Transcript
Page 1: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

FIN 30220: Macroeconomic Analysis

Measuring the U.S. Economy

Page 2: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

U.S. GDP of $17 Trillion represents approximately one fifth of total worldwide production ($85 Trillion) and makes the United States the largest single country economy on the planet!!

02468

1012141618

* Source: CIA FactbookNote: 20013 GDP estimates measured on a Purchasing Power Parity Basis

Page 3: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

GDP is the standard benchmark for economic well being. Is it a good indicator of well being? VS

1950: $275B

2010: $14,600B

1950: $1,696B

2010: $12,973B

1950: $10,941

2010: $42,120

1950: $20,000

2010: $50,233

Principle #1: What exactly are you trying to measure? Is your definition consistent with what you are trying to measure?

Rat

io

2005 Dollars 2008 Dollars2005 Dollars

Page 4: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

GDP is the standard benchmark for economic well being

VS

Annual defense spending has grown from $35B in 1950 to $795B in 2009. Should this be subtracted out?

The service industry has grown from 30M employees in 1950 to 113M in 2009. Is this really “new activity”?

Should we count things like pollution as economic “bads”? How do we account for the added quality and convenience of new products and technologies?

Page 5: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

The Genuine Progress indicator corrects for social “bads”

VS

Page 6: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Gross Domestic Product measures the current market value of all goods and services produced within a country’s borders over a certain time period (usually a quarter)

Farmer A produces 1,000 bushels of Apples (Apples cost $10/bushel)

Farmer B produces 2,000 bushels of Corn (Corn costs $15/bushel)

GDP = ($10)(1,000) + ($15)(2,000) = $40,000

Principle #2: How is your variable measured?

Page 7: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Suppose that Intel produces 1,000 computer chips (P = $100)

100 Chips sold to consumers

900 Chips sold to Dell

Dell produces 500 computers (P = $1,000)

$100,000

$500,000- $90,000

$40,000

- $0

$100,000

$450,000

Sales

Materials Expenses

Materials Expenses

Sales

Change in Inventories

Total = $550,000

Value Added Approach

(The remaining 400 chips were added to Dell’s inventories)

Page 8: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Example: Microsoft

Sales: $600,000

Expenses: $420,000• Labor Costs: $200,000• R&D Costs: $50,000• Materials: $100,000• Lease: $20,000• Utilities: $10,000• Equipment Purchase: $40,000

Inventories:• BOY: $620,000• EOY: $640,000

Value Added:

$600,000 - $220,000 (Non-Labor Exp)+ $40,000 (Equipment Inv)+ $20,000 (Inv. Investment)+ $50,000 (R&D) – NEW $490,000

Page 9: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Product Markets

Factor Markets

Factor Services

Goods & Services (GDP)

Income

Expenditures

Page 10: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

The Circular Flow of Payments suggests that we could also calculate GDP by measuring total expenditures on the goods and services produced

GICY G GDP

Gross Business Investment

Structures

Equipment

Inventories

Residential Investment

Consumer Expenditures

Durables

Non-Durables

Services

Government Purchases (Federal, State, and Local)

Page 11: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Suppose that Intel produces 1,000 computer chips (P = $100)

100 Chips sold to consumers

900 Chips sold to Dell $0

$40,000 Inventory Investment

Total = $550,000

Expenditure Approach

$510,000 Consumer Durables

Dell produces 500 computers (P = $1,000)

(The remaining 400 chips were added to Dell’s inventories)

Page 12: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

What’s so Gross about GDP?

Suppose that we have the following information from GM’s financial statements

Sales: $300M

Depreciation: $5M

Change in Inventories: $20M

Materials Costs: $150M

$300,000- $150,000

$20,000

Materials Expenses (000s)

Sales (000s)

Change in Inventories (000s)

Total = $170,000

Strictly speaking, depreciation should be counted as a cost of production. GDP calculations do not include depreciation expenses!

Page 13: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

•Exports of Goods and Services

•US Citizens Working Abroad

•Imports of Goods and Services

•Foreign Citizens Working in the US

US Acquisition of Foreign Assets

Foreign Acquisition of US Assets

Page 14: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

BMW operates a manufacturing facility in Spartanburg South Carolina. Meanwhile, Nike operates 73 production facilities in Thailand. How should we count this production?

$130,000- $70,000 Labor Costs (000s)

Value Added (000s) $400,000- $50,000 Labor Costs (000s)

Value Added (000s)

$60,000 Profits (000s) $350,000 Profits (000s)

Gross Domestic Product = Total Production within US borders

Gross National Product = Total Production by US Citizens

The $60,000 in profits from BMW accrue to foreign nationals and should not be counted in US GNP. However, GNP would need to include the profits from Nike’s Thailand plants.

Page 15: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

BMW operates a manufacturing facility in Spartanburg South Carolina. Meanwhile, Nike operates 73 production facilities in Thailand. How should we count this production?

$130,000- $70,000 Labor Costs (000s)

Value Added (000s) $400,000- $50,000 Labor Costs (000s)

Value Added (000s)

$60,000 Profits (000s) $350,000 Profits (000s)

GDP = $130,000GNP = $70,000 + $350,000 = $420,000

$420,000 = $130,000 +($350,000 - $60,000)

GNP GDP Net Factor Payments

Page 16: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

With the global economy, we need to keep track of expenditures between the US and the rest of the world as well as domestic expenditures

NXGICY G GDP

Gross Investment

Consumer Expenditures

Government Purchases

Net Exports = Exports - Imports

Page 17: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Category Amount (B) % of Total

Consumption $11,792 69%

Gross Investment $2,694 16%

Government $3,116 18%

Net Exports -$501 -3%

GDP $17,101 100%

GDP is calculated using a method of double entry accounting – each dollar of production should have a corresponding expenditure.

GDP: 2014Q1

Page 18: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Recall that total income (national income) in the US should accrue from the production undertaken by American citizens

Gross Domestic Product = $17,101BFirst, we need to correct for income earned abroad as well as domestic production accruing to foreign nationals

+ Net Factor Payments = $235B

Gross National Product = $17,336BNow, recall that depreciation is an expense that should be deducted as a production cost

- Depreciation Expense = $2,721B

Net National Product = $14,615B

Finally, we need to correct for indirect taxes/transfers (essentially, sales taxes)

- Indirect Taxes = $198B

National Income = $14,417B

Page 19: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

National Income by Source: 2014Q1Category Amount(B) % of Total

Wages $9,040 62%

Proprietor’s Income $1,366 9%

Rental Income $611 4%

Income on Assets $2,030 14%

Transfer receipts $2,504 17%

Less Contributions - $1,134 6%

National Income $14,417 100%

Page 20: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

NXGICGDP G

To get to the flow of funds accounts, begin with GDP equals aggregate expenditures

Now, add net factor payments to both sides

CAGICGNP G Current Account = NX + NFP

Lastly subtract depreciation and indirect taxes from both sides

CAGICNI N Net Investment (Gross Investment minus depreciation)National

IncomeConsumer Outlays (Net of Indirect Taxes)

Page 21: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

CAGICNI N National Income = Personal Income + Undistributed Corporate Profits

CATGICTNI N Now, Subtract Consumption from both sides…

CATGISCTNI N

Subtract taxes from both sides….

The flow of funds measures financial market transactions

Net Private Saving = Personal Saving + Undistributed Profits

Page 22: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

CATGIS N

Last year, the US current account was -$380B. What does this mean?

CAGICNI N

Total US IncomeTotal US Outlays Net lending abroad

In other words, the US is borrowing $1B per day from abroad! Should we be worried about this?

This number continues to shrink as US consumers overspend!!

This number continues to grow as the US government overspends!!!

Page 23: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

-900

-800

-700

-600

-500

-400

-300

-200

-100

0

1001960-01-01 1970-01-01 1980-01-01 1990-01-01 2000-01-01 2010-01-01

Think of the current account as the savings of the entire economy. We have become a debtor nation!

Billions of D

ollars

Page 24: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

What a wacky world we live in!

CCCCC CATGIS

Currently, China is running a $30B trade surplus with the world

USUSUSUSUS CATGIS

Currently, the US is running a $380B trade deficit with the world

What’s wrong with this picture?

Page 25: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Nominal Variables are in terms of a current year’s prices. For example, you’re starting salary after college might be $50,000 per year.

Real variables are in terms of some tangible commodity or some constant year’s prices. Real variables measure purchasing power.

Principle #3: Is your variable in terms of current prices or fixed prices (Real vs. Nominal)

VS.

How do we construct a measure of prices?

Page 26: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

The objective of a price index is to measure cost of living. To state this precisely, a price index measures the dollar cost of obtaining a fixed level of utility (happiness).

Example:

$3.50 $2.00

Suppose at the current prices, you elect to buy 3 slices of pizza and 2 beers

The absolute dollar cost of your current happiness is (2)($3.50) + (3)($2.00) = $13

If beer increases in price to $4.50 (25% increase) and pizza increases to $2.20 (10% increase), this level of happiness now costs

(2)($4.50) + (3)($2.20) = $15.60

ln 15.60 ln 13 *100 18%

Page 27: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Good Base Year Price (BY)

Base Year Quantity

Current Year Price (CY)

Inflation

Beer $3.50 2 $4.50 25%

Pizza $2 3 $2.20 10%

Base Year Expenditure: (2)($3.50) + (3)($2.00) = $13

Beer Expenditure Share: (2)($3.50)/$13 =.54Pizza Expenditure Share: (3)($2)/$13 = .46

Alternatively, we could write the price index in terms of relative dollars (relative to a base year) instead of absolute dollars

4.50 2.20.54 .46 1.2

3.50 2.00CYP

3.50 2.00.54 .46 1.0

3.50 2.00BYP

(Or, 100)

(Or, 120)

ln 120 ln 100 *100 18%

Page 28: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

The CPI is calculated by the Bureau of Labor Statistics (BLS) on a monthly basis

Education & Communication

5%

Tobacco & Smoking Products

1%

Recreation6%

Medical6%

Housing40%

Food & Beverage16%

Apparel5%

Personal Care4%

Transportation17%The CPI is composed of

211 individual products over 38 geographic areas.

Consumer Price Index

Page 29: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

When calculating the CPI, be sure to use the same weights each year!

Good Base Year Price (1983)

Year 2013 Price Year 2014 Price

Housing $200 $780 $800

Transportation $90 $280 $300

Food $40 $190 $200

Apparel $30 $245 $250

Household Budget

2013

780 280 190 245.40 .30 .20 .10 4.25

200 90 40 30CPI

CPI inflation (2013 – 2014)

ln 4.43 ln 4.25 *100 4.15%

(Or, 425)

The CPI is an example of a fixed weight index

2014

800 300 200 250.40 .30 .20 .10 4.43

200 90 40 30CPI

( or, 443 )

1983

200 90 40 30.40 .30 .20 .10 1

200 90 40 30CPI

( or, 100 )

Average CPI inflation

ln 443 ln 100*100 4.80%

31

Page 30: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

1983 = 100

CP

IC

PI Inflation R

ate

CPI

The Consumer Price Index (1948 – 2014)

Average Inflation = 3.54%

Page 31: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Note That expenditure shares do change over time, so the weights need to be updated periodically

Page 32: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Potential Problem:

$3.50 $2.00

Suppose at the current prices, you elect to buy 3 slices of pizza and two beers

The cost of your current happiness is (2)($3.50) + (3)($2.00) = $13

If beer increases in price to $4.50 (25% increase) and pizza increases to $2.20 (10% increase), suppose you alter your decision and buy 1 beer and 4 slices of pizza

(1)($4.50) + (4)($2.20) = $13.30

ln 13.30 ln 13 *100 2.2%

Page 33: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Good Base Year Price (BY)

Current Year Price (CY)

Inflation

Beer $3.50 $4.50 25%

Pizza $2 $2.20 10%

No Substitution:

Original Expenditure:

(2)($3.50) + (3)($2.00) = $13

(1)($4.50) + (4)($2.20) = $13.30

ln 13.30 ln 13 *100 2.2%

Substitution:

(2)($4.50) + (3)($2.20) = $15.60

Which measure of inflation is more realistic?

ln 15.60 ln 13 *100 18%

Page 34: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

In 2000, the BLS introduced a “chain weighted CPI” that allows for this substitution between different goods. It’s thought to be a better gauge of inflation

CCPI

Inflation RateC

hain

ed C

PI

Page 35: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

It is, however, very controversial…In

flatio

n R

ate

Average Inflation Rate

CPI: 2.31%CCPI: 2.06%

Page 36: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

CPI Inflation Rate (2.31% per year)

CCPI Inflation Rate (2.06% Per Year)

Suppose that you are a social security recipient. Let’s calculate your total payments received in social security payments under the different inflation measures from 2000 to 2014. (Assume you received $1,000 per month in 2000)

2 14$12,000 $12,000 1.0231 $12,000 1.0231 ... $12, 000 1.0231 $212,232

2 14$12,000 $12,000 1.0206 $12,000 1.0206 ... $12, 000 1.0206 $208,442

Difference = $3,790 (1.8%)

Now, consider that there are approximately 65 million social security recipients:

$3,790*65M = $246B

Page 37: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Another potential problem: Products change over time. Suppose you observe the following TV Prices

Price: $250Features: 27 inch

Cathode Ray TubeEnhanced Definition TVS-Video InputUniversal Remote

Price: $1,250Features: 42 inch

PlasmaHigh Definition TVS-Video InputUniversal Remote

$1,250 $250*100 400%

$250

2003

Note: The first plasma TV was released by Fijitsu 1n 1995. The 42’’ TV cost $14,999

2004

Is this a fair assessment of inflation?

Page 38: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

0 1 1 2 2ln ... N NP X X X

What do we value in a TV? (At least, what is reflected by price)

Natural log of retail price

Television Features

Solution: Hedonic price adjusting

Page 39: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Characteristic Category Characteristic Name Coefficient

Intercept 3.4455

Display Type Projection -.25586

CRT Base (0)

DLP .58356

LCD Projection .38566

LCD Direct View .73075

Plasma .72843

Screen Size .08348

(Screen Size)^2 -.00049

Features Picture in Picture .08430

Universal Remote .16261

High Def (HDTV) .34280

Extd Def (EDTV) .12228

3D Comb. Filter .07122

Flat Screen .18461

S-Video Input .13722

DVD Built in .38247

What do we value in a TV? (At least, what is reflected by price)

Plasma TVs sell for 73% more that CRT TVs

Each 1’’ increase in screen size raises the price by 8%

HDTV is priced 22% more than EDTV

Page 40: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Characteristic Category

Characteristic Name Coefficient Value

Intercept 3.4455 3.4455

Display Type Projection -.25586 0

CRT Base (0) 0

DLP .58356 0

LCD Projection .38566 0

LCD Direct View .73075 0

Plasma .72843 0

Screen Size .08348 27*.08348

(Screen Size)^2 -.00049 27*27*(-.00049)

Features Picture in Picture .08430 0

Universal Remote .16261 .16261

High Def (HDTV) .34280 0

Extd Def (EDTV) .12228 .12228

3D Comb. Filter .07122 0

Flat Screen .18461 0

S-Video Input .13722 .13722

DVD Built in .38247 0

Total 5.64208

First, value all the features on the old TV

Price: $250Features: 27 inch Cathode Ray Tube Enhanced Definition TV S-Video Input Universal Remote

Page 41: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Characteristic Category

Characteristic Name Coefficient Value

Intercept 3.4455 3.4455

Display Type Projection -.25586 0

CRT Base (0) 0

DLP .58356 0

LCD Projection .38566 0

LCD Direct View .73075 0

Plasma .72843 .72843

Screen Size .08348 42*.08348

(Screen Size)^2 -.00049 42*42*(-.00049)

Features Picture in Picture .08430 0

Universal Remote .16261 .16261

High Def (HDTV) .34280 .34280

Extd Def (EDTV) .12228 0

3D Comb. Filter .07122 0

Flat Screen .18461 0

S-Video Input .13722 .13722

DVD Built in .38247 0

Total 7.45836

Now value all the features on a new TV

Price: $1,250Features: 42 inch

PlasmaHigh Definition TVS-Video InputUniversal Remote

Page 42: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Price: $250Features: 27 inch

Cathode Ray TubeEnhanced Definition TVS-Video InputUniversal Remote

Price: $1,537Features: 42 inch

PlasmaHigh Definition TVS-Video InputUniversal Remote

7.45836 5.64208$250 $1,537P e

$1,250 $1,537*100 18%

$1,573

Now, we can add the extra features to the old TV

(Hedonically adjusted)

2003

2003

Page 43: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Potential Problem: What about housing? Consider the following examples:

Option #1: Rent a $240,000 house

Option #2: Buy a $240,000 house with an interest only mortgage (5% per year)

Option #3: Buy a $240,000 house with a 30 year mortgage (5% per year)

$240,000(.05) = $12,000/yr. = $1,000/mo.

$1,288/mo.$1,000/mo.

One of these things is not like the other!

Page 44: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Potential Problem: What about housing? Consider the following examples

Option #1: Rent a $240,000 house

Option #2: Buy a $240,000 house with an interest only mortgage (5% per year)

Option #3: Buy a $240,000 house with a 30 year mortgage (5% per year)

$1,288/mo.

$1,000/mo.

Difference = $288/mo.

OR

What if you put $288/mo. and put it in a savings account that earns 5% per year?

Page 45: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Month Deposit Beginning of Month Balance

Interest End of Month Balance

1 $288 $288 ($288)(.0041) = $1.18 $289.18

2 $288 $577.18 ($577.18)(.0041) = $2.37 $579.55

3 $288 $867.55 ($867.55)(.0041) = $3.56 $871.11

4 $288 $1,159.11 ($1,159.11)(.0041) = $4.75 $1,163.86

5 $288 $1,451.86 ($1,451.86)(.0041) = $5.95 $1,457.81

What if you put $288/mo. and put it in a savings account that earns 5% per year? 5%/yr. = (5/12) = .41%/mo.

What do you think your balance would be after 30 years?

Cool, huh!?

Page 46: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Potential Problem: What about housing? Consider the following examples

Option #1: Rent a $240,000 house

Option #2: Buy a $240,000 house with an interest only mortgage (5% per year)

$1,000/mo.OR

(This is pure cost of living)

Option #3: Buy a $240,000 house with a 30 year mortgage (5% per year)

$1,288/mo.

(This is cost of living plus investment in an asset)

Page 47: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

In 1983, the BLS decided to focus entirely on rental markets for housing.

Housing Prices Housing Inflation

Average Inflation Rate

Home Price Index: 4.40%Rental Index: 4.01%

Can you spot the housing bubble?

Page 48: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

An alternative to the consumer price index is the GDP Deflator.

Good Production (2014) Current Price (2014) Current Value

Housing 300 $550 $165,000

Transportation 500 $350 $175,000

Food 100 $260 $26,000

Apparel 200 $220 $44,000

Total = GDP (Current Dollars) $410,000

Suppose we have the following Data

Now, Suppose we revalue current GDP at, say, prices in 2009 (Call this the base year)

Good Production 2009 Price 2009 Value

Housing 300 $500 $150,000

Transportation 500 $300 $150,000

Food 100 $200 $20,000

Apparel 200 $200 $40,000

Total = GDP (2009 Dollars) $360,000

Page 49: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Current value of current production (2014)

$410,000 (Current Dollars)

Base year value of current production (Base year = 2009)

$360,000 (2009 Dollars)

We can use these two numbers to construct an implied relative price

$410,000 (Current Dollars)

$360,000 (2009 Dollars)= 1.14 (or, 114)

Note that the base year (2009) is 1 (or, 100) by definition

ln 114 ln 100*100 2.62%

5

Page 50: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Note that the price index is still a weighted average of individual relative prices

Good Production (2014) 2009 Price 2009 Value 2014 Price

Housing 300 $500 $150,000 $550

Transportation 500 $300 $150,000 $350

Food 100 $200 $20,000 $260

Apparel 200 $200 $40,000 $220

Total = GDP (2009 Prices) $360,000

$150,000.41

$360,000

Housing Share of Real GDP

$150,000.41

$360,000

Transp. Share of Real GDP

$20,000.06

$360,000

Food Share of Real GDP

$40,000.12

$360,000

Apparel Share of Real GDP

$550 $350 $260 $220.41 .41 .06 .12 1.14

$500 $300 $200 $200P

(Or, 114)

Page 51: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Good Production (2013) 2009 Price 2013 Price

Housing 280 $500 $535

Transportation 490 $300 $310

Food 105 $200 $240

Apparel 170 $200 $216

$363,620

$342,000= 1.06 (or, 106)

Suppose we repeat for a different year to calculate an inflation rate

$140,000.41

$342,000

Housing Share of Real GDP

$147,000.43

$342,000

Transp. Share of Real GDP

$21,000.06

$342,000

Food Share of Real GDP

$34,000.10

$342,000

Apparel Share of Real GDP

$535 $310 $240 $216.41 .41 .06 .12 1.06

$500 $300 $200 $200P

(Or, 106)

ln 114 ln 106 *100 7.27% Index Inflation

Value of GDP at 2013 Prices

Value of GDP at 2009 Prices

Page 52: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Good 2013 Price 2014 Price Inflation

Housing $535 $550 2.76%

Transportation $310 $350 12.10%

Food $240 $260 8.00%

Apparel $216 $220 1.83%

Now, the inflation rate incorporates price changes as well as expenditure share changes – a lot like the chained CPI!

$140,000.41

$342,000

Housing Share of Real GDP

$147,000.43

$342,000

Transp. Share of Real GDP

$21,000.06

$342,000

Food Share of Real GDP

$34,000.10

$342,000

Apparel Share of Real GDP

2013

2014

$150,000.41

$360,000

Housing Share of Real GDP

$150,000.41

$360,000

Transp. Share of Real GDP

$20,000.06

$360,000

Food Share of Real GDP

$40,000.12

$360,000

Apparel Share of Real GDP

The GDP deflator is an example of a variable weight index

Page 53: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Average Inflation: 3.20%

GDP Def.

GD

P D

efla

tor

2009 = 100

The GDP Deflator: 1948 - 2014

Inflation Rate

Page 54: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Inflation with the GDP Deflator versus the CPI

Average Inflation

CPI: 3.55%GDP Def.: 3.20%

Let’s enlarge this area

Page 55: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

What’s going on here?

Average Inflation

CPI: 2.30%GDP Deflator: 2.01%

Inflation with the GDP Deflator versus the CPI

Page 56: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Recall that a large portion of our oil is imported and is therefore not a part of GDP. Which means its not a part of the GDP deflator!

Page 57: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

The “core CPI” removes food and energy prices due to their excessive volatility.

Average Inflation

CPI: 2.30%Chain CPI: 2.06%GDP Deflator: 2.01%Core CPI: 1.95%

Page 58: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Lets plot out GDP over a few years. Notice the “saw tooth” pattern?

Page 59: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Retail sales follows a seasonal cycle with lows in January/February and September/October and Highs in May/June and December. This seasonality in sales creates seasonal cycles in most macro series.

Page 60: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Retail Sales (Seasonally Adjusted)

255000

275000

295000

315000

335000

355000

NSA SA

Seasonally adjusting is a process that removes the seasonal components.

Page 61: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

9000

9500

10000

10500

11000

11500

12000

12500

Gross Domestic Product

GDP(NSA)

GDP(SA)

In 2002(Q1), GDP is $10,064B while Seasonally adjusted GDP is $10,333B

Page 62: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Lets take a look at the US economy from 1957 to 2008 …

0.0

2000.0

4000.0

6000.0

8000.0

10000.0

12000.0

14000.0

16000.0

Jan-57 Jan-67 Jan-77 Jan-87 Jan-97 Jan-07

GDP (Billions of Dollars)

$14.2T (2008Q1)

$457.2B (1957Q1)

%73.651/100*2.457200,14 LNLN

Page 63: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Comparing GDP in 1957 and 2008 is like comparing apples and oranges. Prices were much different 51 years ago!!

Year Price Level (CPI)

1957 30.0

1983 100.0

2000 180.0

2008 213.3

$14,200B (2008Q1)

$457.2B (1957Q1)

Let’s “scale up” GDP in 1957 and “scale down” GDP in 2008 to reflect year 2000 prices…

18030

180213

=$2,743.2B

=$11,983.12B

Now, these numbers are comparable!

Page 64: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

We have now converted GDP to real GDP (2000 prices)

0.0

2000.0

4000.0

6000.0

8000.0

10000.0

12000.0

14000.0

16000.0

Jan-57 Jan-67 Jan-77 Jan-87 Jan-97 Jan-07

GDP (Billions of 2000 Dollars)

$14,200B (2008Q1)

$457.2B (1957Q1)

Lets convert all the years…

$11,983B

$2,743.2B

Page 65: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

We have now converted GDP to real GDP (2000 prices)

0.0

2000.0

4000.0

6000.0

8000.0

10000.0

12000.0

14000.0

16000.0

Jan-57 Jan-67 Jan-77 Jan-87 Jan-97 Jan-07

Real GDP (Billions of 2000 Dollars)

$11,983B

$2,743.2B

Note that “Real” GDP crosses GDP at the year 2000

$14,200B (2008Q1)

$457.2B (1957Q1)

Page 66: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Now that we have real GDP, let’s think about the trend…

0.0

2000.0

4000.0

6000.0

8000.0

10000.0

12000.0

14000.0

Jan-57 Jan-67 Jan-77 Jan-87 Jan-97 Jan-07

Real GDP (Billions of 2000 Dollars)

$2,743B

$11,983B

Would a linear trend fit this data (constant dollar growth in GDP)

Page 67: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Exponential growth is constant annual percentage growth

y = 2371.3e0.008x

0.0

2000.0

4000.0

6000.0

8000.0

10000.0

12000.0

14000.0

1 13 25 37 49 61 73 85 97 109 121 133 145 157 169 181 193

Real GDP (Billions of 2000 Dollars)

$2,743B

$11,983B

%89.251/100*743,2983,11 LNLN

Average quarterly growth rate

Page 68: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

The previous slide uses an exponential trend. This assumes that the US has some constant annual rate of real economic growth (3.2% per year). Note that actual growth varies even over long time periods.

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

1957-1967 1967-1977 1977-1987 1987-1997 1997-2007 2007-2013

Notice the downward trend in growth…we’ll talk about that later!

Page 69: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Over five year periods, we see that growth seems to have a cyclical pattern rather than a constant annual rate.

0

1

2

3

4

5

6

Page 70: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

The Hodrick-Prescott (HP) filter allows us to calculate a trend rate of growth that is not constant.

The HP filter applies a minimization problem…pretty ugly, huh?!

Squared deviations between series and trend

Smoothness of trend

Smoothing parameter (bigger numbers create smoother trends) – usual value = 1600

Page 71: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Here we have annualized growth rates of the HP trend and the Exponential trend

Why is getting the trend right so important?

Page 72: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Time

GDPTrend

Lets imagine enlarging a portion of our GDP graph with a trend. We can see a distinct set of stages…

Negative growth

Above trend growth

Trend Growth

Below Trend Growth

This is what we mean by the business cycle

Page 73: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Time

GDP

Trend

Removing the trend involves subtracting out the trend component from GDP

t

100*%

ttrend

ttrendtGDPDev

Page 74: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

-2.00

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2000

-I

2000

-II

2000

-III

2000

-IV

2001

-I

2001

-II

2001

-III

2001

-IV

2002

-I

2002

-II

2002

-III

2002

-IV

2003

-I

2003

-II

2003

-III

2003

-IV

2004

-I

2004

-II

2004

-III

2004

-IV

% D

evi

ati

on

Recession

100* %

Trend

TrendValueDeviation

Expansion

Peak

Trough

Removing the trend leaves us with the business cycle.

Page 75: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Here, we are plotting percentage deviation of GDP from a HP trend%

Dev

iatio

n fr

om tr

end

We have had 11 cycles since WWII

Page 76: FIN 30220: Macroeconomic Analysis Measuring the U.S. Economy

Business Cycle Dates Duration (In Months)

Peak Trough Contraction (peak to trough)

Expansion (Previous trough to this peak)

Cycle (Peak from previous peak)

August 1929 March 1933 43 21 34

May 1937 June 1938 13 50 93

Feb 1945 Oct 1945 8 80 93

Nov 1948 Oct 1949 11 37 45

July 1953 May 1954 10 45 56

Aug 1957 April 1958 8 39 49

April 1960 Feb 1961 10 24 32

Dec 1969 Nov 1970 11 106 116

Nov 1973 March 1975 16 36 47

Jan 1980 July 1980 6 58 74

July 1981 Nov 1982 16 12 18

July 1990 March 1991 8 92 108

March 2001 Nov 2001 8 120 128

December 2007 June 2009 18 73 81

Average 13 55 69

The US has had 13 Cycles since the great depression


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