermediate expenditure



Value addedFarmer

Miller

Farmer’svalue added

Value of wheat

Miller’svalue added Final

expenditure




Value addedFarmer

Miller

Baker


Value of wheat

Valueof flour

Miller’svalue added

Bakersvalue added

Final expenditure




Value addedFarmer

Miller

Baker

Grocer


Value of wheat

Valueof flour

Wholesalevalue of bread


Bakersvalue added

Grocer’s value added

Final expenditure




Value addedFarmer

Miller

Baker

Grocer

Consumer


Value of wheat

Valueof flour

Wholesalevalue of bread

Retail value of bread;Final Expenditure on bread


Bakersvalue added

Grocer’s value added

Final expenditure



The Price Level and Inflation

• The inflation rate is the percentage change in the price level from one year to the next.

• Two Main Price Indexes

• Consumer Price Index

• GDP Deflator



• Consumer Price Index

• Measures the average level of prices of the goods and services that a typical urban family buys.

• Published monthly by the Bureau of Labor Statistics

• Must use a base period (1982-1984)


The CPI: A Simplified Calculation

5 pounds of oranges$0.80/pound $4

6 haircuts $11.00 each $66

100 bus rides $1.40 each $140

Total expenditure $210

Base Period Current period

Base-period basket Price Expenditure Price Expenditure



5 pounds of oranges$0.80/pound $4 $1.20/pound $6

6 haircuts $11.00 each $66 $12.50 each $75

100 bus rides $1.40 each $140 $1.50 $150

Total expenditure $210 $231





5 pounds of oranges$0.80/pound $4 $1.20/pound $6

6 haircuts $11.00 each $66 $12.50 each $75

100 bus rides $1.40 each $140 $1.50 $150

Total expenditure $210 $231

CPI $210.00$210.00

100 = 100$231.00$210.00

100 = 110





• The GDP Deflator

• Measures the average level of prices of all the goods and services that are included in GDP

GDP deflator =Nominal GDP

Real GDP 100



• Nominal GDP is GDP valued in the current year’s prices.

• Real GDP is GDP in a base year (1992) scaled up by the growth rate of real GDP since the base year.



• The GDP Deflator can now be calculated.

GDP deflator = $146

$109.5 100 = 133.33


The U.S. GDP Balloon

1996



GDPdeflator

1996



GDPdeflator

19961992


The Biased CPI

• The sources of bias are:

1) New goods bias

2) Quality change bias

3) Commodity substitution bias

4) Outlet substitution bias


The Biased CPI

• In 1996, a Congressional Advisory Commission on the CPI said the CPI overstates inflation by 1.1 percentage points.

• The GDP deflator uses price indexes to estimate quantities, so it too is somewhat biased.


The Biased CPI

• The three primary consequences of the bias are:

1) It distorts private contracts

2) It increases government outlays

3) It biases estimates or real earnings


Two Measures of Inflation


CHAPTER 8Employment and Unemployment

CHAPTER 8Employment and Unemployment

Chapter 25 in EconomicsChapter 25 in EconomicsChapter 25 in EconomicsChapter 25 in Economics


Employment and Wages

• Population Survey

• Every month, the U.S. Census Bureau surveys 60,000 households and asks a series of questions about the age and job market status of its members.

• Called the Current Population Survey




• The working age population is the total number of people aged 16 years an over who are not in a jail, hospital, or some other form of institutional care.




• The working age population is divided into those in the labor force and those not in the labor force.

• The labor force is divided into the employed and the unemployed.



• To be counted as unemployed, a person must be available for work and must be in one of three categories:

1) Without work but has made specific efforts to find a job within the

previous four weeks




2) Waiting to be called back to a job from which he or she has been laid off




3) Waiting to start a new job within 30 days


Population Labor Force Categories

0 90 180 270Population (millions)



0 90 180 270

Population

Population (millions)



0 90 180 270

Young andinstitution-

alized

Population

Working-age population




0 90 180 270


alized

Population



Not in labor forceLabor force



0 90 180 270

Not in labor force


alized

Population


Labor force

EmploymentUnemployment




• Three Labor Market Indicators

• The unemployment rate

• The labor force participation rate

• The employment-to-population ratio



• The unemployment rate is the percentage of the people in the labor force who are unemployed.

Unemployment rate =

Number ofpeople unemployed

Labor force 100



• The unemployment rate is the percentage of the people in the labor force who are unemployed.

Labor force = Number of people employed + Number of people unemployed



• The labor force participation rate is the percentage of the working-age population who are members of the labor force.

Labor forceparticipation rate

=Labor force

Working age population 100



• Discouraged Workers

• People who are available and willing to work but have made not made specific efforts to find a job within the previous four weeks.



• The employment-to-population ratio is the percentage of people of working age who have jobs.

Employment-to-population ratio

=

Number of people employed

Working-agepopulation

100


Employment, Unemployment, and the Labor Force: 1960–1996


Unemployment andFull Employment

• People become unemployed if they:

1) Lose their jobs and search for another job.

2) Leave their jobs and search for another job.

3) Enter or reenter the labor force to search for a job.



• Job losers are people who are laid off, either permanently or temporarily.

• Biggest source of unemployment

• Numbers fluctuate considerably

• Job leavers are people who voluntarily quit their jobs.

• Smallest and most stable source of unemployment



• Entrants are people who are entering the labor force.

• Reentrants are people who have previously withdrawn from the labor force.

• Reentrants/entrants are a large component of the unemployed

• Numbers fluctuate mildly


Unemployment by Demographic Group

0 20 30Unemployment rate

10 40

Business cycle peak

Business cycle trough

Black males 16-19

Black females 16-19

White males 16-19

White females 16-19

Black males 20 and over

Black females 20 and over

White males 20 and over

White females 20 and over


Homework Solutions

Prices per unit Output

Production 1990 1998 1990 1998

Light Bulb $1 $2 20 25

Wine 3 4 40 50

Meat 6 8 50 65

Table I: Production Data

a. 1990 nominal GDP = $440 1998 nominal GDP = $770

b. Price index 1990 = 100 Price index for 1998 = 136.36

c. Inflation rate = 136.36 - 100 = 36.36%

d. Real GDP 1990 = 440/1.00 = $440 Real GDP 1998 = 770/1.36 = $566



• There are three(four) types of unemployment:

1) Frictional

2) Structural

3) Cyclical

4) Seasonal



• Frictional Unemployment

• Arises from normal labor turnover — people entering and leaving the labor force and the creation and destruction of jobs

• Influenced by unemployment benefits



• Structural Unemployment

• Arises when changes in technology or international competition change the skills needed to perform jobs or change the locations of jobs

• Typically lasts longer than frictional



• Cyclical Unemployment

• Arises from the fluctuations of the business cycle

• Increases during a recession and decreases during and expansion

• The natural rate of unemployment excludes cyclical unemployment



• Full employment exists when the unemployment rate equals the natural rate of unemployment.

• It fluctuates periodically

• Economists disagree about the size of the natural rate and the extent to which it fluctuates


Aggregate Supply

• Natural Rate of Unemployment

• The unemployment rate that exists at full employment

• In 1997 it was about 5.5%


Aggregate Supply

• Potential GDP is the quantity of real GDP supplied when unemployment is at its natural rate and there is full employment.


Types of Inflation-Demand Pull-

Price Level

Output (GDP)

AD1

AD2

AS

PL1

PL2


Types of Inflation-Cost Push-

Price Level

Output (GDP)

AD

AS1

PL1

PL2

AS2

chapter 6 measuring gdp, inflation, and economic growth chapter 23 in economics

Documents

gdp deflator

aggregate income

stocks of capital

measuring gdp

aggregate production

flows of production

consumption goods

key macroeconomic stock